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No more excuses. It’s time to open your first IRA account. We walk you through the entire process, including where to open your account. It’s easy!

First IRA Account

Establishing your first IRA, or Independent Retirement Account, is a big deal in the world of finance. This tax-advantaged account is a great way to save and invest for the future. It generally earns more than you would in a high-yield savings account (thanks to compound interest!). And it allows your money to grow tax-free for decades. Aside from a 401(k)–if you have one–it’s the biggest first step you can make toward saving, and planning for a successful retirement.

Planning for retirement is imperative, too, if you don’t want to work for the rest of your life. No matter how much you make now or how much you’ll need in the future, set aside what you can, when you can. Believe me: your future self will thank you!

So, how do you go about deciding on and opening your first IRA? More importantly, how can you start saving in this retirement vehicle with a limited initial contribution?

Let’s talk about the first steps toward opening an IRA. Then we’ll discuss the best ways to fund one if you only have, say, $1,000 to contribute.

Who Can Open One?

First, know that not everyone is eligible to contribute to an IRA. So, who is eligible to establish and contribute to one? If you are younger than 70 ½ and have earned, reported income of any kind, you’re good to go.

The rules for an IRA are simple: you’re can contribute up to the maximum of either the annual contribution limit or your earned income for the year, whichever is lower. The annual contribution limit can change from year to year. For 2018 it’s $5,500 in or $6,500 if you’re over 50.

This means that if you earned $100,000 this year, you can still only contribute up to $5,500 (or $6,500) to your IRA. Conversely, if you only earned $2,500 this year, that is all you can contribute. Even if you have savings elsewhere or your parents want to give you a little extra cash, you can’t put more in the account than you earned in income.

Decide Which Type Is Right for You

There are two types of IRAs to choose from: traditional and Roth. Both are tax-advantaged. This means they both offer tax benefits as they grow. But they work very differently.

Both IRA types have the same contribution limit. You can have both types of IRAs and contribute to both throughout the year. But if you split the money, the combined amount you contribute to both accounts still can’t exceed the applicable maximum.

A traditional IRA lets you see the tax benefits now. You contribute money to this account during the year tax-free. You can contribute pre-tax dollars through your employer. Or you can contribute post-tax income on your own, and then deduct the contributions when you file your taxes.

Your earnings in the traditional IRA will grow tax-free over the years. However, when you withdraw the funds in retirement, you will pay income taxes at whatever your normal rate is at that time.

A Roth IRA is a little different. You will contribute to this fund with after-tax dollars throughout the year. So your employer won’t contribute from pre-tax dollars. And you can’t take a tax write-off for your contribution. Every penny you contribute has already been taxed.

Again, your earnings will grow tax-free over the years. However, when you withdraw funds, you won’t pay any income taxes. None, nada, zip. You’ll be able to withdraw dollar for dollar in retirement (after age 59 ½), without Uncle Sam taking another cut.

So, which one should you choose?

Well, first off, you don’t have to choose. You can certainly open both types, or even open one now to begin contributing and then open the other type later on. However, if you’re asking which would be the better choice for you, here’s the general rule:

  • If you think you’re making more money now than you will in retirement, go with the traditional IRA. Taking the tax break now, while you’re in a higher income bracket, is smarter and results in more savings.
  • If you think you’ll make more in retirement than you’re making now, go with the Roth IRA. A tax cut now, in the form of annual deductions, doesn’t do you much good if you’ll pay higher taxes on distributions when retirement comes.

Decide when you’re most likely to be in a higher tax bracket, and take the tax benefits then. You can also change this later down the line, if your career shifts and you wind up making substantially more or less than you do now.

Where to Open It

So, you’ve picked an IRA type and set aside some cash. Now, where is the best place to open your account and invest the money? After all, an IRA isn’t simply a savings account, meant to sit around earning a couple percent in interest. It’s a retirement account that you want to grow.

You have a few options available. Almost all major financial institutions offer IRAs. You can open one through a bank or a credit union of which you’re a member. You could turn to mutual fund companies or investment accounts for a more traditional option. Or you can even look into using your IRA to invest with a peer-to-peer lending site, such as Lending Club or Prosper.

