Month: May 2020

  • Sinking Funds: What They Are and Why You Need Them in Your Budget

    Have you ever had one of those months where you’re right on track with your budget and feeling really proud of yourself, and then your car breaks down?

    You’ve got a $500+ expense that you hadn’t planned for, meaning you have to put it on your credit card. Now, instead of spending the next few months saving up for that weekend getaway you’ve been dreaming up, you’re going to spend it paying off those car repairs. 

    Luckily, there’s an incredibly simple solution to prevent this problem from happening again: Sinking funds. 

    In this post, I’m going to share what sinking funds are, why you need them in your budget, and how to get started using them today.

     

    Sinking Funds: What They Are and Why You Need Them in Your Budget

    There are affiliate links in this post, meaning I may make a small commission at no additional cost to you. For more information, see my full disclosure policy here.

     

    What is a sinking fund?

    A sinking fund is a savings strategy you can use to save monthly for planned expenses that come up throughout the year.

    The entire concept of sinking funds is that you save a bit of money each month for big expenses you know you’ll only have to pay once in a while.

    Let’s say you spend $600 each year on Christmas. Rather than waiting until the end of the year and having that oh shit moment when you realize how much you’re spending (end ultimately putting it on a credit card), you can save throughout the year. Set aside $50 per month for Christmas, and when December rolls around, you’ll have your entire $600. 

    Sinking funds are effective for three different types of purchases. The first type of purchase is expected costs you know how much will cost. Sinking fund examples of this include vehicle registration, insurance, and annual subscriptions.

    Sinking funds are also ideal for expenses that you know are coming but that you don’t know quite how much they’ll cost. These expenses include car repairs, medical bills, and pet expenses. 

    The final type of expense you can use sinking funds for is saving for financial goals. If you’re saving up for a vacation or the downpayment on a home, you can use sinking funds by setting aside a specific amount of money each month. 

    The important thing you have to remember is to treat your sinking funds just like any other bill — Nonnegotiable.

     

    Why are sinking funds important?

    There are so many expenses that pop up throughout the course of the year that we know are coming, but that somehow always seem to catch us by surprise. And they always end up screwing your budget.

    Sinking funds allow you to spread those expenses out across each month instead of paying them in a lump sum when they pop up. That way, you can ensure you’re never going over budget. 

    You’ll never have to feel guilty about going on that vacation or spending money on the holidays because you’ve been planning and saving for those expenses. 

    Read More: 17 Foolproof Ways to Save Money on a Tight Budget

     

    Common sinking fund categories

    Everyone’s sinking fund categories are going to look a bit different based on what you’ve got going on in your life, but here are some common sinking fund examples:

    • Vehicle registration
    • Car repairs
    • Car insurance
    • Home repairs
    • Christmas
    • Medical bills
    • Pet expenses
    • Vacation
    • House downpayment
    • Association dues
    • Clothing
    • Car replacement
    • Weddings
    • Kid-related expenses
    • Tuition
    • Annual subscriptions
    • New appliances

     

    How much should I put in a sinking fund?

    Each sinking fund is going to have a different amount in it based on how much you expect to spend in each category. 

    For fixed expenses, this will be easy. Let’s say you’re creating a sinking fund for your vehicle registration, which costs $120 per year. Save $10 per month, and you’ll have the full amount after one year to pay for your vehicle registration. 

    For variable expenses, you’ll have to estimate how much is appropriate for you. One way to do this is to look at how much you’ve spent in the past. 

    Let’s say you’re setting up your Christmas sinking fund. Look back through your budget to see how much you spent on Christmas last year, and you’ll have a good idea of how much to save.

     

    Where should you keep your sinking funds?

    When it comes to storing and keeping track of the money for your sinking funds, you have a few different options. 

    I’ll start with my favorite: You Need a Budget (YNAB). YNAB is a budgeting app that allows you to not only plan your monthly budget but to plan your finances further into the future and track the money you’ve set aside for specific purposes. 

    At any given time, I can see exactly how much money I have in my pet expense sinking fund, for example. Then, when I spend money on our dog, it gets categorized as a pet expense in YNAB. The money that I’ve set aside for each category just sits in my savings account until I need it.

    YNAB is hands-down my favorite budgeting app and has totally transformed our budget. It has an annual fee, but you can grab a free trial here. 

