Retirement Investing 101: The Basics of an IRA

One of the best strategies to save for retirement is to use a tax-advantaged account such as a 401(k) or 403(b) offered through your employer. However, those work-sponsored accounts aren’t available to everyone — and they aren’t the only tax-advantaged way to build up your nest egg, either. Whether you’re self-employed or simply don’t have access to a 401(k), almost anyone can open up an individual retirement arrangement, or IRA account, and invest for retirement while taking advantage of some useful tax breaks.

How IRAs Work

An IRA essentially functions as a personal 401(k) that you open and operate yourself. This has its advantages — for one thing, while your workplace 401(k) will typically be limited to the bank your employer uses and whatever investment choices they offer, you can open an IRA with virtually any bank or investment broker you want, and your investing options will be nearly limitless.

However, you can’t contribute as much money to an IRA each year as you can to a 401(k). In 2016, combined IRA contributions are limited to $5,500 (or $6,500 if you’re age 50 or older), compared to the $18,000 limit of most 401(k)’s. Plus, you’ll be responsible for making those contributions yourself — they don’t magically vanish from your paycheck before you even see the money, as with a work-sponsored plan.

There are many types of IRAs, but most people are concerned with just two of them: traditional and Roth IRAs. They are similar in many ways, but have very different tax structures with different benefits — so it’s important to know the difference and choose the right one for your financial situation.

Traditional IRA

A traditional IRA is the most like a 401(k), because the money you put into a traditional IRA is tax deductible this year (unless you also have a 401(k) at work, in which case your deduction may be subject to income limits). That means if you earn $60,000 in 2016 and contribute $5,000 of that to your IRA, your taxable income drops to $55,000 for the year and your tax bill shrinks.

As with a 401(k), with a regular IRA you’re simply deferring the taxes owed on that income until retirement — when you’ll presumably be in a lower tax bracket and therefore less impacted by the tax hit. So when you withdraw that $5,000 (plus any investment gains) two or three decades from now, you’ll pay regular income taxes on it then.

Traditional IRA Eligibility and Limitations

Almost anyone can contribute to a traditional IRA, as long as you have some taxable income and you’re not over age 70-1/2. Combined IRA contributions are limited to $5,500 in 2016 (or $6,500 if you’re age 50 or older). Traditional IRAs, like 401(k)’s, also require you to start taking minimum distributions after age 70-1/2.

Roth IRA

A Roth IRA, meanwhile, has a unique tax advantage. The money you contribute to a Roth IRA isn’t tax deductible this year — meaning the person in our example above, earning $60,000 and contributing $5,000 to a Roth IRA, will still owe taxes on all $60,000 in income this year. However, he or she will be able to withdraw that money — and any investment gains it accrues over the years, which can be substantial — completely tax-free in retirement (after age 59-1/2).

Where a traditional IRA aims to defer your tax burden until retirement, when you’re likely to be in a lower tax bracket, a Roth IRA allows you to take the tax hit now and not have to worry about those taxes in retirement. It also offers the rare opportunity to earn tax-free income in the form of investment gains on your Roth IRA contributions.

A Roth IRA also offers a bit more flexibility than either a 401(k) or a traditional IRA. “With a Roth IRA, you always can withdraw up to the amount you’ve contributed, both tax-free and penalty-free, no matter the purpose,” says financial advisor Matt Becker. You may also be able to use money from a Roth IRA — including earnings — to help with a down payment on your first home or to pay for qualified educational expenses such as college tuition.

• Related: Four Ways to Use a Roth IRA That Have Nothing to Do With Retirement

Roth IRA: Eligibility and Limitations

Not everyone is eligible to contribute to a Roth IRA — eligibility phases out once your annual income tops $117,000 (or $184,000 if married filing jointly). If you do qualify, you can continue contributing to a Roth IRA after age 70, and hold onto it as long as you live. Yearly contributions are limited to $5,500 ($6,500 if age 50 or older) between all IRAs combined (Roth and traditional).

Which IRA Is Right for Me?

Because of its unique tax benefits and flexibility, we often recommend a Roth IRA to readers if they fall below the income limits. However, both types of IRAs (not to mention other types, such as SEP IRAs) can come in handy depending on your situation and your expectations about future earnings and future tax rates. (For an in-depth comparison of the various retirement accounts available and how they differ, check out our post “Which Retirement Plan Is Right for Me?“)

But in the end, your most important decision when it comes to retirement investing isn’t which type of IRA you choose. It’s not where you open your account, or even which investments you choose.

Nope, the single most important investing decision you’ll ever make is simply to start saving a healthy portion of your income for retirement. More than anything else, the percent of your income that you set aside is going to determine how comfortably you can retire in the future.

Related Articles:

• Best IRA Accounts of 2016
• Roth IRA vs. Traditional IRA: Retirement Showdown
• The Best Retirement Account You’ve Never Heard Of
• Roth IRA vs 401k? You May Not Have to Choose
• The $15 Retirement Plan

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The Surprising Way Growing Up Rich Almost Ruined My Finances

Here’s the thing about money.

It’s a little bit like air: If you have enough of it, you don’t really have to think about it too hard — especially if you’re not the one in charge of making it.

Like many twentysomethings, I’ve fumbled my way through my finances for a long time, going into credit card debt and failing to save for my retirement.

But the difference? It’s all my fault.

I’m not struggling under the weight of student loan debt or camping out on pizza-box furniture, unable to afford the real deal.

I was lucky to grow up with parents who could afford to put me through college free and clear, so I have no student loans to speak of. I didn’t have to work a part-time job in high school or even college, and I got pretty much everything I wanted growing up.

Yes, including a pony. A real one.

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My parents both grew up poor. When they met, they started a business together, which quickly flourished. By the time I came around, they were making six figures… several times over.

In their new position of plenty, they wanted me to have the childhood they couldn’t (Read: one free of financial worry).

I totally understand and appreciate their intention and all the indulgences I got to experience as a child.

But since my wealthy parents never had to worry about balancing the books, they never had conversations about how to do so with me — and so I continued to treat my own, much-more-finite funds like they were inexhaustible after I left the nest.

Growing Up Without Any Financial Literacy

Let me start by acknowledging this post is about as #FirstWorldProblems as it gets.

