Money Saving Tip: Get Crafty with Holiday Home Decor

Tis the season to celebrate!  One of the most fun ways to celebrate  and get into the holiday spirit is to decorate your home for each upcoming season and holiday.

Decorating your home doesn’t have to cost a fortune.  Save money by getting crafty and decorate your home with items found in nature (bonus – they’re free!) and items from the dollar store. By getting creative  you can create beautiful one of a kind decorations for your home for less than $5.

Pinterest is a gold mind for ideas for cheap holiday home decor. Here are a few of our favorite ideas that we’ve found on Pinterest:

 

  • Create a beautiful wreath for under $2.00 using coffee filters and ribbon.
  • Give your home a warm and welcoming by creating a festive center piece for your dinner or coffee table.

 

SHARE your ideas with us on Facebook – be sure to tag us @InChargeDebtSolutions and #BeInCharge so we can find your pins. Check out our Pinterest page for more ideas on how to decorate your home for the fall and winter holidays!

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FICO® scores vs. credit scores: What’s the difference?

FICO® scores are commonly used by lenders to assess your credit risk, but other credit scores can also give you a good idea of where you stand.

In other words, your FICO® scores are just one type of credit score you can get. This is because FICO is a company that creates specific scoring models used to calculate your scores. But there are other companies that use different scoring models to determine your credit scores, too.

VantageScore is an example of one of these companies. Both FICO and VantageScore offer credit-scoring models to evaluate the information in your credit reports and issue a corresponding credit score. These scoring models evaluate many of the same factors when looking at your credit reports and calculating your scores, but they differ very slightly.

That’s why you may see different credit scores depending on which scoring model is used. Your scores can also differ depending on which consumer credit bureau report — Equifax, Experian or TransUnion — the scoring model pulls your information from.


  • The rundown on FICO scores vs. other credit scores
  • Which scores does Credit Karma offer?
  • Hear from an expert

The rundown on FICO® scores vs. other credit scores

There are several credit-scoring models out there, but here are a few you might want to have on your radar.

FICO® scores

Lenders started using FICO® scores, created by Fair Isaac Corporation, in 1989, and the scoring models have been updated several times since. According to FICO, more than 90% of top lenders use FICO® scores. In addition to its base versions, FICO also offers industry-specific scoring models (and scores) for distinct credit products, such as auto loans, credit cards and mortgages.

So even if you view your FICO® scores, say, through your bank, they won’t necessarily be the same scores the lender sees when you apply for credit.

Base FICO® scores range from 300 to 850 and are made up of the following important factors:

  • Payment history: 35%
  • Amounts owed: 30%
  • Length of credit history: 15%
  • New credit: 10%
  • Credit mix: 10%

Depending on what your scores are, you may wonder what they mean. FICO defines the following credit ranges based on FICO® Score 8 credit scores:

  • Exceptional: 800+
  • Very good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 579 and below

Industry-specific FICO® scores — including FICO® Auto Score 8 and FICO® Bankcard Score 8 — have a broader range of 250 to 900. These scores are tailored to specific types of credit.

There are several ways to get free access to your FICO® scores, including from various credit card issuers. You can also check out Discover’s Credit Scorecard tool.

VantageScore

VantageScore Solutions was created in 2006 as a joint venture of the three major consumer credit bureaus: Equifax, Experian and TransUnion. There are four VantageScore® models, and the latest, VantageScore® 4.0, uses a range of 300 to 850.

“Data scientists don’t build a model and then just stick it on the shelf,” says Jeff Richardson, vice president of communications and public relations at VantageScore. “They’re continually testing and validating it. If there are new modeling technologies and techniques that are available or if the data changes or improves, they’ll update their models accordingly.”

To generate a score for you, FICO requires that you have at least one account opened for six months or more and at least one account reported to the credit bureaus within the previous six months.

VantageScore, on the other hand, might be able to provide more people with credit scores by using just one month of history and one account reported within the previous 24 months.

According to VantageScore, more than 2,200 financial institutions use its credit scores. The scores are based on the following factors:

  • Payment history: extremely influential
  • Age and type of credit: highly influential
  • Percentage of credit limit used: highly influential
  • Total balances and debt: moderately influential
  • Recent credit behavior and inquiries: less influential
  • Available credit: less influential

Pretty similar to the factors that FICO evaluates, right?

Here are the ranges for the VantageScore® 3.0 credit-score model.

  • Excellent: 750 to 850
  • Good: 700 to 749
  • Fair: 640 to 699
  • Needs work: 300 to 639

Proprietary scoring models

In addition to the FICO® and VantageScore® credit scores, each of the three national consumer credit bureaus offers its own proprietary credit scores. Because lenders typically don’t use these scores when making credit decisions, they’re often called “educational credit scores.”

For example, Experian offers the PLUS Score, which ranges from 330 to 830, and Equifax offers the Equifax Credit Score, which ranges from 280 to 850. Access to either of these scores may cost you.

What’s in my credit reports?

Your credit reports are records of your past dealings with creditors and other credit history. They include information such as your name, addresses, employers, the history and status of various credit accounts, and inquiries from companies checking your reports. If applicable, you’ll also find information from public records, such as bankruptcies, tax liens and civil judgments.

Which credit scores does Credit Karma offer?

The model used for credit scores on Credit Karma is VantageScore® 3.0.

While VantageScore® credit scores aren’t used as widely as FICO® scores for credit decisions, they can still give you a good idea of where your credit stands. Remember, the VantageScore® model incorporates many of the same factors that are used when calculating your FICO® scores, although it may assign a different weight to certain factors.

Credit Karma shows you the different credit factors that can affect your scores and where you can work to try to improve your credit. And if you opt for credit monitoring, Credit Karma will also send you alerts when there are important changes to your credit reports, which may help you spot potential errors or fraud. Using a service like this can give you tools to help you improve your credit.


