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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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4 Tips for Teaching Kids About Money

This article was written by in Financial Literacy, Personal Finance. Comments Off on 4 Tips for Teaching Kids About Money

According to the USDA’s latest calculations, a middle class American family will spend about $233,610 raising a child born in 2015 to age 18. And that doesn’t count college. Personally, I think these figures are a bit overblown. But the bottom line is that kids are expensive.

teaching kids about money

So we parents are worrying about where we’re going to get all the money for the children’s expenses and how we’re going to spend it. But in the hustle of everyday parenthood, we often forget to teach them where to get money and how to spend it wisely.

Studies show we’re basically failing at this goal — miserably. Get a load of these statistics from recent studies:

  • A T. Rowe Price survey showed 13 percent of parents never talk about money with their kids, while 30 percent talked to them about money one time a month or less.
  • Only 15 percent of parents surveyed actually set aside specific time to talk to their kids about money.
  • Another study showed that most parents consider some money topics, like family finances, parental income, investments, and debt, “off limits.”
  • One survey from 2011 showed that nearly 60 of parents were helping their adult children financially. This number seems to be lower as the job market has improved. But it’s still fairly common for adults to move back home or rely on the Bank of Mom and Dad.

Clearly, we could do better. And we need to do better. Teaching kids about money should be right up there with teaching them to cook, clean, and do their own laundry before they graduate high school! Managing money well is simply an essential life skill that your kids won’t just pick up by accident.

Of course, that brings us to the hard part: the how.

How do we go about teaching kids about money? There are all sorts of opinions out there on this. But I’m going to try to boil it down to a few basics.

Let Them Practice

Here’s what I think is the primary thing parents miss the mark on: we don’t expect kids to practice with money.

We know they need to practice all these other skills we want them to learn. We’d never turn a 16-year-old loose with our car without taking them for lots of supervised driving time first.

But many of our kids never have an opportunity to practice substantially with money. Sure, they might get a few bucks from Grandma for their birthday. Or get a little allowance here or there. But what you really need is a thought-out system for giving kids the chance to manage money.

Of course, for them to practice with money, they need to actually have money. Luckily, there are a couple of different options in this space.

Option 1: Commission-Style Allowances

This option has been popularized by Dave Ramsey. It posits that kids should be expected to do basic chores just because they’re a member of the household. You don’t get paid just for existing, so why should your kids?

So instead of a set allowance kids get paid a certain amount of money to do particular chores. Each chore has a value. When they do that chore, they get the money for it. Then, they can do what they want with that money, within whatever limits you set.

This option is good for older kids, I think, who want to earn above and beyond what you’re willing to just hand over to them. However, it has its weaknesses. For instance, what if kids don’t have anything on their wish list? They’ll just stop doing extra chores because they don’t need money.

Option 2: A Set Allowance

This is an option I’ve read about elsewhere, but the book The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money by Ron Lieber really solidified it for me.

Lieber argues that kids should get an allowance basically for just being a part of the family. They should get enough money to make decisions that feel fairly high-stakes to them.

The advantage of this option is that kids can practice earlier and more often with money. Also, since you’re just handing your kids money, you can reasonably expect to have a little more control. Lieber suggests having kids split the money into spending, saving, and giving categories. (To be fair, Dave Ramsey also advocates a similar approach here.)

But with this higher allowance comes higher expectations. For instance, you might just stop buying your five-year-old toys or treats at all outside of birthdays and holidays. She’ll have to use her own money when she wants something, which is an incredibly valuable lesson.

As kids age, the expectations can increase. A middle-schooler should be able to manage his or her own back-to-school clothing budget. And a high-schooler should be paying for his smartphone, for instance.

Practice Makes Perfect

You can probably tell which way I lean on this issue. I really prefer Lieber’s style of allowances because it does give kids higher expectations and more consistent opportunities to practice.

In fact, I’ve already seen this play out with my kindergartener. She gets $6 per week in allowance, split evenly between spending, saving, and giving. Watching her figure out how to spend — or not spend — that spending money is enlightening, to say the least.

Regardless of which method you choose, though, the bottom line is that your kids need to practice with money. And they need to practice now, when the stakes are relatively low. This type of practice helps kids start defining wants versus needs, make spending choices, and learn the power of savings.