Growing up with enough money (let alone a surplus of it) is a privilege I was very lucky to experience, and I did absolutely nothing to earn or deserve such an advantage in life.

But due to my lack of financial literacy, I promptly messed up that advantage.

Here’s how not learning anything about money as a child or teenager has hurt me as an adult.

I Went Into Debt Without Thinking Twice

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Lots of teenagers and twentysomethings go into credit card debt.

When you’re just starting out and working jobs that don’t pay quite enough to make ends meet, it can be hard not to.

And with sky-high student loans already keeping many millennials in the red, it’s easy to take a defeatist attitude: You’re gonna be in debt anyway, right?

Please don’t take that position! No matter how much debt you’re already in, more debt is always worse. Here’s how much of your precious cash you waste if you’re just making minimum payments every month.

Like many of my peers, once I had the opportunity, I immediately racked up credit card debt.

But here’s the thing: I didn’t need to.

I didn’t use my credit card to help me bridge an income gap between jobs, or pay for a medical emergency. Mine was an error of sheer ignorance and bad impulse control. And since I didn’t have student loans, I was destroying my totally clean financial slate.

Luckily, since I got a job here at TPH, I’ve learned a ton about personal finance.

I was able to repair my credit after identity theft, pay down the cards and even start using them to my own benefit.

By choosing cards with rewards that fit my needs (can you say travel hacking?) and paying them down all the way, every single month, I get free stuff without paying even a cent of interest.

But throwing my whole savings at paying them off in the first place, reducing my emergency fund to zero? Yeah, that wasn’t a great start.

I Struggle to Live Within My Means

Eva Katalin Kondoros/Getty

By the time I graduated from college, my understanding of money was basically this: You get it from working and you use it to buy things.

I thought money was for spending, and so I’d happily spend every cent I had available — and some I didn’t (see point one).

The concept of creating a budget and sticking to it was a difficult one for me, and it took me a long time to figure out how to make it work.

Sometimes, I still feel claustrophobic within my budget, like I have no unaccounted-for “free” money, and I make more than enough to support myself.

I know this is just because I’m spoiled, and almost everyone deals with this. But had budgeting been on my radar as a child, perhaps I’d at least be better at it, if not more accustomed to it.

I Only Just Started Saving for Retirement

This is, of course, directly related to the first and second points.

I vaguely knew saving money was a thing people did. But growing up, I could always rely on an amorphous, big-enough pool of funds. When I went on my own, I continued to treat my own money like my parents’ — inexhaustible.

Spoiler: I do not make an inexhaustible amount of money.

And I soon learned if I’m ever going to retire, I need to actually save some of it, which turns out to be a lot harder than I expected.

All of this is exacerbated by the ticking clock. If I’d known all this at 21, for instance, I’d just need to put away $25 per week. I still have some time before my 30th birthday, but every year makes the slope a little bit steeper.

My 20s are More Cluttered Than They Should Be

Yuri_Arcurs/Getty

Yes, this really means “I have too much stuff.”

I can feel your eyes rolling, and I kind of agree with you. But hear me out.

Many of us spend our 20s living a freewheeling, fast-moving lifestyle. Blogs constantly feed us lists of destinations to visit or even move to — places you “absolutely must” see in your 20s.

Without a family, solid career, and — yes — a ton of stuff, it’s fairly simple to pick up and go.

But since I had my parents’ backing throughout college, I’d accumulated all the trappings of a “Real Home” — sets of dishes big enough for dinner parties and a desk I actually care about — well before my 25th birthday.

This might not seem like a problem, except when you consider I’ve moved eight times in as many years. Most other twentysomethings I know cycle through used-but-acceptable stuff sourced from Craigslist and the side of the road, buying and selling beat-up couches every time they move.

I, on the other hand, have settled-down furniture… even though I’m far from settling. That means every move has been costly and exhausting, requiring a moving truck and a lot of manpower.

I could ditch it all and start again with budget furniture… but I feel bad selling stuff my parents basically paid for. Plus, some of it’s really nice, and I have no idea when I’ll be able to afford “good” furniture again.

Why Teaching Kids About Money is So Important

Martin Barraud/Getty

My financial missteps likely have less to do with my parents’ wealth than with their choice not to teach me very much about personal finance.

Perhaps their own lack of financial knowledge led to this — but since they’re both business owners, I don’t think that’s the problem.

Furthermore, I fully understand every one of these financial faux pas is the result of my own choices and lack of knowledge. I had the opportunity to educate myself before making big decisions, and I didn’t.

My money foibles are all my own fault and my own responsibility.

But I do wish my parents had decided to teach me more about good financial hygiene — and I think that would have been more likely to happen if they’d struggled to balance the books themselves.

No matter where you stand on the financial security spectrum, if you have kids, it pays to teach them about how to use money strategically.

Not only will they spend less time stressing out about their bank accounts down the line — they’ll also be more grateful for everything they have now.

Whether your finances are pristine or in need of some TLC, helping your children understand how to use money is imperative.

For most of us, it’s not a skill that comes naturally — which makes it easy to trash the clean financial slate we’re born with once our teens and 20s roll around.

Luckily, we’ve got some posts to help you out.

If you’re ready to get your kids up to speed, check out:

• 5 Things Your 5-Year-Old Should Know About Money

• The Brilliant (and Simple) Way This Family Teaches Their 6-Year-Old About Money

• 4 Creative Ways to Teach Your Kids About Compound Interest

• 9 Fun Ways This Mom is Raising Future Penny Hoarders

• How to Talk to Your Kids About Paying for College

If you could use a review of your own before you start schooling your little ones, here are some resources:

• 5 Money Lessons for Kids That Totally Work for Adults, Too

• A 7-Step Plan to Create an Effective Budget

• How to Set Financial Goals

• The Ultimate Guide to Starting an Emergency Fund

Meanwhile, for the sake of poetic justice, you should know I’ll probably never be rich again.

No matter how money savvy I become, my decision to become an English major — yet another effect of my complete financial obliviousness — means I probably won’t ever be a super-stellar earner.

At least I love my job!

Your Turn: How do you teach your kids about money? Let us know in the comments!

Jamie Cattanach is a staff writer at The Penny Hoarder. Her writing has also been featured at Word Riot, DMQ Review, Hinchas de Poesia and elsewhere. Find @JamieCattanach on Twitter to wave hello.