You have many, many investment options–more so than with 401(k) investments, in fact. Which you choose is determined by your risk level, your ability to manage the account, and whether you have any specific investment goals.

You can invest your IRA with a robo advisor like Betterment or Wealthfront. These low-cost options can help you decide on a portfolio. They’ll even re-balance your portfolio over time to keep meeting your investing needs.

You could look into utilizing a broker, such as Ally Invest or OptionsHouse. If you want to invest in ETFs (exchange-traded funds) or individual stocks, this is the way to go. This is a great option if you want to pick and choose where your money gets invested.

Mutual fund companies, such as Fidelity, Vanguard, or Charles Schwab are some other preferred places to invest. Each company offers plenty of its own mutual funds to choose from, so you can pick the one that best suits you.

Within the “mutual fund” umbrella, you have a number of options for where your money actually goes. You can pick a target-date retirement fund, which is a fund based on your expected year of retirement. The company will rebalance your portfolio and asset allocation as you go, according to an established timeline. Essentially, the company starts you off in higher-risk, higher-reward investment options when you’re young. As you near retirement, they’ll move your money into safer bonds.

Lifestyle funds are similar, in that they automatically rebalance your portfolio as you go. However, with these, you choose your asset allocation from the get-go, and it doesn’t change over time.

You can also utilize financial advisor services to manage your investments. Each of the mutual fund companies mentioned here offers these services. This is a bit more costly of an option, but can be a great choice if you want to have more control over your money.

Which of these options really depends on your personal preferences and how much money you have to invest. Many companies have initial investment minimums of $0 to $500. But some have minimums of $2,000+. Be sure to check out the details and our reviews before you settle on a company for your first IRA.

Opening and funding an IRA is a great first start toward saving for retirement. It provides more of a return on your savings than a basic savings account would, and also offers tax advantages that help you keep a little more of what’s yours.

By wisely contributing and investing your IRA, you’ll not only grow your money but also save for a successful retirement future. And believe me, you’ll be glad you did.

 

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APR vs. APY: While the seem similar, there’s a big difference between annual percentage rate and annual percentage yield. Here’s what you need to know.

APR vs. APY

APR and APY are short acronyms with big importance. Despite the confusion, these two terms are not interchangeable. What exactly is the difference between APR and APY? Here’s a quick lesson:

  • APR stands for annual percentage rate
  • APY stands for annual percentage yield
  • APR is more commonly used regarding credit cards, mortgages, and loans
  • APY is more commonly used regarding interest-bearing accounts

One thing APR and APY have in common is that they come into play in our lives just about every day if we use credit cards, pay a mortgage, or keep money in the bank. Both determine how much you will earn or pay on investment products and loans. Understanding the basic differences between APR and APY is important before you do something like open a credit card or choose an investment account.

APR is going to be tossed at you when you shop around for credit cards, car loans, or home loans. APR represents the interest you’ll be responsible for paying. APY is a phrase you’re going to hear as you search around for bank accounts, CDs, and a variety of investment products. APY is the amount you stand to earn if you place your money in the hands of a financial institution.

The Basics of APR

The rate portion of an annual percentage rate refers to the amount of money a lender is charges when you borrow money. You can figure out the APR of a loan or balance by multiplying the period rate by the number of payment periods in a year. A simple way to look at it is that an account with an interest rate of 1 percent will have an APR of 12 percent.

On the other side, you can divide the APR by the number of payment periods to get the per-payment rate. Many loans will give you the APR rather than the per-payment rate. If your car loan has a 7.5 percent APR, you’ll pay .625 percent in interest every month.

Sometimes you’ll see both an interest rate and an APR for any given loan or balance. In this case, the APR is typically higher. That’s because APR includes interest, points, broker fees, and additional fees. This is especially common for accounts like mortgages.

The Basics of APY

APY is the rate of return of an interest rate. It takes into account compound interest. Compound interest is the interest you earn on top of the principal and simple interest. APY takes the interest rate and provides a percentage based on how often interest is compounded during a year.

Remember the account with an interest rate of 1 percent and an APR of 12 percent? That same account would carry an APY of approximately 12.68 percent. However, that’s just a basic estimate using the most basic scenario. Actual percentages will always depend on factors like the specific financial institution you’re dealing with and state laws.