Sure, blowing the back-to-school budget on a single pair of jeans means your kid will scramble for decent shirts to wear to school. Truly, not that big a deal. But when it’s  21-year-old making $100,000 decisions about which college to attend, she doesn’t have as much room for error.

Be Open and Honest

You’ve probably experienced the power of kids’ truth telling as a parent. If you haven’t, your kid probably isn’t talking yet.

Kids are incredibly perceptive and able to see through our most sophisticated untruths. Sometimes it’s easier to tell a half-truth. But it’s usually not a good idea. Nowhere is this truer than with our finances.

When your kid is with you at the store asking for yet another new toy, what’s your answer? If it’s something like, “We don’t have the money for that right now,” is that really true? In many cases, it’s not.

The bottom line here is that it’s better to be clear with your kids about the reasoning behind your financial choices. For instance, maybe that particular toy doesn’t fit well within your family’s value system. Or maybe you prefer to save extra money for travel versus buying more toys. Or maybe you’re just overwhelmed with the clutter already and know your kids don’t need more toys.

Whatever your reasoning, say it, and stick with it. Unless you’re honest with your kids about your financial choices, they won’t know the why of money management.

This honest can and should expand as children get older. Sure, it might feel uncomfortable to have conversations about investments, debt, and the family budget. But if you don’t have these conversations, your kids will be left to just figure it out as they go along. Not a good thing!

Save Early and Often

Perhaps one of the best things we can use to teach kids about money is saving and the power of compound interest.

Compound interest is a concept even many adults don’t understand. But it’s one of the most powerful financial forces out there.

You can start teaching kids about compound interest as soon as they’re old enough to save money in a jar. For instance, when you dole out allowance every week, you could give your kid a nickel for every dollar that’s still in their jar. They’ll pretty quickly see that it doesn’t take long for the nickels to make another dollar, which earns even more nickels.

Once kids are a bit older, though, it may be best to leave this lesson to the bank. Have kids open a savings account, and regularly put money away. Then, help them calculate how the interest will grow over time.

Bank interest not high enough for you? Help kids buy bonds or a CD. These are great options for mid-term savings. They could be especially helpful when kids are old enough to start thinking of saving for a car. That extra money from interest will come in handy when it’s time to start car shopping!

Keep Sharing What You’re Learning

You may have landed on a personal finance site like this one because you’re still learning about money management. That’s great. There’s always more to learn! So start sharing what you’ve learned with your kids. Even young kids can understand that you’re never too old to learn more about how best to make your money work for you!

 

A step-by-step guide on how to calculate your net worth. The article also includes tools and templates to help you automate the process.

how to Calculate your net worth

Calculating your net worth can be a bit tricky. But it’s a worthwhile exercise, especially if you’re trying to meet certain financial goals.

Figuring out your net worth for the first time can be scary, especially if it’s a great big negative number. But it’s worth taking the time to track your net worth on a fairly regular basis. It helps you get a handle on where you are financially, and where you need to make changes.

Here, we’ll talk about why you should calculate your net worth and how to do it.

Why Should You Calculate Your Net Worth?

First, let’s talk about why you should calculate your net worth. That’s the point? Especially since this exercise might take you a couple of hours the first time you do it.

Actually, there are plenty of great reasons to put this number on paper. None of them has to do with comparing yourself to your neighbors. After all, you don’t really know their net worth, anyway. Maybe they drive fancy cars that are financed up to here. Or maybe they look broke because they spend no money, which means their savings accounts are flush.

Really, it’s none of your business.

With that out of the way, let’s talk about good reasons for calculating your net worth:

  • It’s an accurate measure of your financial health. It’s easy to think of wealth as a number on a savings or investment account. But if you have $1 million in savings and $750,000 in debts, are you really rich? Probably not. Calculating your net worth gives you a better picture of your overall financial standing.
  • It can motivate you to keep making progress. If you’re trying to get out of debt, seeing your debts get smaller each month is great. But seeing your net worth rise is even more motivating. And once you start tracking your net worth into positive numbers, it’s even better.
  • It shows you the real value of your assets and liabilities. It’s easy to get a skewed picture of the value of your assets and of the seriousness of your debts. When you have your net worth, you’ll have a total picture of how these items relate to each other. If you have $30,000 of debt and a -$25,000 net worth, you’re not in great shape. But that same $30,000 of debt looks a lot different if your net worth is $150,000.