The post The Surprising Way Growing Up Rich Almost Ruined My Finances appeared first on The Penny Hoarder.

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Now You Can Hunt for Pokemon at Sam’s Club Without a Membership

If you spent your weekend wandering around parts of town you’ve never seen before and killing your phone’s battery (i.e., playing Pokemon Go), you’re in for a sweet deal.

Literally.

Sam’s Club is offering Pokemon Go players a free day pass to shop in its stores — and a free cookie to boot.

Pika your interest? Here’s how it works.

How to Get a Free Sam’s Club One-Day Pass

Like the game itself, participating in Sam’s Club’s deal couldn’t be simpler.

Just head to your local store and show your phone to an associate — with the app installed, of course.

…That’s it.

In return, you’ll get a free cookie from the bakery to replace some of those calories you’re walking off.

But best of all, you’ll get a free one-day shopping pass — and access to a ton of bargains!

“This pass waives the 10% upcharge” — what non-members normally have to pay for shopping privileges — “and is available at the Member Services desk,” writes Sam’s Club corporate communications director Tara Raddohl.

Plus, who knows? While you browse the aisles, you might even find a Pokemon or two hanging out on top of all those great deals you’re sure to catch.

Either way: Happy hunting! Both deals are available until July 31.

Your Turn: What Pokemon Go team are you on? Valor, Mystic, Instinct or “Get Off My Lawn”?

Jamie Cattanach is a staff writer at The Penny Hoarder who might have finally caved and downloaded Pokemon Go this weekend. Her writing has also been featured at The Write Life, Word Riot and elsewhere. Find @JamieCattanach on Twitter to wave hello.

The post Now You Can Hunt for Pokemon at Sam’s Club Without a Membership appeared first on The Penny Hoarder.

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Best 0% APR and Balance Transfer Credit Cards

If you’re struggling under the weight of high interest credit card debt, a balance transfer credit card might be exactly what you need. By transferring your high interest debts to a card with 0% interest, you can save money while paying down your debts at lightning fast speed. You can also look into getting a personal loan at a low rate that may work as well.

This is not to say that you should use these cards to allow you to take out more debt. 0 APR cards should be a tool that can help people get out of debt faster, not accumulate larger amounts.

While most balance transfer credit cards offer 0% APR for a limited introductory period, others extend that benefit to purchases as well. That makes signing up for one of these offers a smart idea for anyone who needs an affordable line of credit to remodel their home or make a large purchase. By signing up for a card that offers 0% APR for anywhere from 12 – 21 months, you can secure your own “short term” loan that is both convenient and interest-free.

Best 0% APR and Balance Transfer Credit Cards for 2016

This page includes the top 0% APR balance transfer credit cards currently available, as well as details that make each offer unique. Before we dig in, take a look at our top 0% APR balance transfer credit cards for 2016:

• Chase Slate^®
• Citi^® Diamond Preferred^® Card
• Chase Freedom^®
• Discover it^® – Double Cash Back Your First Year
• Blue Cash Preferred^® Card from American Express

Chase Slate^®: Best All-Around Option

Whether you want to transfer high interest balances or secure an affordable line of credit for a large upcoming expense, the Chase Slate^® card offers the best of both worlds. For starters, this card is the only card on the market that charges zero balance transfer fees for the first 60 days, plus a 15 full months at 0% APR. This offer extends to purchases as well, making this the perfect card to save money as you pay down debt or make a large purchase.

The only caveat to consider is the fact that you cannot transfer balances from other Chase cards to your new Chase Slate^®. Here are some additional details to consider before you sign up and start paying down your debts for good:

• Read here to learn more about the Chase Slate^® card
• 0% APR on purchases and balance transfers for 15 months
• No balance transfer fee for the first 60 days
• No annual fee
• Free Monthly FICO score for cardholders

Citi^® Diamond Preferred^® Card: Longest 0% APR Period

The Citi^® Diamond Preferred^® Card offers the longest repayment period among 0% APR and balance transfer credit cards on the market – a full 21 months with 0% APR. That’s almost two full years with no interest you can utilize to pay down debt faster and save money in the process.

While this card does charge a balance transfer fee of 3% of your total balance or $5, whichever is greater, it offers the longest 0% APR introductory period on the market. Best of all, you can score 0% APR for a full 21 months without paying an annual fee for the privilege.

And since the 0% APR is good on purchases as well, this card is a no-brainer if you plan to remodel your home or finance a large expense you want to repay over time. Here are some more details to consider:

• Read here to learn more about the Citi^®Diamond Preferred^® Card
• No annual fee
• 0% APR on balance transfers and purchases for a full 21 months
• 0% liability on unauthorized purchases
• APR readjusts 12.24 % -22.24% based on creditworthiness after introductory period

Chase Freedom^®: Best Perks with No Annual Fee

The Chase Freedom^® card is one of the most popular credit cards on the market, and for good reason. Not only does it offer 0% APR on purchases and balance transfers for a full 15 months, but it also offers a signup bonus and excellent ongoing rewards – and all with no annual fee.

You’ll earn a signup bonus worth $150 if you can use the card for at least $500 in purchases within the first 90 days, plus 1 point per dollar spent on all purchases and 5X points in categories that rotate every quarter, making it one of our best cashback rewards cards. Redeem your points for cash back, gift cards, or travel, and all while taking advantage of 0% APR to pay down your debts as quickly as possible. If your goal is to get the best airline credit card for rewards this is a great pick as well. More details:

• Read here to learn more about the Chase Freedom^® card
• 0% APR on purchases and balance transfers for 15 months
• No annual fee
• Earn $150 after you spend $500 on the card within the first 90 days

Discover it^®: Double Cash Back Your First Year

If you want to pay down debt and earn rewards at the same time, the Discover it^® card offers one of the best opportunities out there. Not only do you get 0% APR on balance transfers for a full 18 months, but you also earn a minimum of 1 point per dollar spent on all of your purchases – plus double your miles after the first year!