Things to Keep in Mind When Shopping Around for Rates

Keep in mind that most lenders and institutions will list whichever number makes their products appear more appealing. This is why it’s important to always ask a potential lender or institution which percentage type they’re quoting as you’re shopping around for loans or accounts.

Compare all the options you’re considering based on the same percentage type to get a true picture. Anything else would be like measuring apples against oranges instead of making a true apples-to-apples comparison. The Truth in Lending Act (TILA) requires all lenders to provide you with accurate cost information that allows you to comparison shop for loans.

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Prosper claims to offer great rates for both borrowers and investors. In this Prosper review, we put these claims to the test.

prosper review

Prosper offers a different way to look at lending. The Prosper platform is a peer-to-peer marketplace where people can borrow money for all aspects of life. It’s an interesting platform for people who need to borrow money. But it’s also great for investors, who have potential to get solid monthly returns. Prosper offers loans for the following:

  • Debt consolidation
  • Home improvements
  • Vehicles
  • Babies and adoptions
  • Small businesses
  • Weddings and other special occasions

Prosper’s big strength is that it removes the roadblocks between people and the funding they need to make the next big leap in life or pursue their goals. It’s a virtual platform for funding that provides both lenders and borrowers with the tools and transparency they need to make informed decisions. There are no in-person meetings with lenders or lengthy application processes.

The Basics of Borrowing Through Prosper

Borrowers can get a rate quote in minutes just by answering a few questions on Prosper’s website. Once you’ve been cleared to receive the loan, Prosper deposits funds straight into your bank account. The process usually takes between three and five business days. Here are the basics of Prosper loans:

  • Fixed terms of either three or five years
  • Maximum loan amount of $35,000
  • Minimum loan amount of $2,000
  • No early payment penalties
  • No hidden fees
  • No minimum income requirement
  • Minimum credit score of 640
  • Payment schedules cannot be adjusted
  • Late fees are charged if payments are not made on time
  • Borrowers can file joint loan applications
  • Payment modification plans are available in some situations

Prosper assigns every borrower on the platform a grade. This grade determines the interest rate Prosper offers and the origination fee borrowers pay. In addition, it’s what investors will look at when deciding whether or not to invest in your loan.

How does Prosper determine your grade? They look at things like your credit score, income, and current debt level. The average income of a Prosper borrower is $88,746. The average FICO score is 710. Those two figures should give you a good idea of how you’d do when seeking a peer-to-peer loan from Prosper’s investors.

The Basics of Lending Through Prosper

Prosper offers the opportunity to invest in personal loans. Lenders can browse loan options for creditworthy borrowers based on factors like FICO scores, Prosper ratings, and loan terms. Prosper assigns each loan opportunity a rating based on its levels of risk and return. As with other investment types, you can earn a higher return. But you generally have to take on more risk for that.

Lenders can either select individual loans or use Prosper’s Auto Invest tool to create a target portfolio. Prosper deposits monthly returns from investments directly and automatically into your account. Prosper does require a $25 minimum investment per loan. The estimated return for Prosper investors is 7.57 percent.

Is Prosper a Good Choice?

Prosper offers a simple and solid way to take part in the peer-to-peer lending world. With loan amounts between $2,000 and $35,000, it’s a good option if you’re looking for a way to finance just about anything without going through traditional banking channels. One thing that separates Prosper from peer-to-peer lending platforms that may appear similar is the fact that the company doesn’t fund loans using its own money. Prosper does underwrite applicants.

What’s the bottom line on Prosper? Borrowers can enjoy a fast way to get funding as long as their credit history is in decent shape and they have a solid income. Lenders may find Prosper to be a simple investment tool that allows them to enjoy some diversification.

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Credit cards offer convenience, security, and rewards. Overspend with a credit card, however, and the interest and fees can bury you. Here are 10 tips to stop using credit cards.

stop using credit cards

If you’ve got a bad credit card habit, chances are you know it. Whether or not you’re willing to admit it is a whole other story. But admitting you have a problem is the first step to making changes.

