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Jeff Hoyt

Fill Your IRA With Low-Cost Index Funds

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Save On Fees While Building Your Retirement Nest Egg

Does your IRA or 401(k) contain mostly actively managed funds or index funds? Do you know the difference between those two funds? Do you even know what’s in your IRA or 401(k) at all?

If any of those three questions give you pause, it’s probably time to review your retirement account and think about whether you are investing properly to meet your needs.

Consider the difference between actively managed funds and index funds, starting with their objectives. Index funds attempt to match the return of a given index (such as the S&P 500 or the Russell 2000).

Easy to Manage

These funds are easy to manage, because all that’s required is buying the stocks in that index and maintaining them in relative proportion to their importance in that index.

Actively managed funds employ fund managers who are constantly attempting to beat the market and provide a greater return than the index average.

The tradeoff is in fees. Actively managed funds have significantly higher fees than index funds on average (0.84% for active funds versus 0.11 percent for index funds, according to The Motley Fool).

Better Returns

Not only must an active fund manager provide a better return than the market, the difference must be large enough to cover the higher fees.

While a 0.73 percent difference in fees doesn’t seem like much, remember that as your retirement funds grow, overall fees grow since they are assessed as a percentage of assets in your account.

Higher fees can make a difference of hundreds of thousands of dollars over a lifetime of retirement investments.

Huge Additional Savings

An analysis by NerdWallet found that a millennial with a $25,000 starting investment and annual $10,000 additions would save $533,000 over the course of a 40-year retirement investment if fees were cut from 1.02 percent to 0.09 percent (assuming a 7 percent average annual return).

A 0.93 percent difference is not hard to find when switching from an active fund to an index fund.

You may find an active fund manager that crushes the market and provides stunning returns – but the odds are against you.

Passive Usually Outperforms

Research from Standard and Poor’s in May 2017 suggests that you have a nearly 5 percent chance that picking an actively managed domestic equity mutual fund will provide a better overall return than a passively managed index fund.

If your chosen retirement vehicle is an IRA, you have the freedom to choose any type of account that you want.

You can simply do research on the index funds that have the lowest fees and perform up to the index benchmark (which should always be the case), and make your choice from those options.

Your 401(k) Should Have Them

An employer-based 401(k) plan may have limited options, but generally at least one index fund will be available to you.

Of course, if you contribute very little to your retirement accounts – or have no retirement accounts at all – you have some work to do before considering what type of investments to select.

Make sure that you take full advantage of any employer-based 401(k) account, especially up to any matching fund levels. Put away as much money as you can afford into your IRA or 401(k) up to the annual limits.

IRA Limits

For 2018, 401(k) limits have risen to $18,500 per year with an extra $6,000 if you are at least 50 years old, and IRA limits stay at $5,500 with an extra $1,000 if you are at least 50 years old.

Unless you can pick a great active fund manager, or are talented enough and have enough time to manage your own funds, we suggest going with low-cost index funds.

If you do decide to go with an active fund with higher fees, just make sure that you are getting your money’s worth for the extra expense.

This article was provided by our content partners at MoneyTips. Photo ©iStockphoto.com/AndreyPopov

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Your Poor Credit Score Can Cost You at Least $21,000

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New Study Shows the Effect of Low Scores on Mortgage Loans

Your Poor Credit Score Can Cost You $21,000 New Study Shows the Effect of Low Scores on Mortgage Loans

A poor credit score can cost you a lot of money when you take out a mortgage.

A recent study by Zillow shows that the higher interest rates from a poor credit score can add at least $21,000 in additional interest to a mortgage, but often it’s even more than that.

Zillow analyzed over 100,000 mortgage quotes offered on Zillow Mortgages across the nation between March 25 and May 5.

It Doesn’t Take Much

Using the nationwide median home price of $213,100 and a 20 percent down payment as a reference point, Zillow found that potential borrowers with excellent credit (above 760) could qualify for a 4.5 percent interest rate on a thirty-year fixed-rate mortgage.

Borrowers with merely fair credit scores (640 to 679) could only qualify for a 5.1 percent rate. A change of 0.6 percent doesn’t seem like much, but the differences add up.