The Discover it^® card also offers 5% cash back in categories that rotate every quarter, which seriously improves your ability to rack up points quickly! Best of all, there is no annual fee so you can pay down debt and earn rewards without paying for the privilege. Here are some additional details:

• Read here to learn more about the Discover it^® card
• No annual fee
• 0% APR on balance transfers for 18 months
• Balance transfer fee equal to 3% of your transferred balance
• Track your FICO score for free online

Blue Cash Preferred^® Card from American Express: Best Ongoing Rewards

The Blue Cash Preferred^® Card from American Express is another great option for anyone who wants to earn rewards while paying down debt at 0% APR. This card’s current offer include 0% APR on balance transfers for the first 15 months, plus a $150 signup bonus after you spend $1,000 on the card within 90 days.

In addition to the signup bonus, you’ll earn 6% back on your first $6,000 in grocery spending each year, plus 3% back at gas stations, and 1% back on all other purchases. I have seen several entrepreneurs that drive for their business who use this card as their business credit card because of the gas rewards. This card does charge a $75 annual fee, but the signup bonus alone more than covers it. Before you move forward, consider these other important details:

• Read here to learn more about the Blue Cash Preferred^®Card from American Express
• 0% APR on purchases and balance transfers for 15 months
• Earn 6% on your first $6,000 spent at grocery stores annually, plus 3% back at gas stations and 1% back on all other purchases
• $75 annual fee

Getting the Most Out of Your 0% APR or Balance Transfer Credit Card

So, you’ve signed up for one of the best balance transfer or 0% APR credit cards on the market. Now what?

To get the most of your card, you’ll want to come up with a long-term strategy for its use. Most of the time, that means creating a plan that will help you maximize your card’s benefits while minimizing any expenses you pay out-of-pocket. Here are some tips that can help.

If you’re taking advantage of a 0% APR balance transfer offer…

#1 Watch the fees.

Many balance transfer credit card offers will have a fee of 3%-6% to make the transfer.  If you are paying 25% in interest this may not be a bad decision. However, with creditors finally letting up a bit on their offers, there is a good chance that you can get a transfer with no fees, if you have a good credit score.

#2 Create a plan to become debt-free during your card’s 0% APR introductory period.

If you signed up for one of the cards listed above, you’ll have at least 15 months to pay your balance down at 0% APR before your interest rate readjusts. To figure out how much you need to pay each month to make that happen, take your total balance and divide it by the number of months included in your introductory offer.

Let’s say you owe $5,000 total and have 15 months at 0% APR to pay it down. You would need to pay $334 per month to pay your debt in-full before your card starts charging you interest.

Example: ($5,000/15 months = $334)

#3 Don’t use credit as an excuse to overspend.

If you choose a card with 0% APR on purchases, you might be tempted to spend more than you can afford. Don’t let that happen! To avoid getting into more debt, only use your card for purchases you plan to pay off right away. If you need to stash your card away in a sock drawer until you’re debt-free, so be it. Don’t let the allure of cheap and easy credit cause you to dig a deeper hole than you had to begin with.

#4 Once you’re debt-free, dedicate your life to keeping it that way.

Once you transfer a balance to a 0% APR card and pay off your debts, you might be tempted to borrow money again. No matter what, you shouldn’t let that happen! Instead, you should create a monthly budget you can stick to and live well below your means. Enjoy being debt-free and all that means for your family instead of falling back into old habits.

If you’re taking advantage of a 0% APR offer in order to finance a large purchase….

#1 Take your introductory period into account before you start putting purchases on your card.

If you’re taking advantage of 0% APR in order to make a large purchase or take on a huge project such as a home remodel, you’ll want to take your card’s introductory APR period into account. If you have 18 months at 0% APR, for example, you’ll want to create a spending and repayment plan that will help you avoid paying interest in the long run.

You should also consider the type of card you are getting. For instance, if you are using the card to finance a vacation, you should really look at a travel rewards card that will give you a good percentage back on all your travel. This way, not only are you financing at a low rate you can also take advantage of the rewards (some of which will also let you pay down the balance of the card).

#2 Only borrow what you can afford to repay while you’re at 0% APR.

Just like with a balance transfer, you should create a repayment plan that lets you take advantage of your card’s full 0% APR introductory period while helping you avoid interest. If you plan to charge a $10,000 home remodel, for example, and have 15 months at 0% APR to pay it back, you’ll need to pay $667 per month to make that happen.

Example: ($10,000/15 months = $666.66)

#3 Don’t get hooked on cheap and easy credit.

It’s easy to grow accustomed to charging all of your expenses, but you can do some serious damage if you let it become a habit! If you want to take advantage of your card’s 0% APR introductory offer without getting into trouble, use your card sparingly and only for planned purchases you know you can pay off right away.

Final Thoughts

To get the most out of your 0% APR offer, you should do your best to avoid the pitfalls that tend to plague people who rely on credit. For the most part, that means only using credit for purchases you can pay off right away, or in this case, during your card’s introductory 0% APR period. Second of all, even though you are getting a deal signing up for one of the best credit cards, you should learn to use credit as a tool to improve your finances and not as a crutch that pulls you deeper into debt over time.

The best 0% APR and balance transfer credit cards can serve as a valuable tool in anyone’s financial tool chest, but only if they are used wisely.

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How Much House Can I Afford?

I often receive emails from readers concerning whether or not the sender can afford a particular house – or how much house they can afford. The stories vary a lot in detail – some people have a down payment, while others do not, and some people have other debts, while others are debt free.

Regardless of the situation, though, I give these people the same advice. Your total debt payment for a given month should not exceed 30% of your take-home pay. 

In other words, if you bring home $4,000 per month, your total debt payments for that month — including student loans, car payments, credit card bills, and your potential mortgage itself — shouldn’t exceed $1,200.

Now, that’s not necessarily what a bank thinks you can afford — lenders are often willing to stretch you farther than might be wise. We’ll get to that in a moment.

First, let’s walk through a few of the specifics of my 30% rule.

This is take-home pay, not gross pay. The only pre-tax number you might consider including is your 401(k) contributions, but I wouldn’t include those. I would never include taxes or other payroll deductions when thinking about this. Why? In the end, this is all about budgeting, and having 30% of your monthly income go straight into debt payments is a pretty hefty chunk of your money. This leaves the rest to cover all of your utilities, food, household supplies, gas, insurance, and other living expenses.