If you can answer yes to any or all of these questions, you need some major changes:

  • Do you pay interest fees when you send in your credit card payment?
  • Have you ever paid your credit card late because you didn’t have the money for the payment?
  • Do you use your credit card when you don’t have enough cash?
  • When your issuer raises your credit limit, do you spend more because you can?

Credit card companies just love credit card users like this. They pay interest and late fees. They spend more on their credit cards, too.

This means credit card companies can charge merchants for more transactions. Altogether, these credit card users are the ones who are putting food on the table.

And putting more money in the pockets of credit card issuers means you’re putting less money in your own pocket. So the goal should be to stop these bad credit card habits. Instead, work to get to a place where you can use credit responsibly. This means taking advantage of rewards programs but never paying interest or fees.

Don’t think you can do it? Think again. Take these ten steps to systematically break your bad credit card habits.

1. Look at your spending carefully

Deep down, maybe you know your credit card habits have come about because you’re spending more than you earn. And this is a self-perpetuating issue. Once you get stuck in the cycle of paying interest and fees, it becomes harder and harder to get back to spending less than you earn.

So your first step is to track your spending faithfully. You can do this on a pen and paper. Or an Excel spreadsheet. Or you can use a program like Mint.com that will automatically import your transactions.

The key here is to total up all of your spending from all sources–credit cards, checking account, savings, and cash. Keep this up for at least a month, and you’ll see where you’re spending money you shouldn’t spend. Keep it up for multiple months in a row, and you’re likely to find that you automatically reduce your spending.

2. Create a new budget

Once you’ve tracked your budget for a month or two, you can see what you are spending versus what you should be spending. Now it’s time to actually create a new budget. This budget should be based on the money you actually make each month.

Again, you can do this in different ways. You can stick to cash-only spending. Or you can use a program like Mint to track where you stand in various budget categories. Either way, you’ll need to use discipline to make sure you stick to your budget. The best way to do this is to cut back on spending slowly, particularly in essential areas like groceries.

Try to take your grocery spending from $500 per month to $200 per month overnight, and you’ll probably fail. But you can succeed by cutting just $20 per week from your spending. Keep doing this until you reach a comfortable, but frugal, level of grocery spending.

You can do this with other areas of your budget, too. The key is simply to budget for what you need and then stick to the budget. This will be more possible if you consistently check in on your spending. Make this a habit, and you’ll find you’re more likely to stick to your budget.

3. Build an emergency fund

This step can take some time, especially if you’re in the habit of overspending rather than saving. But find places where you can stash back even $10 per week. Over time, you’ll build up a pad of savings that can help you in an emergency.

Start by opening a high-yield savings account. Then, begin with the first goal of putting about $1,000 into the emergency fund. Sure, you’ll eventually want to save three to six months’ worth of expenses. But this can take a really long time. Starting with this smaller goal lets you be prepared for minor emergencies, which can help you cut back on credit card spending.

Remember: an emergency fund is to be used in true emergencies only. This doesn’t take the place of your credit card. The purpose of the emergency fund is to remain untouched for regular expenses but accesible when major spending is required. Some examples might be the loss of a job or a significant medical expense.

For more details, see Five Components of an Emergency Plan, but ignore component number four.

4. Stop using your credit cards

Building up an emergency fund is essential for this step to start working. If you’ve consistently used your credit card for minor emergencies, you’re relying on it too much. When you have a bit of money in savings, you can reduce your credit card dependency. And this can let you stop using your credit cards.

Now that you’re living on a budget, you should not need to rely on your credit cards anymore. Instead, you should only be spending the money that actually comes into your bank account each month.

So stop using your credit cards. You might want to take baby steps here. Start by simply leaving the cards at home all the time. Then remove them from your PayPal account and other automatic online payment options. Then, start shredding them, which will lead you to the next step.

5. Destroy your credit cards except for one or two

You can play this one of two ways. If you’re disciplined enough, you can simply destroy the physical credit cards and remove them from your online accounts. This means you’ll stop spending on the cards but won’t actually close the accounts. This is because closing old credit card accounts can actually damage your credit score.