In this case, the drop from excellent to fair credit will cost you approximately $21,000 over the life of a thirty-year loan.

More Profound Effects

If you live in a market where homes are more expensive, the effect is even more profound. Apply the above example to San Jose ($1.3 million median home price), and the credit drop costs an additional $129,000.

Conversely, in a relatively inexpensive urban market like Pittsburgh, where the median home price is $135,465, the credit score drop only costs $9,000.

When you’re in the fair credit range, even a small increase has large positive effects. By bumping your credit score from the fair range to the good range (680-719), your interest rate offer for the national median home would decrease from 5.1 percent to 4.6 percent — bridging most of the gap between fair and excellent credit.

Save Money with Good Credit

According to Zillow’s data, on the national scale, simply moving up from fair to good credit would save you $16,000 over the life of a 30-year loan.

Not every market follows the national example. In Cincinnati, Zillow found that the rates for excellent, good, and fair credit were 4.7 percent, 5 percent, and 5.2 percent respectively.

In that market, going from fair to good credit saves $5,000 over the life of the median home loan while going from fair to excellent credit saves $12,000.

See the Impact

The Zillow study shows the credit score effects on median home costs for 53 urban markets. If you live in one of these markets, you can see the effects directly.

If not, you can estimate the effects by finding the median home price for your market and using an online calculator to run different interest rate scenarios.

You can see why a higher credit score is important – but do you know how to get one?

Make sure that you always make all of your monthly payments on time with at least the minimum amount due. Your payment history is the largest contributing factor to your credit score.

Keep Your Ratios Low

The second largest factor in a credit score is the total amount you owe. Keep your overall debt-to-income (DTI) ratio and your credit utilization ratio – the amount of credit you use versus the amount you have available – as low as you can.

Finally, check your credit report regularly to make sure there are no errors or signs of fraudulent accounts that could be inadvertently dragging down your score.

If you plan to buy a home, check your score three to six months before you intend to buy, and periodically until you do buy. You may need time to raise your score – and, thanks to Zillow, you now know how much you can save by doing so.

This article was provided by our content partners at MoneyTips. Photo ©iStockphoto.com/kosmin

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1 In 4 Kids Will Be Victims Of ID Fraud Before Age 18

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1 In 4 Kids Will Be Victims Of ID Fraud Before Age 18It’s hard for young Americans to leave the security of their childhood home and find their way in the real world. It’s even harder when identity thieves have stolen their identity and ruined their credit before they even have a chance to establish their own record.

The Federal Trade Commission (FTC) reported just under 14,000 cases in 2017 and over 15,000 cases in 2016 involving identity theft of Americans age nineteen and younger.

The credit bureau Experian reports that around 17 percent of their annual fraud cases target children, and they estimate that 25 percent of children will experience a form of identity theft or fraud before they turn eighteen.

ID Fraud Before Age 18

Identity thieves consider a child’s ID a gold mine. Parents don’t think to check for fraudulent accounts established in their minor child’s name.

They may not find out about the identity theft until bills or collection notices arrive or tax forms are rejected – perhaps years after the damage is done.

How do thieves get children’s information? A Social Security number is generally all they need – the rest can be pieced together with a basic Internet research.

Your Child’s Number

Think of all the places that your child’s Social Security number is collected and stored – schools, medical facilities, tax forms, day care centers – even sports leagues and summer camps often require Social Security numbers for identification.

Every reveal of your child’s Social Security number is an opportunity for hackers to steal that information. Hold back your child’s Social Security number and other personal information unless it’s essential. Safely store any documents containing your child’s personal info and shred the non-essential ones.

Consider your definition of “safe” very carefully – family members and friends can also perpetrate child identity theft.

Social Media

Social media also provides plenty of information for thieves to use. They may not find a Social Security number, but they may find enough information (place and date of birth, etc.) to successfully open accounts. Be careful about what you post online.

If your child has a credit report, you can place a credit freeze in your child’s name with the three major credit bureaus (Experian, Equifax, and TransUnion).