The percentage should be pretty close to that even if you’re earning a lot of money. Again, why? This is all about downside. You don’t want to have to sell your home in a panic if you lose your job or some other major lifestyle change occurs. You want to keep yourself afloat no matter where your ship goes.

Sticking with this policy usually implies a few things.

First, you’re going to be able to afford a bigger home if you’re otherwise debt-free. If you’re still paying hundreds per month in student loans or car loans, the burdens of home ownership are going to be intense. If you want a home in the next several years, focus hard on freeing yourself from that debt.

Second, you’re usually better off if you buy a smaller home rather than a larger one. Once you get beyond a certain point of home size, the excess space mostly just serves as storage for your excess stuff – mostly stuff you don’t really need in the first place.

When Sarah and I were house-hunting, we fell in love with a house that was about 50% larger than the one we ended up purchasing. We both just loved this house. We tried to find a way to afford it but, when we sat down and were realistic with our financial situation, we knew we couldn’t really afford it. We bought a smaller house, one within the range of what we could afford.

Guess what? We’ve never missed the extra space. In fact, as we’ve been designing our “dream home,” it’s not much bigger than the one we have now. It’s mostly just rearranged.

Third, overburdening your short-term future with expenses is a huge mistake. When you sign up for a mortgage, you’re signing up for a pretty hefty addition to your monthly pile of bills. However, when you initially sign up for them, those bills are likely within your ability to pay them each month.

The catch comes if something changes in your life. A job loss or a serious accident can derail lots of things in your life – and the last thing you need on top of those misfortunes is a difficult decision about your house when you’re unable to pay for it. It’s not worth it.

Finally, a full down payment is a tremendous help here. Not only does it reduce the size of your mortgage by up to 20% or more, it will also likely reduce your interest rate.

If you charge ahead without a full down payment — many first-time home buyer programs allow you to make down payments as low as 3.5%, and VA mortgages offer no down payment at all — you’ll be financing that much more of the home price, adding to your monthly bill, and it will typically be at a higher interest rate. You’ll also probably have to pay private mortgage insurance, or PMI, to protect the lender — which amounts to another monthly bill you won’t have to pay if you simply saved up a full down payment first.

Yes, saving $40,000 for a down payment on a $200,000 home seems difficult — especially when you’re ready to buy a home now and feel like the homes near you are climbing out of your price range — but it’s the right approach for the long term. After all, if you find it difficult to save a healthy chunk of your income each month, how will you be able to survive as a homeowner? Owning a home comes with many new expenses and responsibilities you’ll need to save for.

Given these factors, I strongly feel that a conservative approach to the question of “How much house can I afford?” is the right one.

How Big of a Mortgage Will I Qualify For?

However, how much house you can actually afford and how much a bank thinks you can afford are quite often very different numbers. Here are the key factors lenders take into consideration when determining how big a mortgage you’ll qualify for and how much house you can afford.

Your debt-to-income ratio: This is the big one. In general, most lenders want your overall debt payments — including your mortgage — to represent no more than 36% of your gross income (not take-home pay) each month.

That means a couple earning $6,000 a month can have no more than $2,160 in total debt payments. So if they have $500 in monthly student loan bills, $100 in minimum credit card payments, and a $400 monthly car payment, they won’t qualify for a mortgage that’s more than $1,160 a month.

Now remember — that’s only what the bank deems reasonable. If your gross income is $6,000 a month, you’re probably taking home something closer to $4,000 a month after taxes and other payroll deductions. If $2,160 of that is going toward a mortgage and other debts, you’re left with less than half of your take-home pay to cover all other expenses. That leaves you walking a very tight rope and it’s not something I’d recommend, even if the bank thinks it’s fine.

Your credit score: A good credit history and score will help you get a more favorable interest rate, which in turn means you can take out a larger loan without raising your monthly mortgage payment. To get the enticingly low rates that lenders advertise, you’ll need very good to excellent credit – typically a score in the high 700s or 800s.

You can use the home affordability calculator below to see just how much difference even one percentage point makes when it comes to how much house you can afford. A family earning $72,000 a year with no other debt and a $40,000 down payment saved up could afford a $379,000 house at a 4% fixed rate, according to the calculator. But that same family, paying a 5% rate because of less-than-perfect credit, could only afford a house priced at $354,000 — a $25,000 difference.

• Related: What Is a Good Credit Score?

Your down payment: By default, the more money you put down, the less you’ll have to finance. But a larger down payment — at least 20% of the home’s value — also makes your loan less risky to the lender in the event that you default on your mortgage, so it can help you get a lower rate and better terms and avoid paying private mortgage insurance.

Funds available: In addition to your down payment, a lender will look at all of your savings and investments — including your savings accounts but also any IRA or 401(k) balances – to make sure you can cover closing costs and could pay your mortgage for a few months if you were to lose your job.

Calculator: How Much Home Can I Afford?

Use this calculator to determine how much house you can afford given your income and monthly debt obligations. Click on the advanced tab, and you can adjust variables like interest rates or your preferred debt-to-income ratio — whether it’s the 36% limit most banks like to see, or a more conservative 25% to 30%.

How Much House Can I Afford?

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How to Afford a More Expensive Home

Of course, it’s a lot easier to purchase a home in your price range in areas where the housing market is more in line with typical incomes. In certain parts of the country — particularly coastal cities like San Francisco, Los Angeles, San Diego, New York, Boston, and Seattle — home prices are out of reach for many middle-income earners. And yet, rents in these areas are often just as high, putting residents in a bind.

The National Association of Realtors tracks the median sale prices of single family homes by metropolitan area, and compares them to local median household incomes to create a quarterly Home Affordability Index. According to recent data, here are the least affordable metro areas in the country when it comes to buying a home (a score of 100 means the median income is just enough to qualify for a mortgage on a median-priced house).