Next steps

No matter what scores you look at, most do a good job of giving you an idea of the state of your credit. Staying on top of your credit scores can help you determine where you stand and steps you can take to improve your credit health.

“I think the best way to use these credit monitoring apps is to monitor your score[s] and look at where you fall into the range,” says Richardson.

If you check your credit scores regularly, you can keep track of how your scores are trending, work on building your credit history and address potential issues as they arise.


Hear from an expert

Q: Why is credit history so important?

A: It is important since it provides information to the lender about your financial stability. It reveals the level of risk they (lenders) will have to absorb when they deal with you.

— Dr. Miren Ivankovic, Adjunct Professor of Economics, Clemson University


About the author: Ben Luthi is a personal finance freelance writer and credit cards expert. He holds a bachelor’s degree in business management and finance from Brigham Young University. In addition to Cr… Read more.

Credit Counseling Helps Family Dream Of Solid Financial Future

Tamara Holleman wants a new car and at first glance, she could easily afford one.

Holleman and her husband work in the medical profession, bring home comfortable incomes, live in a four-bedroom house with two teenage children and already own three cars.

They would be considered the idyllic middle-class family … if this were 2005.

Instead, it’s 2014 and like a lot of middle-class families, the Hollemans tumbled some through the Great Recession, picked themselves up, but still are clawing their way back to the relaxed financial status they enjoyed a decade ago.

They lived through job layoffs, underwater mortgages and credit card debt that peaked at $66,000 before Tamara accepted a personal challenge and found a debt management plan that reversed the family’s financial spiral.

“We were in a downhill cycle that looked like it was never going to end,” Tamara said. “We were charging everything on credit cards and even though it was causing me a lot of stress, I couldn’t stop. I couldn’t see a way out. There was no light at the end of the tunnel to even give us hope.

“But now, we can breathe again. There is excitement because we have hope.”

Challenge Issued

The seeds of hope were planted in the spring of 2012 when a co-worker asked Tamara to identify something important she couldn’t do without and give that up for 40 days.

Tough choice, Tamara thought. So many possibilities. Eating out? Clothes shopping with the kids? Entertaining at home?

The co-worker protested that none of those were really important and re-issued the challenge: “Give up something that is so important you absolutely can’t do without it.”

That was easy.

“Credit cards,” Holleman replied. “We used them for everything. If I wanted something or my husband or kids wanted something … no problem, I’d buy it and just put it on a credit card.”

Actually, there was a problem: Paying off those credit cards.

When Tamara accepted the challenge, the Holleman’s used nine credit cards and owed $66,000 on them. The interest rates on the cards ranged from 13 percent to 29.9 percent. Tamara, who handled the family’s finances, made the minimum payment due most months and the stress kept building.

“There was one card that we owed $13,000 on in 2002 and because I only made the minimum payment every month and the interest rate was so high, we still owed $13,000 on it in 2012,” Tamara said. “Giving up those cards for 40 days was going to be a blessing.”

No More Eating Out

Tamara’s game plan for living without credit cards meant writing checks at the start of the month for the big bills, then taking a cash allowance for everything else. When the cash ran out, she stopped spending.

“We used to eat out all the time and just put it on the credit card,” Tamara said. “I didn’t have enough cash to cover that so eating out was the first place I noticed where I could save a lot of money. I’d tell the kids we need to start eating healthy so Mom’s going to cook at home.”

The 40 days flew by and the experience convinced Tamara that, with a little help, she could do something about the balance on those credit cards.She called the card companies to try and negotiate with them, but got stonewalled.

“The biggest thing I learned from this was the card companies don’t want to deal with people like me,” she said. “I called them, I sent them emails, nobody wanted to hear my story. I wanted help with lowering my interest rates and nobody wanted to help me.”

She called InCharge Debt Solutions, a non-profit credit counseling organization, for help dealing with the card companies. InCharge enrolled her in a Debt Management Program and negotiated the interest rates on the nine cards down to between three and nine percent.

“Light at the end of the tunnel,” Tamara called it.

Payoffs Happened Quickly

Her husband, who had been laid off for 14 months, was back at work and when the cash flow picked up, Tamara directed it all toward the debt management program. In a little more than two years, they had paid off four of the credit cards. The balance on the remaining five cards will be eliminated in July of 2015.

“There is no more stress around our house,” Tamara said. “When we make that last payment in July, we’re going to have not hundreds, but thousands more dollars coming back into our pockets every month. If we want to go out for dinner or take a long weekend at the beach, I won’t feel stressed about it because we’re spending our own money, not borrowing it from the credit card companies anymore.

“Finally, we can dream again.”

And are you still dreaming about a new car?

“I do,” she said, “but not if I have to pay for it with credit.”

Credit Scores Going Up … Without Any Help From Consumers

The average credit score for American consumers is at an all-time high, but will almost surely go higher within the next year as credit bureaus and government tinker with one of the key components in the economy.

Fair Isaac Corporation (FICO), the most recognized name in the credit score industry, said the average consumer’s score is 692, up one point from 2013 and six points better than the all-time low of 686 recorded in October of 2009. Credit scores range from 300 to 850. Anything above 720 is considered very good and anything over 750 is excellent.

FICO recently announced that it was tweaking the algorithm it uses to arrive at that score to put less emphasis on medical debts that went to collection agencies. More than 60 million consumers have a medical collection on their credit report.

The company says that consumers whose only major negatives are medical collections, should see their score increase by 25 points, though it may not happen for 6-8 months while lenders adjust to the new scoring model.

“What we found through research was that when the only negative is medical collections, that is typically an anomaly,” Anthony Sprauve, senior consumer credit specialist with FICO, said. “It’s not really indicative of a consumer’s ability to pay so the new score won’t penalize them as severely as it did before.”

That’s one step in the right direction, but California Congresswoman Maxine Waters wants to add a few leaps. Waters introduced a proposal to the House Financial Services Committee on Sept. 10 that would make the credit bureaus and reporting agencies more responsible for the accuracy of the information they use in setting consumer credit scores.