    If you’re not using a budgeting app like YNAB to track your money, I recommend using a savings account with budgets (or just multiple savings accounts) to separate your sinking funds.

    In addition to the savings account I have at my credit union, I also have a savings account at Ally Bank. Ally Bank allows you to use buckets in your account to separate the money you’re saving for different purposes. 

    Another solution that plenty of people find useful is using a printable sinking fund tracker. You can find plenty of options on Etsy, or even search for free sinking fund trackers to print.

     

    What is the difference between a sinking fund and an emergency fund?

    You might be reading this post and wondering what the difference is between a sinking fund and an emergency fund. After all, aren’t they both just a way to save for emergencies?

    Sort of.

    An emergency fund is a way to save for unexpected emergencies. The most important job of your emergency fund is to temporarily cover your monthly expenses in case you lose your job. That’s why it’s wise to have 3-6 months of living expenses in your emergency fund.

    Learn more here about how to build an emergency fund and how much you should save.

    A sinking fund, on the other hand, is for specific expected costs. In some cases, it will be a cost, such as your vehicle registration or your Amazon Prime membership, where you know exactly how much it costs.

    In others, such as car repairs, you don’t know exactly how much they’ll cost, but you know they’ll come up eventually. If the amount you need exceeds the amount you’ve saved, then you can dip into your emergency fund to fill the gap. 

     

    Final Thoughts

    I can totally relate to that frustration of getting hit with an unexpected expense, or an expense that you knew was coming but totally forgot about. 

    I can honestly say that sinking funds have completely changed my finances around. Rather than getting hit by expenses that I have to throw on a credit card, I’m able to plan ahead with my budget and instead put my money toward things I’m really excited about (rather than those pesky car repairs).

  • Should I Refinance My Student Loans?

    When my husband and I got married, we had over six figures of student loan debt. It wasn’t exactly the ideal way to start our life together. 

    However, it did force us to have a lot of money conversations early on and make sure we were on the same page with our finances. And for that, I could not be more grateful. 

    One of the topics of conversation was the fact that, while most of our debt was from federal loans with reasonable interest rates, he had one private student loan with an astronomical interest rate — About 14%. Yeah, that was painful. 

    One of the first money decisions we made together was to decide to refinance that private loan. With literally only a few minutes of effort, we were able to reduce his rate by about 60%. When we ran the numbers, we found that we were saving ourselves tens of thousands of dollars over the life of the loan. 

    Refinancing a student loan is an amazing way to reduce your interest rate and save yourself a ton of money in the long run. 

    In this article, you’ll learn what student loan refinancing is, whether student loan refinancing is the right choice for you, and how to refinance a student loan. 

     

    Should I Refinance My Student Loans?

    There are affiliate links in this post, meaning I may make a small commission at no additional cost to you. For more information, see my full disclosure policy here.

     

    What is student loan refinancing? 

    Refinancing a student loan is essentially taking out a new loan to replace your old one. When you refinance a student loan, you take out a loan from a private lender. That lender pays off your existing loan, and you now have a new loan with new terms, a new interest rate, and a new monthly payment. 

    You can refinance both private and federal student loans, though certain types of loans may make more sense for refinancing. 

     

    How do I know if refinancing is right for me?

    The primary reason to refinance a student loan is to save money over the life of the loan as a result of a lower interest rate. In the case of Brandon and I, we reduced our loan by more than 60% and saved our future selves tens of thousands of dollars. 

    Here are some reasons that student loan refinancing might be the right choice for you:

     

    YOU HAVE A LOT OF STUDENT LOAN DEBT

    Even with aggressively paying down our loans, it’s still going to take Brandon and me years to pay them off. For that reason, any reduction in interest rate would have been worth it for us. If you know you’re going to be paying down your loans for many years, refinancing to a lower rate is definitely worth it!

     

    YOU HAVE HIGH-INTEREST DEBT

    Even if you don’t have a ton of student loan debt, a high interest rate can be miserable. I know far too many people who see their student loan balances increase because of interest! If you have a high rate right now, refinancing is definitely something to consider.

     

    YOU HAVE A STABLE INCOME AND A GOOD CREDIT SCORE

    While it would be amazing if everyone could refinance to a lower interest rate, that’s simply not how it is.

    Just like qualifying for any other loan through a private lender, refinancing your student loans with a low rate will require you to have a credit score and income that makes you a desirable loan candidate. If you do have an excellent credit score, you may be able to get a really good rate. 