Least Affordable Cities for Home Ownership

Metro Area	Median Sales Price, 2015	NAR Affordability Index
San Jose, Calif.	$950,400	63.9
Honolulu	$707,700	66.1
Anaheim, Calif.	$707,500	67.9
San Francisco	$782,300	72.6
Los Angeles	$476,800	73.6
San Diego	$542,600	79.8
White Plains, N.Y.	$475,900	84.4
Naples, Fla.	$405,000	89.8
New York	$397,900	112.6
Miami, Fla.	$280,000	114.7
Boulder, Colo.	$454,100	118.1
Riverside, Calif.	$290,700	118.8
Denver	$353,600	128.7
Seattle	$379,700	129.9
Portland, Ore.	$312,100	130.7
Reno, Nev.	$283,600	131.1
Boston	$403,900	133.8
Cape Cod, Mass.	$362,600	138.1
Long Island, N.Y.	$422,700	141.8
Sacramento, Calif.	$289,300	141.9

Home buyers in these areas may feel more obligated to stretch themselves, especially when rents are already oppressively high. The New York Times has a pretty comprehensive rent-versus-buy calculator, with a number of adjustable inputs to help you evaluate whether it makes sense to continue renting or to buy a home given the variables of your own situation and locality.

Four Ways to Afford a Pricier Home

If you’re struggling to afford a home in your area, don’t over-extend yourself — better to buy a cheaper home or continue renting than to stretch yourself so thin you default on your mortgage or other obligations. Here are some sensible strategies you can employ to afford to buy a more expensive home:

Save up a bigger down payment: A larger down payment can help you in so many ways — you’ll probably get a lower interest rate, you’ll avoid paying PMI, and by definition you won’t need to finance as much of the purchase, so you’ll get more house for the mortgage. If you’re priced out of homes in your area, don’t kill yourself chasing the market — just keep socking away more money for a down payment until you can reasonably afford the home you want. If you can only feasibly handle a $200,000 mortgage, but want to buy a $300,000 home — keep saving until you’ve got $100,000 to put down.

Pay down debts: The fewer debts you have, the more a bank will be willing to lend you. So if you want to qualify for a larger mortgage, pay off all your credit cards before you apply. Pay off your car. Pay down your student loans. In the example above, the couple earning $6,000 a month could only qualify for a $1,160 mortgage because of their existing debts. Without those monthly obligations, however, a bank might allow them to take out a mortgage equivalent to 25% of their income or more.

Improve your credit score: Building good credit takes time, but you can make substantial progress in less than a year if you’re diligent about paying your bills religiously and reducing your credit utilization (how much of your credit limit you’ve used up). A better score will get you a better interest rate on your mortgage, which can help you borrow more money with the same monthly payment.

Increase your income: And of course, perhaps the simplest way to afford more home is to earn more money. Whether it means taking on side jobs or applying for the loan with your partner so you can combine incomes, a higher income will help you qualify for a larger mortgage.

Remember that just because a bank says you can afford a certain mortgage doesn’t mean that it’s true. They may be comfortable lending that amount to you, but it’s more important that you are comfortable with the idea and amount of that monthly payment.

Related Articles:

• Why You Should Buy Less House Than You Can Afford
• How to Find the Best Mortgage Rates in 2016
• Best Mortgage Lenders of 2016
• Should You Refinance Your Mortgage?

The post How Much House Can I Afford? appeared first on The Simple Dollar.

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ASK GFC 002: Keeping Your Own Money and Building a Legacy for the Future

Welcome to another Ask GFC! If you have a question that you want answered you can ask it here.

If your questions get featured on GFC TV or the GFC Podcast, you are the lucky recipient of a copy of my best selling book, Soldier of Finance, and a $50 Amazon gift card.

So what are you waiting for?  Ask your question now!

Here’s today’s Ask GFC question from Stephen who’s interesting in building his legacy:

Hey Jeff I would like to know the best foundation structure and tools for building a routine of keeping more of my own money in my own pocket and building a legacy for future generations. Thanks, Stephen C.

A recent survey by the Federal Reserve indicated that nearly half of Americans couldn’t come up with $400 if they had to, so this question is a lot more important than it may seem. That means that we all need to spend some time reviewing the basics.

I like that Stephen asked not only about keeping more of his own money, but also building a legacy for future generations. From a motivational standpoint, embarking on a plan of financial improvement for the benefit of others can often provide a stronger incentive.

What’s needed to accomplish those goals? We’ll keep it basic.

Step 1: Learn to Live Beneath Your Means

This is the first step, because everything else that follows will be impossible without it. People sometimes think that they will become financially successful as a result of luck – coming into a windfall, having a winning lottery ticket, receiving an inheritance, selling a house or a business, or picking the right group of stocks.

That does happen on occasion, but for the vast majority of people the only way to accumulate wealth is to create a plan, and execute it faithfully.

To save money and build a financial legacy, you first have to create room in your budget to allow for savings. That comes about by learning to live on less than you make. Simply put, if you earn $50,000 per year, you live on $40,000, and bank $10,000. After 10 years, you’ll have saved $100,000 plus the investment income earned on that money. At that point, your savings will be several times higher than your income. That’s what financial success looks like.

That’s simple in concept, but very difficult in the execution. That may not be the case if you are a natural saver, and some people are. But for the rest of us, it takes discipline and consistency.

You have to start by lowering your living expenses. How far you will go with this will depend upon what your financial goals are. If you only plan to save a little bit of money each year, you can probably accomplish that by clipping coupons, cutting back on restaurant meals, and eliminating some services that you hardly use.

But if you want to save a serious amount of money, it will require genuine sacrifice. Some examples include:

• Trading down to a less expensive housing arrangement
• Buying no more car then you can afford to pay cash for
• Cutting back vacations from an annual event, to once every few years
• Ignoring the living and spending patterns of your peers

Not everyone wants to pay that kind of price, which is why relatively few people ever achieve financial independence.

Seriously evaluate how much you want it, and if you’re willing to make the sacrifices necessary.

Step 2: Automate the Savings Process

Once you have made room your budget to save money, you need to create a mechanical process that will enable it to happen. The more automatic the process, the easier it will be. That means creating methods of saving money that take place out of view.

You can do this through payroll savings deductions. It’s common to do this with employer-sponsored 401(k) plans. If you have such a plan available, you should definitely participate in it. Not only is it a good way to accumulate money, but you also get a tax break for doing it. At a minimum, you should contribute enough that you will max out any employer matching contribution to the plan. On the high-end, you can contribute up to $18,000 per year to a 401(k) plan ($24,000 if you are 50 or older). If you can hit the maximum contribution, and get a company match, you will accumulate money quickly.

Retirement plans aren’t the only way that you can use payroll savings. You can use payroll deductions to fund a savings account, an emergency fund, an IRA, or other investment account of your choice.