These are just three reasons to calculate your net worth. You may have others. But these reasons are enough to get started.

But What Is Net Worth?

In essence, your net worth is the value of all your assets minus the value of all your liabilities. In simpler terms, the equation is this:

Assets – Debts = Net Worth

So if you decided to sell everything today, settle all your debts, and move to Aruba, what would you have to live on?

Sure, that’s not likely to happen. But as we discussed above, having a handle on your net worth is helpful for a variety of reasons.

Calculating net worth seems fairly straightforward. And, really, it is. But there are some caveats to consider, as well. Let’s talk about those now.

Caveats in the Calculation

The real reason to track your net worth is to track your progress towards your financial goals. So it’s not essential that you get the net worth calculation exactly “right,” whatever that means. But you do need to establish your calculation up front, and use that same calculation each month or year.

So what decisions do yo uhave to make up-front? Here are some to consider:

  • Your primary residence: Some people prefer to include their primary residence — both the mortgage balance and the value of the home — in their net worth. Others exclude the house from the equation. Either way is fine, as long as you’re consistent. If you’re trying to become mortgage-debt-free, you’ll probably want to add the mortgage and the value of the house to the equation.
  • Your personal belongings: You can include everything you own, down to the last teaspoon, in your net worth calculation. This gets tedious, but it can be done. However, this might give you an inflated sense of your net worth. Sure, your spoons and clothes and power tools are worth something. But what would you really get for them if you decided to liquidate all of your assets tomorrow? Probably not much.
  • Your vehicle: Again, you can choose to track your vehicle in this equation, or not. If you do, be sure to check out its current value each month when you’re running the numbers. You’ll probably be shocked at just how much the value drops from month to month!
  • Fees and penalties: Some people take things to the extreme by looking at what would happen if they even liquidated retirement accounts immediately. So they put a negative into the calculation for what they would owe the IRS if they cashed out a 401(k) or IRA early. This is a little nit-picky, but, again, it’s up to you.
  • How often you track: Finally, you’ll need to decide how often to track your net worth. It’s a good idea to do it at the same time of month or year. That way, your recent payments on debts and deposits into savings and investments are taken into account, and you have a more accurate picture of where you stand.

Again, the details are really up to you. The key is to be consistent in how you decide to run this calculation.

Now that you know what to include in your net worth calculation, here are some tools to help you actually get it done.

Tools for Calculating Net Worth

Of course, you could just do this the old-fashioned way. Get out two sheets of ruled paper. Label one “Assets” and one “Liabilities.” Then, start looking up account balances, property values, and all the other information you need. Add up all your assets and all your liabilities. Then, subtract your liabilities from your assets. The number left over is your net worth.

You could do it that way. But where’s the fun in that when the internet is full of great tools? Here are a few to check out:

  • Net Worth Calculator: This calculator gives you a huge list of assets and liabilities to fill in. It’s a great place to start if you’re worried you’ll forget something.
  • Net Worth Projection: This calculator lets you project your net worth over time if your assets and liabilities grow due to interest. The numbers may not hold true in real life, but it’s an interesting exercise, nonetheless.
  • Google Sheets Net Worth: There are actually several Google Sheets templates for net worth. But this one is nice because it lets you track year over year and month over month results. This is great if you’re working towards some specific goals.
  • Mint.com: Mint has long been one of my favorite money management tools. If you want to get a general overview of your net worth, it makes it easy. Just link up all your accounts and manually add balances to any that you don’t. You can also add property values for your home and car or other assets. It’ll track your net worth for your automatically.
  • Personal Capital: For a more in-depth net worth tracker that also tracks your investments, Personal Capital is an even better option than Mint. Again, you can link up your accounts but manually enter property values, etc. for better results.
  • Net Worth Comparison Calculator: Okay, so we said that calculating your net worth isn’t about comparing yourself to others. But if you’re trying to set financial goals, it helps to know where you stand in comparison to “average.” This calculator shows the median net worth for people of your age and income bracket. Don’t base all of your financial goals on this, but it’s interesting.

Figuring out how to calculate your net worth and then doing it is a great financial exercise. For those getting out of debt, it can be a painful one. But it’s always revealing. And it’s an excellent way to track your progress as you journey towards financial freedom.

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Trading in your car at the dealer is guaranteed to lose you money. Yet many opt for this route because it’s easy. The better approach, however, is to sell your car yourself. You’ll get more money, and it’s easier than many think. Here’s how to sell your car fast and for top dollar.