     

    How do I refinance my student loans?

    Alright, we’ve talked about what student loan refinancing is and when it might be the right choice for you. But how the heck do you actually do it? Luckily, it’s a lot easier than you may think.

     

    STEP 1: REVIEW YOUR CREDIT REPORT

    First of all, I definitely recommend doing a quick review of your financial situation before applying for any loans. The last thing you want is to fill out an application and find that your credit score has unexpectedly dropped or that you have a negative mark on there. 

    Checking ahead of time will help you to avoid any unwelcome surprises. If you check your report and your score has dropped or there’s a negative mark, you may want to take some time to get that ironed out before refinancing. 

     

    STEP 2: SHOP AROUND FOR DIFFERENT RATES

    Don’t just pick a lender because someone else used them. Spend some time shopping around. Lenders will allow you to fill out a prequalification form, and it only takes a few minutes. That way, you’ll be able to compare a few different offers. 

     

    STEP 3: CHOOSE THE BEST OFFER FOR YOUR SITUATION

    Once you have all the offers in front of you, you can choose whichever one is right for you. It usually makes sense to go with whichever company offers the lowest interest rate, but make sure to read all of the terms, such as the repayment period and forbearance options. 

    If you’re shopping for a loan to refinance your student loans, I recommend Credible. You can see rates from more than a dozen different lenders to find the best loan for your situation.

     

    STEP 4: FINALIZE YOUR NEW LOAN

    After you choose a lender, you’ll probably have a bit more paperwork to fill out to finalize the loan. Then they’ll handle the process of paying off your old loan, and it’s just a matter of making your monthly payments!

     

    When is refinancing not a good idea?

    Refinancing your student loans is an excellent choice for some people. In the case of my husband and me, refinancing his student loan is saving us tens of thousands of dollars over a period of several years. 

    But it’s also the case that refinancing simply isn’t for everyone. Let’s talk about a few of the reasons why you might be better off not refinancing your student loans. Some of these reasons are specific to people with federal loans, while others apply to anyone. 

     

    IF YOU’RE ON THE PATH TO STUDENT LOAN FORGIVENESS

    There are several federal student loan forgiveness programs available to individuals working in certain fields, such as teachers and public servants. 

    However, these programs are only available for federal loans. If you refinance loans with a private lender, you are no longer eligible for those programs. If you think you’ll be able to take advantage of one of those programs, you may be better off not refinancing. 

    As a note, please do a LOT of research on these programs before you get your heart set on them. Student loan forgiveness is never a guarantee and plenty of people who expected to have their loans forgiven have thus far been denied. 

     

    IF YOU NEED AN INCOME-DRIVEN REPAYMENT PLAN

    Like so many recent college graduates, I remember being so excited when I learned about income-driven repayment plans. After all, I was a low-paid government worker and wanted to be able to reduce my monthly student loan payment as much as I could. 

    Then it became clear that the lower my monthly payments, the longer it would take me to pay my loans off. For that reason, I generally don’t recommend income-based repayment plans (or limiting yourself to your minimum monthly payment). 

    That being said, I recognize that many of us go through situations in life (myself included) when our income is low and we just can’t swing a higher payment. Heck, one of the first phone calls I made after my divorce was to my student loan lender, asking them to lower my payment based on my income. 

    If you currently rely on an income-based repayment plan to afford your bill each month, refinancing is not for you. Private companies are far less likely to offer these plans.

     

    IF YOU CAN’T QUALIFY FOR A LOWER RATE

    The big benefit of refinancing your student loans is to reduce your interest rate. My husband and I were able to reduce his rate by more than 8% by refinancing — We won’t talk about how outrageous it is that his rate was high enough to be reduced that much in the first place. 

    If you already have a very low rate or you shop around and find that you can’t qualify for a lower one, then refinancing is not for you. You definitely don’t want to refinance for a higher rate!

    If your credit history is preventing you from getting a better student loan refinance rate, take the next 6-12 months and work on boosting your credit score so you can try again in the future. 

     

    IF YOU MAY NOT BE ABLE TO MAKE YOUR LOAN PAYMENTS

    The federal government has programs in place that borrowers can take advantage of if they run into financial hardship and can’t pay their monthly loan payments anymore. Private companies aren’t always so understanding. 

    If you’re struggling to make your student loan payments and legitimately fear the day is coming when you won’t be able to pay, I wouldn’t refinance from a public loan to a private one. 