The Federal Trade Commission estimates that 40 million consumers have errors on their credit reports. ConsumersUnion, a policy and action division of Consumer Reports magazine, said that 10 million people had errors severe enough that they would have to pay a higher interest rate on their loans.

“A person’s credit report is too important in determining access to a wide array of opportunities for these reports to contain inaccurate and incomplete information,” Waters said in an email response to questions about her bill.

Waters’ proposal also would require consumer reporting agencies to remove any information related to fully paid or settled medical debt from a consumer’s credit report within 45 days. The proposed bill would remove any negative information after four years. Currently, negative information is retained on a credit report for seven years.

“People can choose when to shop and buy certain commercial goods but they cannot plan when they are going to be sick and need medical care,” Waters said. “If a consumer fully pays or settles a medical debt, the consumer should not continue to be arbitrarily penalized. The information should be removed from a credit report once it is fully settled or paid.”

That one likely will get push back from FICO and the three major credit bureaus, which include Experian, Equifax and TransUnion. FICO’s credit score is the most popular one used by lending institutions. The other three bureaus combined to create their own score, known as the Vantage Score.

Two of the key elements in calculating a credit score are whether the consumer pays on time and how long of a history of paying they have. In other words, paying bills for seven years counts for more than paying bills for four years.

Credit scores are used by lenders to help determine the likelihood that a person will repay a loan. Other factors go into the final decision on whether to loan someone money, but the credit score carries significant weight, especially in determining the interest rate a consumer pays on a loan.

“We think our current system is an unbiased way of looking at a person’s credit history and predicting future behavior,” Sprauve said. “This bill recommends removing negative information without validating how it will predict a person’s ability to pay in the future. We are concerned about that.”

One area the two sides do agree on is reducing the consumer’s cost for a credit score. Consumers can get credit reports free, but the score typically costs somewhere from $15-$20 and could be higher.

Waters proposal caps the cost for a credit score at $10. Sprauve said FICO is working with credit card companies and lenders to provide credit scores for free.

“We are committed to the concept of making FICO scores available for free,” he said. “We believe the best way is for consumers to get their score free from the lenders they have a relationship with. That way, the score they see is the one the lender uses in making a decision and is most relevant to them.”

Does The Fed Rate Cut Mean I Can Get A 0% Interest Rate Mortgage?

Last night when the news broke that the Federal Reserve would slash interest rates to zero in an effort to bolster the economy and get financial markets running smoothly again (the most drastic economic measures that have been taken since the 2008 financial crisis) I’ll admit one of my first thoughts was pretty selfish: Does this mean it’s time to refinance my mortgage? And what kind of interest rate could I really get? 

My husband and I bought our first place last year (I wrote about the experience here, all about how signing a 30-year, $250,000 mortgage felt so much more serious than any other commitment I’d ever made before) and our current mortgage rate stands at around 4%. I’d been considering looking into refinancing for a few months now, but hadn’t taken the next steps. This morning I reached out to one of my favorite sources Greg McBride, CFA and chief financial analyst at Bankrate.com to get his expertise.

The short answer:  No, you can’t get a 0% mortgage. Rats.

McBride elaborated: “Even the government currently pays 1.4% when they want to borrow money for 30 years — and they have the luxury of being able to print money to pay it back.” If the best rate the government can get is 1.4%, we individual homeowners should expect to pay a good bit more than that.

So who qualifies for the 0% rate? “The rate the Federal Reserve cut to near 0% is a rate banks pay to borrow from each other – but overnight, not for 30 years. This rate serves as a basis for the rates on other loans and savings products,” McBride says.

With that said, mortgage rates have fallen substantially from where they were one year ago (the average 30-year fixed mortgage rate is currently 3.77%), and refinancing a mortgage is the single-biggest way most households can benefit from lower rates. “Cutting a 4.5% rate to 3.5% can shave $100, $150, or even $200 off monthly payments depending on the size of your loan,” McBride says. “But lenders have been inundated with applications, and there is a traffic jam to get on the mortgage refinancing highway. This will ease with time and mortgage rates are poised to remain low throughout 2020.”

If you are considering refinancing, just hold off a bit – “Waiting until the initial wave of refinancing applications work their way through the system should allow rates to normalize, and they’ll do so at levels near-historic lows,” says McBride.

Getting a deal on my mortgage would have been nice, but right now, like most people, it’s far from my greatest concern. We’re living in unprecedented times — never before has a virus like COVID-19 disrupted the world economy in such a way. Like everyone, we’re monitoring the situation as it evolves. And we’ve got you covered. Here’s a look at some of the stories the HerMoney team has whipped up over the last couple of weeks. 

More from the HerMoney team: 

  • Jean lays out the questions you need to ask before you make any changes to your portfolio
  • Kathryn and Becca put together a list of frequently asked questions from our readers, and we checked in with experts to tackle them one by one. 
  • Dori dishes on what a recession really is, and how it will impact your finances.
  • Dayana deconstructs the sharp market movements we’re experiencing and puts crashes, dips, recessions and corrections in perspective by showing how long they typically last. 
  • Beth explains how your investment goals influence how you handle sudden stock market moves.

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Army Captain Teaches Troops Dangers of Finance

How interest rates work is not part of the basic military training manual, but maybe it should be.

Same goes for proper use of credit cards, why you should never accept a payday loan and what percentage of your paycheck to allot to a car loan.

While it’s tough enough for soldiers to learn how to fight America’s combat enemies abroad, they also need training on how to battle some unfriendly businesses – “predators” they call them – right here at home.

Recent studies commissioned by the U.S. Army paint an unflattering picture of economic hardships, many of them brought on by companies overanxious to profit from a soldier’s financial inexperience. The 10-year study found that 27 percent of service members had credit card debt of more than $10,000 as compared to 16 percent of civilians. The same study showed that 21 percent of servicemen used high-cost payday or auto title loans to deal with financial emergencies.