Sell Your Car

In this guide, we’ll walk through the benefits of selling your car on your own. Then we’ll give you some practical tips on how to do it.

Why You Should Always Try to Sell Your Car Yourself First

Trading your car into a dealer when you purchase a new vehicle is quick and easy. That’s why so many people opt for this approaching to disposing of their car. Unfortunately, the dealer won’t give you the best price.

It also complicates the negotiations. With a trade-in, your must negotiate both the price of your new car and the value of your old car. Car dealers are experts at this process. You and I are not. By removing the trade-in negotiations, you greatly simplify the process.

By selling your car yourself, you can maximize the cash that you will receive. As an example, we valued a 2016 Volvo XC90. Using Kelley Blue Book, we compared the money we’d receive from a private party sale versus a deal trade in. The difference was almost $3,000.

Get the Estimated Value of Your Car

Since most of us aren’t car experts, you should get this information from a trusted third-party source. You can get an estimate from a dealer, but they may give you a lowball number under the assumption that you be trading the car in. What you actually want is what you can likely sell your car for.

Fortunately, there are online sources where you can get this information. Two of the best sources are Kelly Blue Book (which we used above) and Edmunds.com. You should also check used car buying sites such as AutoTrader and Craigslist.

In order to get the most accurate value of your vehicle on those sites, you need to be accurate in describing the details of the car. This will be particularly important in regard to the car’s overall condition since it can result in wide variations in value.

They will typically give you three values:

  • Trade-in
  • Dealer retail
  • Private party

Dealer retail will be the highest. It is unlikely, however, you will be able to get that price. You aren’t a dealer and don’t have a dealer’s marketing power. Trade-in will be the lowest, but it’s not what you’re going for. A private party sale will be the most relevant number, as it is the price that you will most likely get for your car on direct sale.

Once you have this number, you should price your vehicle accordingly. Too high and you may not even get anyone to look at the car. But price it too low, and you’ll be losing money.

Get the Loan Information if You Still Owe Money on Your Car

There are two important pieces of information that you will need if you have a loan on your car:

  1. The payoff balance on your loan, and
  2. How to get the title to your car in the shortest timeframe possible.

The payoff balance will let you know how much cash you can expect to clear on the sale. Alternatively, it may show that you are under water and might have to write a check in order to close out the loan after the sale. You need to know this information to decide if selling your car is even the right option.

The title information is just as important. If you have a loan on your car, then the title to the vehicle is in the possession of the lender. The sale of the vehicle has to happen first so that you will have the cash to pay off the loan. But in order to complete the sale of the car, you’ll have to be able to deliver the title to the new owner.There will be a delay in this

There will be a delay in this process after the sale is completed. But you want to get information from the lender so as to keep that timeframe as short as possible.

Find out what the payoff process is, and what the best way to retrieve the title will be. That will likely require getting specific names and addresses, to make sure that all correspondence goes to the right party. You’ll also have to check and see what type documentation the lender will require for the payoff, in addition to the payment itself.

Where to Advertise Your Vehicle for Sale

There are plenty of ways to sell your car online. This can include Craigslist and AutoTrader.com, but you could also try eBay and even Facebook. Also, do email blasts to everyone on your email list who lives in your local area. Even if a direct recipient has no interest, they may forward the email on to someone they know whose looking for a car.

But you don’t have to rely just on online sources. Some of the more traditional advertising methods can work as well. Create a flyer that includes important information about the car, as well as two or three color photos of the vehicle. Post them on the bulletin board at work, at your house of worship, and in any public places that will allow it.

Accepting Payment Proceeds from the Buyer of Your Car

Payment is a specific issue when selling your car yourself, so you will have to take several precautions.

Never accept a personal check. In a worst-case scenario, the buyer can make off with your car, and you’re stuck with a bad check – and the bank fees that you will be charged for it. In that situation, legal action will be your only resort. And that may not work if the personal check you accepted turns out to be fraudulent. It happens in the real world, and not infrequently.

At a minimum, insist that the buyer pay by either certified check or a bank check. Keep in mind that cashier’s checks can be forged. As Teresa Dixon from the Cleveland Plain Dealer recently noted,

It used to be that getting a cashier’s check was a sure-fire way to avoid fraud. Not anymore. The fraudulent cashier’s checks out there fool the banks sometimes. I’ve dealt with cases in the last few years where even PNC and Huntington tellers accepted cashier’s checks that later ended up no good. Sometimes even the police can’t tell.