     

    Final Thoughts

    I can entirely relate to the feeling that you’re never going to get those loans paid off. I understand the anxiety that comes with seeing the amount that you owe increasing each month rather than decreasing because your interest rate is so high. 

    Trust me when I say: I understand.

    Refinancing isn’t for everyone, but being able to refinance your student loan can be a serious game-changer for reducing your monthly payment, reducing your interest rate, and saving yourself a hell of a lot of money in the long run. 

  • How to Rebuild Your Finances After a Divorce

    No one goes into a marriage planning to get divorced. Unfortunately, it happens — And it often it’s a tough financial blow.

    I got married for the first time when I was 24. I thought I had my shit together — Marriage, house, and a sizeable household income. 

    Less than two years into the marriage, I found myself completely undoing everything I had built over the past several years. 

    People often talk about the emotional toll that a divorce takes, but the financial one was a lot harder for me. After all, I knew almost nothing about finances and found myself thrown into the deep end. 

    The next year was one of a lot of learning and a lot of rebuilding. I had to educate myself about all things budgeting and personal finance and then use the information I was learning to completely rebuild my finances. 

    If you’ve been through this or are currently going through this, I see you, and I know how you’re feeling. In this article, I’m talking right to you and teaching you how to rebuild your finances after a divorce. 

     

    How to Rebuild Your Finances After a Divorce

     

    How divorce affects women

    Before we talk about how to rebuild your finances after a divorce, let’s talk about why it’s so important that you make this a priority.

    First of all, divorce is expensive. As if financially starting over on your own wasn’t bad enough, add on the fact that the average divorce costs around $15,000. I was incredibly lucky that mine wasn’t that pricey, but it’s a reality for way too many people. 

    Another ugly truth that it’s important for us to talk about is that divorce uniquely affects women.

    We’re still living in a world where men make more than women, and 69% of husbands make more than their wives. So when a couple gets divorced, the woman’s household income drops more than the man’s. 

    Finally, data actually shows that women are more negatively affected after a divorce, both financially and emotionally.

    I don’t know about you, but I find those numbers horrifying. And those numbers are exactly why these lessons are so important!

     

    Gather your support squad

    If there’s one thing I wish I would have done differently during my divorce (there are actually a lot of things I would do differently, but if I had to pick just one), it would be to gather my support squad right away. 

    Divorce sucks, and you need your support system more than ever. But more than emotionally, they can be there for you financially. 

    I’m not saying you need to ask people to help you financially, but people may be able to offer insight. There are plenty of people who could have offered personal insight on the topic, and I didn’t take advantage of those resources. 

    Another member of your support squad should also be an attorney. When my ex-husband and I started the divorce process, we promised things would be amicable and that we’d split things down the middle without attorneys.

    Needless to say, things did not remain amicable. Even in the friendliest of divorces, hire an attorney. 

     

    Audit your financial situation

    It’s safe to say that your finances post-divorce look a heck of a lot different from your finances pre-divorce. For that reason, your first course of action should be an audit of your entire financial situation. 

    First, take stock of the value of your assets. Depending on your situation, this might be a home or car from your marriage. It also hopefully includes cash in the bank. 

    Next, count up your debts. Unfortunately, many people come out of a divorce with more debt than they started. It’s best to face this head-on. 

    Finally, add up your monthly income and your monthly expenses (including debt payments). Hopefully, your income is more than your expenses, but if not, we’ll deal with that too. 

     

    Set up your financial plan

    Now that you’ve done an audit of your entire financial situation, it’s time to make your financial plan. Your financial plan is going to look awfully different from the one you had when you were married, so it’s best to start from scratch. 

    Here’s what you should include in your plan:

    • Your monthly budget. Adjust any expenses as needed to make sure your expenses are less than your income. 
    • Your debt payoff plan. If you’ve got debt, then you also need a plan to pay it off. And paying the monthly payments is rarely a good plan.
    • A savings plan. We’ll talk later about building an emergency fund, but just know you need to have a savings plan. 

     

    Update your documents and accounts

    After your divorce, be sure to allocate some time to update all of your documents and accounts. First, this might mean letting your insurance companies know about the divorce. If you and your spouse shared a health insurance plan, one of you may need to sign up for a new one.