ProPublica, a non-profit news agency that does investigative journalism, detailed the predatory lending practices and outrageous car deals done by sleazy businesses that surround military bases.

“It is amazing what some businesses will do to take advantage of soldiers,” retired Army Captain Robert “Chip” Heidt said. “A lot of these guys are out on their own for the first time, they come into some money, either just for signing up or when they come home from deployment, and everybody starts grabbing for a piece. It’s really sad.”

Heidt just finished a 10-year career as an Army officer at bases in Alaska, Georgia and Kentucky. He graduated from the United States Military Academy at West Point and was an infantry company commander, in charge of approximately 150 men. He estimateds25 percent of the soldiers in his company had financial problems and, “that number grew to 50 percent if you’re just talking about the age group from 18 to 22,” he said.

“They would come home from an overseas deployment with a bunch of money in the bank and run down to the nearest car dealership to buy a new car,” Heidt continued. “I’d ask them: Do you really need a new car? Can you afford the payments? Or are you setting yourself up for some financial problems that are going to be counterproductive for what we’re trying to accomplish?”

Members of the military who fall into debt can lose security clearances and be overlooked for promotions. That is why most soldiers will not confess their financial failures. Heidt said that was an obvious issue so when he became a company commander, he met monthly, sometimes weekly, with his platoon leaders to discuss ways to educate soldiers on handling money.

“Nothing is worse than somebody being deployed halfway around the world and worried about whether there is enough money back home to buy food and diapers for the family,” Heidt said. “You can’t let a soldier’s mind be sidetracked liked that.”

Some of military financial problems are unavoidable because of the military lifestyle, which includes frequently being reassigned. That could mean having to sell a house during a depressed real estate market, spouses giving up employment and moving where the cost of living may be dramatically higher.

However, the more predictable obstacles to financial security can be avoided.

“Things like credit card debt, car loans and cell phone bills,” Heidt said. “Those are the three areas that ate up a lot of their paychecks, but you can teach people the right way to approach things and the value of saving a dollar.”

The Army routinely paid to bring in experts to educate soldiers on matters like budgeting, power of attorney, how to get auto loans, setting up automatic bill payments and investing. Nonetheless, there still will be times when outside influences overwhelm the most well-intentioned efforts.

A private walked into Heidt’s office one day asking for help with a car loan that a General would have trouble affording.  The private bought a Cadillac Escalade, bragging about how he got it with no down payment.

He financed the car with a 20 percent loan that came out to $900 a month, or about half his monthly take-home pay.

“I couldn’t believe a car dealer would let a soldier walk out of his showroom with that kind of deal,” Heidt said. “This was a guy who didn’t know anything about credit scores, anything about car loans, anything about interest rates and clearly didn’t put together a budget to prove he could pay for it.

“It just emphasized how much we needed to educate our guys on financial matters.’’

Heidt begins his post-military career this fall and he’ll be doing a lot of the same things. He just accepted a job with U.S. Bank and while his position hasn’t been defined precisely yet, teaching young people the basics of finance is going to be a big part of it.

“Really, I’d like to be doing the same kind of thing I did in the military: sharing my knowledge of the financial world and opening doors for young people,” Heidt said. “For a lot of people – military and civilian – it’s just not a comfortable subject, but if you can educate them on how all these things work, it can make their life a lot more comfortable.”

What Is a Recession and How Will It Affect Your Finances?

Right now there’s a swath of the population (those under age 30) that is experiencing economic turmoil for the first time in their adult lives. And even if this isn’t your first rodeo, coming off more than a decade of economic growth can lull anyone into a false sense of security.

With the “R” word — recession — making the rounds, what’s important to remember is that recessions are a natural part of how economies operate.

Recession defined

A recession is a decline in economic performance that goes on for many months — technically two or more consecutive quarters where there’s negative growth in Gross Domestic Product (GDP). The National Bureau of Economic Research (NBER) is the group that officially declares a recession.

The last one — the Great Recession — lasted from 2007 to 2009 and is deemed the longest recession in the United States. It was the country’s worst financial crisis since The Great Depression in 1929. 

Not all recessions play out the exact same way. And right now we have the added complexity of dealing with the Coronavirus. If this is the first time you’ve experienced this economic cycle, here’s what you can expect to happen in the coming months. 

What’s happening right now

Economies go through four phases as part of the economic cycle — the expansion, peak, contraction and then the trough. The length of time it takes to experience these cycles vary, but historically we’ve seen this phenomenon play out the same way over and over again.

Expansion is the phase that marks a growing economy — GDP is healthy, unemployment is low (in the 3% to 4.5% range), inflation is normal — around 2% — and the stock market posts regular gains. Eventually the markets and all other economic indicators hit a peak. And it’s all downhill from there. 

When exuberance over the economy’s good health overheats — when everyone expects the good times to go on forever — reality sets in and we experience a contraction. This phase which we’re in right now happens quickly, driving down GDP, stock market returns (as investors start selling) and causing the unemployment rate to eventually rise as companies are forced to lay off employees. 

When GDP growth has turned negative two quarters in a row, that’s when economists say we’re in a recession. Next, we enter the final stage of the cycle, the trough, which marks the worst that the economy can get. Eventually the roller coaster starts ticking up once again to kick off the next phase of expansion.

Investments will be volatile

The last recession came in the wake of a subprime mortgage crisis. The one before that came from the dot-com bust followed by 9/11. Both of these brought down the stock market for a period of time. Right now it’s the Coronavirus causing the markets to be exceptionally volatile. 

What’s good to remember is that investing in the stock market is made for the long haul. The best thing you can do is weather the storm. Expect that the market will drastically fluctuate and leave your money where it is. If you’re closer to retirement and need your money sooner, you could put it away in a high-yield savings account. But even those are experiencing drops in APYs. 

While you won’t lose money in a high-yield savings account, you won’t gain as much as you would investing in the stock market after the recession ends.

