Smart Money Moves
You've read the headlines: falling home values, rising unemployment, waning confidence among both consumers and businesses. With a recession looking more and more likely, you may already be spending less. And as the Federal Reserve keeps slashing interest rates in hopes of jump-starting the economy, there are steps you can take to boost your family's finances. Here, some timely advice from the experts on to how to save money during a downturn.
Interest rates on federal student loans are adjusted every July 1, and experts predict they'll decrease significantly this month. That's good news for the 66 percent of college graduates still struggling to pay off their debt, which now averages $20,000. Mark Kantrowitz, publisher of the Financial Aid Information Page (finaid.org), estimates that rates will drop from their current average of 7.6 percent to 3.75 percent — the largest single decrease since 1995. If you have multiple federal loans at varying rates, you can shave your monthly payments by consolidating now. Contact your lender or the U.S. Department of Education at loanconsolidation.ed.gov. If you're repaying a private loan, stop snail-mailing checks and send them electronically. "Many lenders knock half a percentage point off your rate for online payments because there's no paperwork and less processing," says Brian O'Connell, author of Free Yourself from Student Loan Debt (Dearborn). "On a $10,000 loan, for example, you could pocket close to $500 a year."
Unless you're one of the lucky homeowners locked in to a bargain-basement rate, now's the time to look into refinancing. Influenced by the Fed's recent cuts, mortgage rates have dropped to historic lows. As of press time, a 30-year fixed was around 6.11 percent, versus an 8 percent average over the last 25 years. But you may not qualify for a refi if you're behind on your payments, owe more than your house is worth, or have less than 10 percent equity. Greg McBride, a senior financial analyst at Bankrate.com, a personal-finance Web site, says it makes sense to refinance if you can shave one-half to three-quarters of a point off your current mortgage. (Crunch the numbers at Bankrate.com to see when you'll recoup the costs associated with refinancing and really start saving. For instance, if you're coughing up $2,400 in fees in order to pare your monthly payments by $100, your break-even point will be in two years.) For those with adjustable-rate mortgages, refinancing is a no-brainer, says McBride. "Let's say you took out a 5-year ARM in 2003 at 4.5 percent and it starts adjusting this year," he says. "The rate may not go up much in 2008, but it's wise to lock in to the predictability of a 6 percent monthly payment rather than get blindsided by a big increase down the line."
It's essential to build up a cash stash for emergencies, especially in a shaky job market. Since interest rates on savings accounts will likely decline in lockstep with the Fed's rate, you can profit by putting your money in a certificate of deposit (CD) account — the rates are more competitive and locked in for a fixed period. (At press time a 9-month, $2,000 CD was yielding around 3.5 percent, compared with less than 1 percent for a typical savings account.) But make the switch soon; if interest rates continue to drop, so will CD yields. Another option is to open a savings account at an Internet bank like ING.com or EmigrantDirect.com. "Compared with brick-and-mortar institutions, online banks pay better rates on savings accounts — up to 3.3 percent — because they're spared the cost of maintaining branch offices," says Emily Davidson, communications director at personal-finance Web site Credit.com. Or transfer your savings account at a mainstream bank to its online division, where rates are slightly higher. But don't move your money unless you're upping your rate by at least a point. Someone with $5,000 in savings and a 3.3 percent yield, for example, would get $165 in interest a year. A 4 percent rate would earn only $20 more — hardly worth the hassle. Before you act, be sure to factor in starting fees, annual fees, and other expenses.
Among Americans with credit card debt, the average household owes about $8,000 — resulting in consumers blowing $7 billion annually on penalty fees alone. In tough economic times credit card issuers don't automatically lower their rates, and they don't seem to be doing so right now. "It's worth a call to try to get a better deal," says Davidson. "Contact your card's customer service department and say you're having trouble paying off your balance. They'll pass you to the little-known remediation department, which may be able to cut your interest anywhere from one-half to several percentage points, depending on your debt and current rate." They may also waive one of your monthly payments (though interest will still accrue). And don't forget about your debt-to-limit ratio, adds Davidson. Any time your balance is greater than 10 percent of your credit limit, your credit score automatically goes down, even if you pay in full and on time. Ask to double your limit, which will improve your ratio and boost your credit score.
Originally published in the July 2008 issue of Family Circle magazine.