But if you have a serious problem, this may not be enough to stop your overspending. Instead, you may need to go as far as actually closing your credit card accounts. Overspending, after all, is a larger issue than getting a better rate on your next mortgage. So if you want to really take away your ability to overspend on credit, you can close the accounts.

However, you’ll only be able to close accounts that have no outstanding balance. You may want to skip to step seven if all of your cards have an outstanding balance.

6. Lock away your remaining credit card

Now that you have one credit card left, realize that you will not be using this card for everyday spending; for now, cash is king. Put your remaining credit card out of sight. Lock it away. I’ve even heard of some people who put their credit card into a cup of water in the freezer. The extra step of breaking a block of ice to get to your credit may be an extra demotivator.

Why keep a credit card at all? You may need it in a real emergency before you emergency fund is fully built up. But making it difficult to access will mean you’re less likely to use it for non-emergencies.

7. Consolidate your balances onto one or two cards

Gather the latest statements for the cards containing balances. Choose one or two with the lowest interest rates, and consolidate your balances onto these cards. By calling the credit card company, you can provide the information for your other cards with balances. Then they will initiate a balance transfer. Ask for a transfer fee waiver. If they aren’t willing to waive the balance transfer fee, consider using a different card to consolidate your balance or apply for a great balance transfer credit card.

Another option is to look at an unsecured personal loan to consolidate your balances. This type of loan can get you into a lower interest rate and help you pay off your credit card debt more quickly. Plus, once you’ve consolidated debt off of some of your cards, you can then close those zero-balance accounts.

What if you don’t have good enough credit or enough available credit to consolidate your debt? In this case, you’ll need to skip to steps eight and nine. You can make this work without consolidation. Consolidation can just make it easier.

8. Enact a cash-only policy

Once you’ve lived without your credit cards on hand for a couple of months, your budget should be in a good place. Now you know what you can and need to spend each month. So now you can enact a cash-only policy.

This doesn’t necessarily mean you have to spend physical cash. But that can be a good idea. Spending cash actually helps you spend less money. But spending cash can also be unwieldy at times. So another option is to keep cash on-hand for certain expenses, such as groceries, but to use your debit card for other expenses.

The key is that you have to actually have the money in hand–either physically or in your bank account–to spend it. Getting into the swing of this can be difficult. But, trust me, it’s worth the learning curve. Once you start spending only what’s coming in, you can turn your attention to spending less than what you make. And this is how you’ll really start to make financial progress.

9. Pay down your balances

Now it’s time to start reversing the damage you’ve done with your bad credit card habits. You’ll likely need to pay more than the minimum payments on your accounts to start getting out of debt. So use that money that you’ve suddenly found in your now-strict budget to get this done.

There are a couple of different ways to pay down your balances. And, really, either one is sufficient, as long as you keep on keeping on. One option is the Debt Snowball method popularized by Dave Ramsey. This has you start paying off your smallest balance first. Once that balance is paid off, apply its minimum payment and any extra money to the next-smallest balance.

The advantage of the Debt Snowball is that you get some quick wins up front. This can help you stay on track as you work towards paying off larger and larger balances.

The other option is the Debt Avalanche. This has you start with the highest-interest account first. Then pay off lower-interest cards as you move through your debts. The advantage of this approach is that you wind up paying less interest over time.

The Debt Avalanche is the most logical way to pay off your debts. But it doesn’t make a huge difference unless you’re in a lot of debt or have a big differential between your interest rates.

You can check out a more in-depth discussion of these two options here. But, really, the main issue is that you start paying off your debts and keep on with it until your credit cards are paid off.

10. Check your progress each month

Paying off debt takes time and dedication. You’ll need to keep moving forward towards your goals, even when things get tough. One way to keep making progress is to see how far you’ve come.

The best option is to come up with a way to consistently track your balances each month. You’re already checking in on your spending frequently, right? Well, make a chart where you keep track of your credit card balances month after month, and watch as they disappear.

You can do this with some budget-tracking softwares, such as Mint. Or you can create your own spreadsheet for tracking your credit card balances. Either way, be sure you’re checking in at least once a month to keep track of your progress. Seeing how far you’ve come will help you keep moving forward until you finally break your bad credit card habits and reverse the damage they’ve done.

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