Unemployment will go up

Concerts, sporting events, conferences and other gatherings are getting cancelled or postponed. Restaurants, daycares and schools are temporarily closing or experiencing a drop in clientele. Many businesses don’t have the capacity to pay rent or even basic operational costs without money coming in. This means they’ll have to start making staff cuts, even if it’s only to stop the financial bleeding for the time being.

While unemployment has never been higher than it was during the Great Depression — almost 25% — recessions cause a spike in people losing jobs. In a healthy economy unemployment is around 3.5% to 4.5%. Right now it’s at 3.5%. In 2009, near the end of the last recession, it went as high as 9.9%.

Some people in your community will lose their jobs — permanently or temporarily — without access to severance pay, paid time off, or other benefits to make sure they don’t fall behind on bills. 

Keep in mind that side-hustle work will likely also see a dramatic shift. As fewer people travel, Uber and Lyft drivers will see less demand. On the flip side, services like Shipt, Instacart or Postmates for food or groceries may experience an uptick.

Access to healthcare may get spotty

This is less an effect of a recession than it is of the Coronavirus pandemic. Hospitals and clinics are getting ready to handle a higher volume of patients. If you have an elective procedure on the calendar, you may be asked to postpone. And if some other healthcare issue arises, you might not be able to get into a doctor’s office for days, weeks, or even months at a time, depending on where you live. Also keep in mind that some doctors might not be taking on new patients. The best thing you can do right now is to follow guidelines — hand washing, social distancing — designed to keep you and your family healthy.

Reduced goods, services, and travel

Already we’re seeing supply and demand affected. Consumers drive the U.S. economy and our confidence about spending is waning. In some cases we simply can’t buy the goods and services we need. For example, the current European travel ban has many families re-evaluating vacation plans. With restaurants closing or limiting staff — and people stocking up on goods to cook at home — you can expect to see a drop available food options as well. And when it’s safe to gather in groups again, some of your favorite family restaurants may not be around anymore.

Education (and productivity) will drop

Once again, due to Coronavirus, as schools close, parents are faced with limited childcare options. This means that even if they were able to adjust their schedules to work from home (or are forced to do so), they do so without help. This also means that their children are behind on their schooling due to the lapse in attendance.

Some teachers, schools, and districts are working on ways to offer students online resources while schools are closed. But that still means parents might still be required to limit their workload as they care for their children. And there are other risks for students: Many rely on school breakfast and lunch as their only meals of the day. If schools are closed, some students could end up going hungry.

When will things go back to normal?

The things we’re experiencing due to the Coronavirus are evolving daily. As far as the economy and the stock market goes, no one can accurately predict when we’ll be at the bottom of the trough. We can get some perspective by looking at how long past recessions lasted:

How Long Do Recessions Last?

Knowing that recessions are a normal part of how business and the economy works doesn’t make it easier to stomach the daily ups and downs. Just remember: Recoveries are also a normal part of economic cycles, too. 

For more on how to get through these rough waters, see the related articles below. 

With additional reporting by Dayana Yochim

MORE ON HERMONEY:

  • Dips, Crashes, Corrections Oh My! Some Perspective On Stock Market Shocks
  • What To Do With the Federal Reserve’s Latest Interest Rate Cut
  • How to Deal With a Market Dip if You’re About to Retire
  • If a Recession Comes, Here’s How to Manage

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How to Begin Budgeting

Money can’t buy happiness, but it can sure help you in attaining it – that’s if you manage to use it smartly and build it up. On the other side of things, not knowing how to manage your money can be disastrous. It can leave you living paycheck to paycheck, in a situation where you don’t have the money to cover for emergencies or, worst case scenario, are forced to take out loans, pushing on you massive debt and an endless lifetime of being broke. 

The main reason for this is a lack of financial education, so if you want to stop this happening to you, you’re going to need to learn how to manage your money. That topic covers a whole range of things, from investing and saving to property and assets. However, before you go anywhere near that deep end, you need to learn how to budget. 

Learning to budget is the foundational point that wealth is built on. Being able to do it properly ensures all expenses are paid for and that you are never in a situation where a bill creeps up on you because you impulse bought take out when you shouldn’t have. 

Budgets aren’t just for building wealth up, though. Primarily, you want to use them as a defensive tool as opposed to an offensive one. 

That’s because proper budgets are going to help you avoid debt. There is one primary reason people get into debt, and that’s because they spend more than they make. Now, while there are times that things come up that force this situation, most people and up doing this without even realizing it, especially if they have a credit card. By monitoring what’s coming in and out, you can make better decisions and decrease the risk of overspending drastically. 

So how do you do it?

How to Start Budgeting

It’s worth pointing out that no two budgets are ever really the same. Sure, there are standardized budgets in the business world. Most profit and loss accounts are going to look similar, as well as with balance sheets. For personal finance, the whole thing is much more, well, personal. Not only does it allow you to see and plan, but it helps you develop good spending habits, as well.

That being said, you don’t need to be running off to get a finance degree so that you can build a budget from the ground up, nor do you need to spend hours and days thinking up a homemade system. There are a few rules, layouts, and other conventions you can follow to make the whole process as easy as possible.

Why Are You Budgeting?

The first step is to actually figure out why you want a budget in the first place. What you need to realize is that, by choosing to live off of a budget, you are entering into the minority of households. For most people, it can be very tough going, so you need to determine why you want to do it and what your goals are. 

Some of the more popular reasons people start budgeting are to save more money, reduce overspending and poor buying habits, get out of debt, avoiding going into debt in the first place, help a relationship, and to avoid living paycheck to paycheck. 

While society generally separates finances and figures from emotions, in this case, the two are closely linked. Your motivations for budgeting play a large psychological role in whether or not you are going to stick to the budget to begin with. Putting time and effort into a budget and putting your goals physically down on paper develops an emotional investment in it, making it far more likely that you are going to stick to it, and increases the satisfaction you’re going to feel when you hit your targets.