If your child has no credit file, you can create one and place a freeze on it. The recently-passed Economic Growth, Regulatory Relief, and Consumer Protection Act will make these actions free starting in September 2018.

Freeze It

A credit freeze prevents anyone from accessing your child’s credit file – even you or your child – and prevents thieves from opening an account in their name.

You can unfreeze the file when your child reaches age seventeen or is ready to establish credit – but be sure you properly store the PIN number required to unfreeze credit when the time comes.

If you haven’t checked to see if there is a credit report on your child, do so now. You can limit the damage caused by any identity theft and start the long process to clear your child’s name.

Other Resources

The Identity Theft Resource Center is an excellent resource for helping you assess the problem and walk you through the reporting and repair process.

Hopefully, there’s no damage and you can take pre-emptive action to keep identity thieves from opening accounts in your children’s names. Do your children a favor and protect their identity and their credit to the best of your ability.

Give them every opportunity to start life on their own with a clean slate – and then you can discuss whether their old room will be a craft room or a mancave.

This article was provided by our content partners at MoneyTips.com. Photo ©iStockphoto.com/Imgorthand

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4 Infographics: How People Found and Financed Their Homes (UPDATED)

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Buying a home will probably be the most expensive item you ever purchase… until you buy the next one.

Finding the right home at the right price is always a challenge. Discover how other American homebuyers searched for – and found – their homes in the infographic below. It’s actually the first of three infographics that are all based on the latest report from the National Association of Realtors.

How People Searched for Their Homes This Year

Infographic on Decision Factors

Is your home bigger than average? What made you fall in love with your home? The infographic below explores the factors that American homebuyers considered when choosing their homes.

How We Chose Our Homes (Infographic)

Down Payment Infographic

You may not need to make a down payment of 20 percent but putting together the down payment is still one of the most challenging steps in buying a home.

The smaller the down payment you can afford, the better your credit needs to be to secure your mortgage.

Finding the right home at the right price is always a challenge. Discover how other American homebuyers searched for – and found – their homes in the third infographic based on the latest report from the National Association of Realtors.

How We Made Our Down Payments (Infographic)

Readers, please let us know what you think of the infographics above — how do the findings compare with the way you found your own home? Please let us know by posting about it in the comments section beneath this article.

This article was provided by our partners at moneytips.com.

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

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First-Time Buyers Account for Nearly Half of All New Mortgages

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First-Time Buyers Account for Nearly Half of All New Mortgages

Prospective first-time homebuyers are facing stiff challenges as they enter today’s housing market – including finding an affordable home. A profound shortage of starter homes is limiting choices and raising home prices.

According to Trulia, as of April 2018, the inventory of starter homes decreased 48.6 percent from six years prior while prices rose 57.9 percent.

Many would-be first-time buyers are millennials, saddled with student loan debt and struggling to save for a down payment.

Interest Rates

To make matters worse, the run of historically low interest rates appears to be over as the Federal Reserve gradually increases interest rates and mortgage rates follow suit.

According to data from Freddie Mac, first-time homebuyers are buying in record numbers despite these challenges. Excluding refinancing loans, first-timers constituted 46 percent of all new mortgages in the first quarter of 2018.

That’s the largest share of first-time buyers recorded by Freddie Mac since they began collecting data in 2012 -– and it’s a continuation of a general upward trend.

Simple Economics

What’s behind the shift? It may be simple economics. The housing crisis knocked many potential homebuyers out of the market through job losses and tightened credit.

Since that time, unemployment has dropped, the economy has recovered, and credit has loosened a bit — putting more first-timers in an economic position to buy a home.

The affordable home shortage is a logical product of this pent-up demand from millennials. If a greater number of affordable houses were to magically appear, the share of first-time homebuyers would be even higher.

Why So Many First-Time Buyers?

It’s also possible that some buyers are stretching to get into their first home before home prices and interest rates rise even further. They may be right. Economists are not optimistic about the supply of affordable homes in the near future.

Are you ready to make your plunge into the home-buying market before interest rates and home prices go up again? Before you begin, take a few moments to consider your overall financial situation.

Start with a review of your credit report and credit score. A low credit score or red flags such as missed monthly payments or excessive debt could disqualify you for a mortgage loan – and any loan offers you get will come with higher interest rates.