    Next, be sure to update your beneficiaries! I’m embarrassed to say that it took me a solid year to change the beneficiary on my life insurance policy — my ex-husband would have gotten a nice surprise if anything had happened to me!

    Be sure to check your beneficiaries on other accounts, too, such as any retirement accounts. 

    In some cases, getting someone’s name off a loan might mean refinancing. That was the case with my car loan, and it’s probably the case with others as well. 

    If your divorce involves a name change, then, of course, you’ve got a whole lot of extra work to do to change your name. Change your name with the Social Security Administration, and then be sure to change your name on all of your accounts. 

     

    Be okay with downsizing

    For most of us, divorce means a pretty drastic reduction in household income (in my case, it was a roughly two-thirds reduction. And when you’ve got less money, you’ve gotta downsize. 

    The first big downsizing move I made was to move from our three-bedroom house to a studio apartment. At first, I thought it would feel way too small, but it was actually the perfect size for just one person! Super easy to clean and very homey. 

    The other downsize I had to make was my monthly car payment. My ex-husband and I had purchased my car together, and the monthly payment was based on what the two of us together could afford. 

    So when it was just me making the payment, I couldn’t swing it. 

    At that point, I was faced with two choices. I could sell the car and downsize to something cheaper, or I could refinance. I ended up refinancing my loan and cutting my payment in half while also getting a lower interest rate. 

    Downsizing is going to look a bit different for everyone, but it really comes down to getting your monthly payments to a place where they fit into your new budget. 

     

    Build up your emergency fund

    Literally one of the first things anyone should do after a divorce is build up an emergency fund. If you’ve already got an emergency fund, make it bigger. 

    Here’s the thing about going from a two-income household to a one-income household. If you lose your job or source of income, you’re now a zero-income household. 

    When you’re married and both bring in income, there’s an extra safety net in that the other spouse would theoretically still be bringing in monthly income. That just isn’t the case when you live alone. 

    So while I think saving three months’ worth of expenses is a good starting point when you’re married, a single person should aim to save twice that. 

    I know this doesn’t happen overnight, and if someone had told me this right after I got divorced, it would have seemed absurd. 

    At the very least, you can start putting little bits away now until you can ultimately reach that goal of six months of expenses. 

     

    Cut back on personal spending

    When you’ve got a lower household income, you’ve got less wiggle room in your budget for discretionary spending. While married-me wouldn’t have given it a second thought to go out to lunch or order my favorite takeout, divorced-me was careful to double-check the budget first. 

    I’m not saying you can’t spend money on yourself. I think that after a divorce, more than any other time, we could use some pampering. 

    But at the same time, we have to be realistic. If you can’t fit the same amount of discretionary spending into your budget as you once could, figure out where you can cut back. 

     

    Seek out personal finance education

    Probably the best thing I did to help rebuild my finances after my divorce was to immerse myself in personal finance education. I was determined to figure this money stuff out, so I threw myself into every resource I could find.

    I read blogs, read books, listened to podcasts, read financial news, and just about everything else you can think of. The year after my divorce was probably more educational than my entire four years of college for that reason! 

    If you’re newly divorced (or not) and looking to up your personal finance game, here are some of my favorite resources:

     

    Look for ways to increase your income

    Listen, divorce sucks for a lot of reasons. But it also has its silver linings, one of which is that you now have a lot more free time. And while more free time might not seem like an upside for everyone, it’s a fantastic opportunity to increase your income!

    I was lucky in that I already had my blog up and running when I got divorced. As a result, it was easy for me to use it to make some extra money. 

    Even if you don’t already have a side hustle in place, you can easily get one up and running! 

    There are so many options out there to help you make extra money. Here are some of my favorite ways to make an extra $1,000 (or more) each and every month. 

    Increasing your income has so many benefits. First, it can help you to quickly pay off any debt you accrued during the divorce — I ended up having to put a lot of expenses on my credit card at first, and having a side hustle was a lifesaver.

    Having a side hustle can also help you to build up your emergency fund, create some extra wiggle room in your budget (for those of you missing your discretionary spending), or help you save for future financial goals. 

     

    Know that you can and will rebuild

    Having gone through a divorce myself, I know how impossible it can feel to build your finances. You look at your much-smaller household income and the amount of debt you accrued over the course of the divorce, and it literally feels insurmountable. 

    But I promise you that it is not impossible. You can and you will rebuild, and someday you’ll find yourself in a much better place, both financially and emotionally. You got this!