Analyze Spending Habits

Next, you need to look very closely at your current spending routines and habits. This doesn’t mean just glancing over your most recent bank statement, but rather going in deep and analyzing everything. 

Without knowing what you’re dealing with and where the problem areas are, your budget is just not going to be realistic or achievable. You should be going back one or two months to properly analyze your card habits. If you mainly use cash, you are going to have to either keep receipts for a few weeks or use a notepad to write down every time you spend something, where you spend it, what on, and how much.

You could also go digital with this approach and use an Excel or Google spreadsheet to track your spending. It takes time, and you might forget to enter things, but it is the most effective. There are plenty of templates out there to use, but if you’re making your own, there are a few metrics to monitor. Here’s an example if you’re wondering where to start:

When Where What How Much Why
5/1 Landlord Rent $1,260 May Rent
5/2 Grocery store Groceries $156.74 Weekly groceries
5/4 Mall Shirt $18.63 Shopping with friends
5/5 Fast food Lunch $13.25 Forgot lunch
May Spending

This is just a basic tracker, though. If you wanted to go more in-depth, you could divide it by location to see if you have a habit of spending money more in certain places over others – or any other number of metrics. Doing this takes longer, but offers more insight into your financial routines. 

If you don’t want to go through the effort of manually drawing up a tracker, there are plenty of apps out there that do it for you. The likes of Mint, PocketGuard, and Dollarbird link all your bank accounts, credit cards, and so on together, meaning you have everything in one convenient spot. 

Unfortunately, when planning out finances, it’s never as simple as allocating X, Y, and Z every week. There are irregular expenses popping up all the time, either predictable or unpredictable. While all you can do to prepare for the unexpected is to stash some cash away, you can plan in advance for the irregular expenses you know you have to overcome. Holidays, birthdays, car inspections, professional dues, any property tax you need to pay, insurance premiums, doctor checkups, birthdays, and more are expenses you can plan for.

Calculate Income

After that’s out of the way, you need to add up your income and expenditure. Budgeting is all about how you use the money you bring in, so you need to know how much that is before anything. You need to factor in income from every source, which includes your primary wages or salary from your job, government subsidies child support, dividends, passive income, freelance, nighttime jobs, and more.

The sources you have differ from person to person and double if you and your partner are budgeting together. It can also be hard to know exactly how much you’re going to make, especially if you freelance or get shift work. To counter this, you’re going to need to use an average for your budget.

Say you budget for all your income, and you get a total of $1,100 dollars per week. Use that to pay what needs to be paid, and any more than that, you should stick into a savings account. It’s important that you be realistic here, so don’t plan to have more money than you’re going to make. 

You don’t have to do this weekly, either; you could do it biweekly or even monthly. Again, budgets are completely personalized to the individual, so do whatever works for you. You could even use more than one budget that works in tandem with each other; it’s all up to you.

Plan for Expenses

Once you have your income jotted down and your average calculated, you need to plot out your expenses. The approach you’re going to be taking to this is significantly more concrete than that of your income, given that you can control a lot of your outgoings. 

Start with your fixed expenses, regular loan payments, fixed bills, and so on. You know definitely how much that is going to cost you each month, so that’s easy to calculate. For any variable bills, again, you’re going to want the average approach. That’s for bills and responsibilities you’re going to have to pay. 

For things like groceries, you’re going to have to give yourself a limit. First, sit down and plan out meals for the week. Then go to the shop with your list, and pick everything up. Once your home, take a look at the total, round it up to a multiple of 25, and use that as your set amount each week for groceries. This might seem like a lot of work just for planning out food, but groceries are one of the biggest budget killers that people don’t expect. So plan it out to avoid blowing through all your wages on foods you aren’t going to eat. 

Long Term Goals

Once you have all your income and expenditure calculated, you can start plotting down some long term goals. 

While you may just want to budget to avoid falling into debt, if you do it well, you’re going to end up with excess cash. So what do you do with it? You could just spend it all on something nice, which is fine every now and again, but you’re trying to be more financially responsible, so you want to put it towards something. 

There are loads of long-term savings goals, like retirement, building up an emergency fund, saving for a house or a new car, college, building an investment portfolio, or any other number of constructive uses for money. 

Pick out the long-term goals that are the most important to you. You want to be specific when you’re planning this out, and you want to give yourself deadlines. Say you want a new car. Instead of just saying you’re going to save for a new car, make a specific plan to save $7,500 dollars for a new car by the 31st of December next year. Doing this helps materialize the goal; it turns it from an abstract idea into something physical you can visualize. 

Once you have those goals down, you need to decide how much you want to save towards them. While you can just use the excess cash exclusively to fund them, splitting it with percentages if you have more than one, you’re better off putting a set amount to it and topping that up with anything you have leftover.

This way, you can be sure that you’re going to hit your target by a specific point instead of relying on unpredictable excess income. 

Now that all the theory work is done, it’s time to decide what type of budget to use.

Types of Budgets

As mentioned at the beginning, no budgets are the same, and you can make one from scratch if you want, but to make your life easier, you’re better off using some of the other well-known systems as a foundation to build upon. 

Zero Based Budget

One of the more restrictive types of budgets is a zero-based budget. This is the type of budget employed by a lot of businesses and corporations. In it, your income minus outgoings always equal zero. This way, every single dollar has a job to do, and there is no room for overspending. It is super optimized but can be hard to stick to, especially if you’re just starting out. 

50/30/20 Budget

A far easier budget for beginners to work with is the 50/30/20 budget that was popularized by Senator Elizabeth Warren. In it, you set aside 50% percent of your income for needs, such as bills, food, rent, debt, and so on. You then use 30% percent for wants – so things like Netflix subscriptions, movie nights, takeaways, and any other things you want to buy. Finally, 20% is put into savings. With this budget, you have plenty of flexibility, while the opportunity to build up savings and cover your expenses is still there.