The nice thing about payroll deductions is that they make saving money completely automatic. If you can pretend that it isn’t happening, you can accumulate a lot of money in a short amount of time with virtually no stress.

Another option is to bank windfalls. That can include income tax refunds, bonus checks, cash gifts, or the proceeds from the sale of personal assets. That will fast-forward your regular savings efforts. The key is to deposit the money into savings immediately, as in before you can spend it.

None of this will be easy, which is why it’s so important to be able to live beneath your means. The basic idea is to take money out of your immediate control, and move it into savings where it accumulates and grows.

Step 3: Invest Your Money – But Don’t Get Crazy

Savings will bring liquidity to your life, but it’s even more important to invest for the future. That’s how you make your money grow. But don’t get carried away with this; very few people have the time, talent and inclination to invest their way to riches. It’s best to keep your feet on the ground, and leave the job investing to the professionals.

That mostly means investing in mutual funds and exchange traded funds (ETFs). These are funds comprised of dozens of stocks that are managed by professional managers. You can invest in index funds, which match popular indexes, like the S&P 500, or in sector funds, that specialize in various industries, such as high-tech, healthcare, finance, and energy.

You should assume that your job is to save the money to invest, and let the funds do the actual investing for you. That will free you up to spend your time living your life and managing your career, while the dirty work of investing is done for you.

Step 4: Get Out – and Stay Out – of Debt

In our current culture, debt is seen as a benign ally; it isn’t. What debt really is is a reduction in your net worth. If you have $100,000 in savings, and $70,000 in debt, your net worth is $30,000, not $100,000.

It will do little good to accumulate a large nest egg, only to have it offset by a large amount of debt. Your goal should be to stay out of debt if you don’t have any already, or get out of it as soon as possible if you do.

Apart from the stress that debt causes, it also represents a reduction of your monthly cash flow. By paying it off, you increase your cash flow, which also increases the amount of cash that you have available to put into savings. In a very tangible way, paying off debt reduces your living expenses, which makes it a double win.

Step 5: Stay the Course

There’s an emotional reason why more people aren’t financially independent: getting there isn’t that exciting. It means living on less than you earn, putting your money where you can’t get it, and not buying as much stuff or doing as many things as other people.

It can help if you find ways to occupy your time and entertain yourself that are not so money-centric. But if you are serious about building a legacy for the future, you’re going to have to make a long-term commitment. It will take not just months or even a few years, but many years. And if your goals are high, it will take decades.

You have to be aware of the time factor. You have to be prepared to stay with your plan, and apply it consistently. That means guarding against distractions, and they will come up along the way.

But understand this, the benefits of financial independence come mostly on the backend. It’s true that while you are building your nest egg, life can be kind of boring. But once your wealth reaches a critical mass, you’ll be able to begin enjoying the comforts of life, and to a greater degree than most people since you’ll be more prosperous.

Set a plan, keep it basic, and execute it consistently. You get there quicker than you realize.

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How to Discover Whether Your Audience Is Bored with Your Content

Let’s be honest. Creating pulse-quickening, super-engaging content that blows the socks off every single reader 100% of the time probably isn’t realistic.

It would be nice, yeah. But it just doesn’t happen.

This is especially true for companies in so-called boring industries—micro-niches with very few people having an overwhelming interest in the subject matter.

But if you’re always boring your audience to tears, this will obviously have a negative effect on your traffic, leads, conversions, brand reputation, and—ultimately—profitability.

Basically, boring content is awful. Boring content is worse than no content at all!

If you think your content marketing campaign is in a death spiral, it’s important to resolve the situation ASAP.

I used to write some pretty boring crap. Once I figured it out, I changed my ways. Today, I’m not necessarily channeling J. K. Rowling all the time, but I do know when (or if) my audience is bored.

How do I know?

I’m about to tell you.

But first, let me spill the beans (well, sort of) upfront: it’s about data—the warning signs are in the data.

Whether you’re a marketer, SEO, or content creator, data is your friend. But don’t worry, I won’t tell you to buy some expensive analytics software. Nearly all the data I cite in this article is free.

Here are telltale signs that your audience finds your content boring.

Your bounce rate is abnormally high

What’s bounce rate?

Here’s how Google defines it:

Bounce Rate is the percentage of single-page sessions (i.e., sessions in which the person left your site from the entrance page without interacting with the page).

Basically, someone looks at your site and leaves.

You can find your bounce rate in Google Analytics.

How do you know if your bounce rate is awful or not?

Here are some benchmarks, according to the type of site you have:

Multiple issues can contribute to a high bounce rate.

Slow page load time, ugly web design, annoying pop-ups, or a crappy mobile experience are just a few of these reasons.

For example, mobile bounce rates are typically higher because of the less-than-optimal mobile design of some sites.

However, it can also simply be because readers are less than thrilled with your content and they’re abandoning ship before even making it halfway through.

If your bounce rate is over 70%, there’s probably cause for concern. If it’s over 90%, it’s a serious issue.

When there’s no other discernible reason, lackluster content could very well be the culprit.

You get few comments or no comments at all

Are you creating blog posts, guest posts, social media updates, etc. that are consistently getting little to no reaction?

Maybe you’re even asking open-ended questions at the end and begging for readers to chime in to spark a discussion.

What’s happening?

If nothing, take this as a warning sign.

In my early days of blogging, about ten years ago, I didn’t get many comments on my articles.

This one post (about postcards?!) received only 17 comments and basically no social shares:

I could have gotten all depressed about that.

But instead, I learned a lesson. Maybe my audience gets bored by stuff about postcards.

So, maybe I need to change my game a little bit.

I changed my game, and I really homed in on the topics and style my audience wanted. As it turns out, a post like this got hundreds of comments:

Comment counts are a great thermometer of the interest level of your audience.

If you write a sizzling-hot article on a sizzling-hot topic, the number of comments will reflect it.

But if you write a complete snoozer, no one will comment.

This is the kind of information that tells you exactly what you need to know about your content’s bore score.

Your content isn’t getting socially shared

I personally think that social shares are one of the most simple yet informative metrics in content marketing.

A quick glance at the number of likes, tweets, and other shares a piece of content receives often serves as a basic litmus test to see how favorably (or unfavorably) your audience has responded.