Conventional loans backed by Fannie Mae and Freddie Mac generally require a minimum credit score of 620, while FHA loans can go as low as 580 with 3.5 percent down payment or 500 with 10 percent down payment.

With scores that low, you will probably need another factor in your favor to secure a loan (such as a high income or a very low debt load).

Consider All the Costs

Next, consider all the costs associated with homeownership. Many first-timers focus on the down payment and monthly mortgage payments, forgetting the many auxiliary expenses.

If you’re on the edge of qualifying for a home, consider your qualifications for alternative programs such as FHA or VA loans that require lower down payments and are more tolerant of low credit scores – but remember that these programs come at a cost. You are borrowing more money and will pay more in interest over the life of the loan.

Join the ranks of first-time homebuyers if you’re ready — as long as you make sure that you really are ready.

Consider downsizing your home goals or delaying your purchase if you are stretched too thin and adjust your budget to plan for a future home purchase instead.

This article was provided by our content partners at MoneyTips. Photo ©iStockphoto.com/vladimirvladimirov

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Why You Should Check Your Credit Report and Credit Score

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Why Check Your Credit Report and Credit Score? Why Wouldn't You?
Sometimes people ignore important warning signs – such as a stop sign, the expiration date on their yogurt, or that rapidly spreading rash. You might ignore those signs and come out okay, but why take that chance? Your credit report and credit score act as similar warning signs for your financial health. Ignore them at your own risk.

Your credit report contains your collective credit history as well as your current credit activity. Lenders use algorithms that distill all that information into a single credit score for ranking purposes.

Low Credit Score

A low credit score tells potential lenders that it’s risky to lend money to you. You may not qualify for a credit card or a mortgage loan, or you may have to pay higher interest rates if you do qualify.

You may not get the best offers for life insurance, cell phone plans, or other services where a credit check is required. A low credit score could even contribute to being turned down for an apartment or a job.

If you always make payments on time, why should you bother to check your credit score? You should check it because it’s possible to be responsible with credit and still have a low credit score.

Not Enough Information

If you don’t use credit very often, your credit file may not have enough information for lenders to decide whether to extend credit to you when you really need it – even if you make all payments on time when you do use credit.

Mistakes on your credit report could also give you a lower credit score than you deserve – for example, payments incorrectly listed as late.

However, there’s one overwhelmingly important reason to check your credit report – fraudulent use of your account.

Identity Theft

With all the security breaches and hacks in recent years, there’s a decent chance that identity thieves have access to your personal information.

Thieves could create entirely new credit accounts in your name, run up huge charges, and leave you to make payments.

If you don’t regularly check your report for unauthorized charges or new accounts that you didn’t create, you may not know about them until bill collectors come in search of payment.

By then, your credit score could be ruined, and you’ll spend months straightening out the mess.

Monitor Regularly

By monitoring your credit score regularly, you’ll notice the factors that make your score rise and fall. This will help you quickly spot trouble.

If your score suddenly drops without any valid reason – such as a large credit purchase that pushes you close to your limit – you know that you need to check your credit report as soon as possible.

The five main factors that make up your credit score are:

  • Payment history;
  • The percentage of your available credit that you’re using;
  • The age of your credit accounts and the length of time since each account was last used;
  • The mix of active credit types that you have;
  • And the amount of new credit you are applying for.

Best Scores

For the best credit score, you need to make all your payments on time, use a small amount of available credit, maintain accounts and use them regularly, have a suitable mix of credit types, and limit applications for new credit.

Now you have no excuses. You know what affects your credit score. You know the importance of monitoring your credit score for unexpected drops and checking your credit report for mistakes or signs of fraud. You have the free resource to make these checks.

Set up a regular credit-monitoring plan and stick to it – and watch out for life’s other warning signs as well.

You may be able to ignore stop signs, icky rashes, and ugly credit reports for a while, but eventually you’re likely to face unpleasant consequences. And remember: Life’s too short for yucky yogurt.

This article was provided by our content partners at MoneyTips. Photo ©iStockphoto.com/HbrH

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