Making a Budget

Now that the planning is all done, it’s finally time to make your budget. The first step in this is deciding what medium to use to create it. There are a few good apps out there that do the hard work for you, such as Mint, as mentioned before, as well as PocketGuard. However, there are plenty of free and premium apps out there for budgeting, so shop around if that’s the route you want to take. On the other hand, no app is going to serve you as well as a trusty notebook, pocketbook, or Excel spreadsheet. 

If you are making your own budget, the first step is to create categories. You can use whatever ones you want. For example, you could have a single food category or one each for groceries and takeout. 

Separate your spreadsheet into two sections: one for income and one for expenditure. You can do this vertically like a profit and loss account or horizontally. Alternatively, you could do it like a calendar, with expenses for each day, or combine the two.

Set up your categories as you need them, either in columns or row, but don’t fill in the boxes yet.

Once the layout is done, make a copy of the file, copy and paste the layout onto another page in the spreadsheet or next to it. 

Go back to the original, and fill in your data. After that, it’s just a matter of sticking to it. It’s easier to track it if you do it daily, so consider laying out your income and expenses and set up a calendar system to estimate how much you need to spend each day. 

Whether you review it daily, weekly, or monthly, chances are, your actual spending is going to differ from your projections. That’s where the other layout that you copied comes in. Fill that one in with how much each item actually cost you. Doing this not only allows you to track it and adjust going forward, but it allows you to compare the two and see where you went wrong. 

That’s the end of your first budget. Follow this guide, and you should be well on your way to creating a financially foolproof plan for the future. Remember, though; consistency is key, so make sure you’re sticking to it. 

How to Fund Your Startup Business

It’s looking like this new decade is going to be the age of the entrepreneur. Thanks in no small part to the success of business-focused Instagram and Facebook accounts, people are getting less and less satisfied with their 9 to 5 salaries, and every day more hopeful individuals are making the leap into opening their own business. 

Despite its growing popularity, it isn’t an easy decision to make. You’re giving up comfort and security. You aren’t going to get a reliable and consistent paycheck, and you’re going to be working all day every day for what could be several years before you see a cent of profit. Once you do, though, you’ve just taken the first step on the path to true wealth, and you can hire someone to take your place while you step back and reap the rewards. 

That’s not to say that the reality is hopeless, though. The 2010s saw the exponential growth of e-commerce, and the 2020s are going to see that grow even more. More people are buying more stuff, and that’s great for you as a new business owner. It means there’s more competition, but it also means that you have the entire globe as a potential market, with anyone able to browse your stock from the comfort of their home using nothing more than their fingertips. 

So if this is really what you want to do, you have a lot of preparation ahead of you, not the least of which is to decide what type of business you want to have. You could open a retailer, but then you have to think about what kind of retailer you want. Do you want a restaurant? In that case, you’re going to need stoves, grills, sinks, gas lines, and more. That’s not even thinking about offering a service, which itself has endless possibilities. What this all means is that there is no one-size-fits-all funding for a business. You could end up spending $250,000 dollars on kitchen equipment to open a restaurant or $5,000 dollars to open up a small corner shop. 

That being said, there are a few loans and strategies that every business can take advantage of regardless of the business model. Below are some tips and advice from entrepreneurs who have been through the mill. 

Start Off Small

This should be the first thing you do, regardless of the financial resources you have available to you. It’s okay to be hopeful of your first venture and to be optimistic about its success, but blind optimism can be critically damaging to your operation. 

You need to keep a dose of healthy skepticism in your back pocket. Otherwise, you’re just asking to be stung. 

So don’t go throwing all your life savings into your first business; that’s not a smart idea, and it’s irresponsible. Start off with something small, like an online t-shirt store, and work your way up from there, gaining experience and knowledge in the process.

Calculate Your Expenses

Once you have your business in mind and you’ve done the market research to make sure there is a consumer base for it – and that you can turn a profit with it, it’s time to calculate how much this business is going to cost to get up and running. This is only going to be an estimate, but it’s a good sign of things to come. 

The U.S. Small Business Association conducted a study where it concluded that the average micro business costs around $3,000 dollars to get started, while other home-based larger scale ventures cost anywhere between $2,000 and $5,000 dollars.

Drew Gerber, the founder and CEO of WasabiPublicty – a technology PR firm, suggests that entrepreneurs need at least six months’ worth of fixed costs on hand before launching a business. He also suggests having a plan in place to cover your first month’s expenses regardless of business performance and to make sure you’ve done your market research and marketing before you open the front door, whether physical or metaphorical. 

The primary reason that new businesses fail is that they run out of cash. Inexperienced business people have a tendency to underestimate expenses in their business plan and financial forecasts while overestimating the amount of revenue the business is going to bring in. You have to stay realistic, and you have to remember that, as your business grows, so too does its expenses. 

Understanding Expenses

Being able to properly manage your business cashflow means being acutely aware of the different types of expenses there are. That’s not to say what each individual expense is, which can number in the hundreds or even thousands for some businesses, but what categories nearly each one can be fit into. Almost every cost you have falls under one of the two types in each of these three categories. For example, rent is a variable, essential, ongoing cost, whereas a bucket of paint is a fixed, optional, once off payment. 

Payment Frequency

One Time Single Payment

This is a one-off payment that doesn’t recur on a regular basis. Things like equipment and décor fall under this umbrella. How much this is going to be depends on the type of business. Like mentioned earlier, this is going to be really high in restaurants and other equipment-based retailers and not so much for home-brewed microbusinesses. These costs are going to be disruptive to your cash flow, and you’re going to need to make up the difference in the months following a big purchase. 

Recurring Payments

On the flip side of single payment costs, you have recurring ones. These are expenses that are paid on regular, usually predictable, occurring dates and can be planned for accordingly. These costs can either differ in amount from one payment to the next or stay the same depending. Most of your business costs are going to fall under this umbrella – the likes of bills and utilities, labor, stock or materials, and transport costs. 