For example, it’s fair to say that if “Blog Post A” received 250 total shares and “Blog Post B” received only 12 total shares, Blog Post A was received by the readers significantly better.

While it wouldn’t be realistic to expect every piece of content to be a home run, a continually low number of social shares often indicates audience boredom.

The readers are simply not captivated by your content and don’t feel it warrants being shared.

The only caveat would be if you’re fairly new to the scene and haven’t really established an audience yet.

But if you used to receive a reasonable number of social shares and those numbers are noticeably dropping, boring content could definitely be the reason.

There’s a simple way to measure how your content is being shared.

You can use a tool such as Buzzsumo. Simply enter the URL of your website or blog, and click “Search!”

You’ll see a screen of results like this:

Granted, you may not have 430k shares on a single post like CNN does. Ideally, though, you’ll see at least a few.

Another free tool you can use is on my blog, NeilPatel.com.

To use this tool, enter your blog’s URL, and click the “Analyze” button.

The report takes just a minute or two to generate—you’ll see a progress bar, telling you where the analysis is at.

When the report is complete, click “Content Marketing.”

The content marketing report shows you the social share counts across your whole website.

Here’s a summary of the social shares on my blog:

The “page shares per network” statistic tells you which individual pages were shared and the number of shares each page received:

You can also see the number of shares each page received according to the social network:

Using this tool allows you to get a very real sense of whether or not your readers are digging your content.

Look, if people are not sharing your content, they probably aren’t too impressed with it.

But let’s be realistic. If your traffic is low, your shares will be low too. No one is going to share your content if no one is seeing it to begin with.

Don’t beat yourself up over your low share counts unless you have really high traffic combined with low share counts.

There are usually several reasons why social sharing fluctuates and/or nosedives. Even a content marketing juggernaut such as Buffer admitted, “We’ve lost nearly half our social referral traffic in the last year.”

They even showed their numbers to prove it:

Kevan Lee, Buffer’s content creator, tried to come up with a few reasons why it happened.

Here are his maybes:

• Maybe we need to hire a full-time social media manager to really devote some time and energy to doing great work on social media.
• Maybe I’m no good at social media marketing.
• Maybe our sharing ratio is off: Too much content, not enough conversation.
• Maybe everyone else is failing, too!
• Maybe we need to post more often.
• Maybe we need to post less often.
• Maybe, maybe, maybe …

So, while low share counts can be an indication of boring content, they are not the only measuring stick.

You have low Twitter engagement

Although it’s not always easy to determine what your exact engagement level is on all social media platforms, Twitter makes it incredibly transparent.

Twitter Analytics makes it super easy to get a feel for your engagement levels on its platform.

Here’s what I do.

I compare the number of impressions my content has received with the number of engagements, which includes retweets, favorites, link clicks, and so on.

Take a look at an example of this in Twitter Analytics.

A 28-day summary of this particular Twitter account shows that the number of tweets is down, impressions are down, profile visits are down, mentions are down, and followers are up.

This kind of data shows an overall decline in Twitter engagement, which suggests that the level of content being published on the account is less than exciting.

Obviously, that’s not the whole story, but it provides a fairly clear snapshot of how my Twitter audience is responding to the content I post on Twitter.

Twitter Analytics is helpful in that it provides month-by-month accounting for your Twitter engagement levels. You can instantly find out:

• Your top tweet.
• The number of impressions your top tweet earned.
• Your top mention.
• The number of engagements your top mention earned.
• Your number of tweets.
• Your total number of tweet impressions.
• Your profile visits.
• Your new followers.
• Your mentions.
• Your top follower.
• The follower count of your top follower.
• Your top media tweet.
• The total number of impressions earned by your top media tweet.

In addition, using Twitter Analytics, you’ll get a sharper perspective of who’s engaging with you. My Twitter followers, for example, are interested in marketing and 61% male. There’s plenty of juicy information here:

How does this data help me?

• I can understand how, why, and by whom my Twitter content is being shared.
• I can understand the demographics of my audience.
• I can retool my content to sustain higher interest.

In other words, all this data is serving a point: it helps me create more engaging content!

Your unfollow rate is climbing

Are your social media followers unfollowing left and right?

Is your audience shrinking rather than growing with each update?

This is obviously a sign that something is wrong.

Many social media users are particular about what pops up in their feeds, and they’re simply not going to keep following an account that’s not revving their engines.

There are a variety of free tools that show you who’s following and unfollowing you on various social media platforms.

A platform like Unfollowerstats gives you detailed reports on who’s following, unfollowing, etc., on Twitter.

Another Twitter tool is Tweepsmap.

Tweepsmap sends you an email summary of the number of people who followed and unfollowed you each week.

Unless you posted something that’s highly offensive, a high number of unfollows usually points to uninspiring content overall.

Traffic overall is dropping

If you’ve noticed a steady decline or, even worse, a dramatic drop in overall traffic, this can also be a sign that your audience is losing interest.

While they probably don’t expect everything you post to be completely awe-inspiring, it’s pretty easy to spot a sinking ship. Many people simply won’t come back for more.

Over time, this can cause traffic numbers to plunge. If you’re noticing that your number of repeat visitors is diminishing, boring content could be the reason for that.

To analyze your content from this angle, do a quick survey of your traffic stats on Google Analytics.

I like to run comparison reports to see how my traffic for a current period ranks against my traffic from a previous period.

Sinking numbers are a sign that something is wrong. This website I recently checked is an example of that:

Data is a tricky beast to tame. If you’re not careful with it, you can come away with a false picture of what’s wrong.

Data only tells you what’s going on, but it doesn’t diagnose the problem.

If you suspect that boring content is a problem, work on fixing it, and see how things change.

Conclusion

Boring content isn’t good for anyone. It’s not stimulating your audience, and it’s not helping your brand grow.

But what do you do if your content just isn’t exciting? How do you fix this problem before it gets out of control?

I recently contributed a post to the Content Marketing Institute that offers some ideas on what you can do when your content is boring. This will provide you with some specific techniques for remedying the situation and spicing things up.

Remember, data is your friend. You can get a clear perspective of what’s happening and ways to fix it by constantly looking at your data, running your numbers, poring over the metrics, and staying on top of things.

What measures have you taken to make boring content more exciting?

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