Better yet, hold the closing of the sale at the buyer’s bank – the same one that the check is drawn on. That should enable you to verify that the funds are available in the buyer’s account.

If the buyer is using a loan to purchase your vehicle, hold the closing at the lending bank. That will enable you to get a bank employee involved in the process. If the new lender is not a local bank, hold the closing at your bank, and ask your bank to verify the authenticity of the check from the buyer’s lender.

None of this guarantees that you won’t get stiffed on the payment, but it does lower the chances considerably.

Selling Your Car Yourself – Keeping it Legal

There will be several steps on the legal side of the sale.

Bill of sale.You will need to prepare a bill of sale in order to complete the sales transaction. Google “automotive bill of sale” for your state in order to get an acceptable form, then complete it with all of the relevant information. The bill of sale will be important if there is an existing loan on your car, and you will not be able to produce the car title immediately.

Temporary operating permit. The buyer can use the bill of sale to obtain this permit from the state department of motor vehicles (DMV). This will allow the buyer to operate the vehicle until the title can be delivered. Receipt of the title can take anywhere from a few days to two or three weeks, so this is an important step for the buyer.

Release of liability. This is a document that is available on your state DMV website. It will confirm the sale of the vehicle. Don’t skip this step! Completing and filing this form with the DMV will release you of liability on the vehicle. File it immediately after the sale to avoid potential problems. The form will likely require the odometer reading at the time of sale. Contact your state DMV to get specific information about this form.

Pay required transfer fees. You can find out what these are from the DMV. This can include sales tax if your state charges it on auto sales. You will want to pay them immediately after the sale since that is when you will have the cash to do so. But in addition, the payment of fees will represent additional confirmation of the transfer of the vehicle, and therefore the release of your liability.

Don’t forget to remove the license plates! The license plates run with the owner, not with the car itself. As well, you could probably transfer the plates to your next vehicle. The buyer will have to work out the license plate situation immediately after the sale.

Though the process of selling your car yourself seems complicated, remember that it can result in your getting thousands more than what you will get by trading it into the dealer. In the end, it will almost certainly be worth the extra effort on your part.

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How Important Is It to Set Up Beneficiaries for All Your Accounts?

by Luke Landes

Wherever you are on your path towards financial independence, it’s important to think about what would happen to your financial accounts if you were unexpectedly pass away. It seems like a morbid thought, but planning for the well-being of your family is essential. Even if you don’t yet have a spouse or children, thinking ahead […]

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Will the Fed’s Rate Increase Cost You More Money?

by Abby Hayes

Unless you’ve been living under a rock, you’ve probably heard whisperings of the Federal Reserve’s rate hike last month. This is only the third time since the Great Recession that the Fed has increased rates… and, well, it’s both a good thing and a bad thing. A Fed rate increase means that the economy is […]

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How is the Country REALLY Doing With Its Credit Card Debt?

by Abby Hayes

National averages for credit card and other consumer debt can be a good barometer of consumers’ financial capacity and goals. For instance, when debt decreases, Americans, as a whole, may be spending less and saving more. Of course, that’s a good thing. So, when SmartAsset released its average credit card debt study recently, we took […]

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Is Quicken Right for You? Here’s Our Ultimate Quicken Review

by Abby Hayes

Quicken has helped millions of people budget and manage their money. But is it right for you? Find out in our detailed Quicken review. We’ve always been fans of Quicken here at Consumerism Commentary, and we’ve got a lot of reviews floating around to prove it. But you don’t really need reviews of Quicken from […]

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Should High Schools Require Money Management Classes?

by Luke Landes

It’s common knowledge that kids today aren’t learning the same things that we learned when we were younger. Take cursive, for instance. Forty-six states have implemented Common Core Standards on at least some level, which eliminates mandatory teaching of cursive in the elementary school curriculum. While children are instead learning how to type and use […]

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How to Pay a Tax Bill You Can’t Afford

by Luke Landes

It’s a good thing I’ve been saving a good portion of my income for the past year. Even with making estimated tax payments — the last of which was due on January 16 — I still have a significant tax bill this year, thanks to increased income. Many taxpayers dread filing their taxes, even if […]

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