Purchase Importance

Essentials

Essential costs are things that need to be bought in order to ensure the success of the business. There is no room for maneuvering with this type of cost, as it constitutes the expenses that are necessary to the operation functioning normally. Rent would be one of these, as would labor.

Optional

As the name implies, optional costs are the opposite of essential costs. These are things like a new carpet for the front of the store, some better-looking shelving, or a fresh coat of paint. These things help, but none of them are essential to the business operating and growing. These should never be made a priority and should only be purchased once there is enough cash saved up in reserves for them. 

Cost Type

Fixed

Your fixed costs are expenses that do not change in amount from payment to payment. Each one stays the same regardless of business performance, hours, or any other metric, allowing you to plan well for it. Things like rent would constitute as a fixed payment. 

Variable

Variable costs are the costs that change on a regular basis. Whereas fixed costs stay the same regardless, variables are based on certain metrics. For example, the price of your electricity bill is going to change based on how much you left the lights on, and your labor cost is going to change depending on how many people you have scheduled for shifts. 

Estimate Your Cash Flow

Once your expenses have been calculated, you need to figure out how much money you’re going to have coming in. Having a lack of cash flow is a killer for startups, as complications and admin difficulties can result in payments being delayed, despite the funds being there, and can kill the business stone dead. 

You should draw up at least three months’ worth of cash flow, to begin with. Including separate plans for the worst-case and best-case scenarios, not just calculating for fixed costs, but for the cost of goods sold as well. 

Make sure you know how much interest you owe on loan, and plan accordingly. Having all this down on paper gives you a solid foundation to build on, and gives you a realistic estimation of how much cash you’re going to need to generate to get the business growing. 

Financing

So all the initial planning and calculation is out of the way. Now it’s time to start thinking about how to get the finances to begin with in the first place. There are a myriad of ways to do this, and we’re going to be talking about some of the more popular options. 

Again, there is no one size fits all here. You may have $5,000 to $6,000 in disposable savings you wish to use, for instance. Alternatively, you’re planning on applying to the bank for a loan or grant; everyone’s situation is unique.

We’re going to look at some specific examples of the options available to you below. Note that these are only types of funding, not examples of institutes, because you could write tomes on the amount of different financing institutions and venture capitalist firms out there. We do go into more detail about small business loans down below, though, if that is what you’re looking for. 

Community Development Finance Institutions

Community development finance institutions, or CDFIs for short, number in the thousands across the United States. 

CDFIs are non-profit, non-bank alternative lenders for businesspeople and entrepreneurs just getting started on their business journeys. The institutions offer reasonable loans, usually with less interest rate than a bank; however, it can be difficult to get one due to the high demand for them. 

CDFIs differ from banks in a few, very key ways. Firstly, most banks check your credit score before putting your loan through. If that score comes up poor, then you may have a hard time finding a lender. CDFIs, on the other hand, use credit scores differently. Instead of solely the score, the institutions look at the reason for the poor credit, and if it can be explained reasonably, then your loan may still be approved. You also don’t need nearly as much collateral for a CDFI loan as you would a traditional bank.

Venture Capitalists

VCs are external groups that exchange funds for part ownership in a business. The amount of money offered to entrepreneurs and the percentage of ownership given in exchange is negotiable and usually based on the estimated value of the business. 

If you have a particularly good business idea, then this is by far the best option available for you. There is no collateral involved, nor is it a loan. You may be skeptical about handing over a chunk of your profits, but if your business has enough potential to get VC funding in the first place, then chances are there isn’t going to be any lack of profit down the line regardless. 

On top of all that, it’s not just financing you’re selling a part of the business for. Venture capitalists are experienced businesspeople; they have been through countless companies and have a wealth of knowledge that you can and should take advantage of. They do, in a way, become your business partner, after all. 

Partner Financing

Partner financing is relatively unknown compared to the other funding options but can be very effective for the right type of business. It involves a separate entity in the same industry, as you are helping to fund your growth in exchange for special access and privileges associated with your business, whether that be access to staff, production, product, or profit. 

It is usually a combination of all of these things, with a partner buying a stake in the business similar to a VC. Usually, partner financing comes from big players in your industry, so the benefits you get from it far outweigh the disadvantages. 

Like VCs, this is also not a loan. There is no collateral or repayments involved, so it is less risky than some other finance options you may be looking at. 

Angel Investors

Angel investors have soared in popularity over the last few years. Angel investors are normally seen as just a different type of venture capitalist; this is sort of true. There is one massive difference between the two, though, and it is the reason for its name. 

Whereas VCs look for demonstratable growth of your business and only invest in projects believed to have high potential, angel investors are much more likely to invest in businesses in the startup stage without that growth or potential yet on display – hence the name angel. 

It is a more personal experience to that of a VC, and your angel investor can usually provide you with invaluable advice and guidance. After all, nobody invests to lose money. 

Factoring

A lot of businesses, especially B2B businesses, don’t get paid until sometime after it has billed out its invoice. The result is that the cash flow isn’t there to pay what needs to be paid, despite strong sales. 

With factoring services, a company fronts you the money for outstanding invoices, which you then pay back once your debtor pays you. 

Factoring is not a startup investment solution, but it can help in keeping cash moving and prevent you from going under in the early days. 

Crowdfunding

Like angel investors, crowdfunding has really taken off in the last few years. Sites like Kickstarter and IndieGoGo have allowed businesses of all shapes and sizes to raise incredibly high funds before any foundation work has even been laid. 

You just upload your pitch to a site and market the hell out of it, and people who want to see it happen pitch in whatever amount they want – no equity needed, no repayment, and no interest. 

Most companies offer some incentive for doing this, even if it’s just something small, like a soundtrack for an indie game.

Just be sure to read the fine print, as a lot of sites require you to raise your full goal to keep any money you make, while others have ludicrously high processing fees. 

Grants

Grants are arguably the most valuable funding option available to entrepreneurs. The government has schemes set up that afford businesses with the potential to thrive funding, free of repayment or equity. 

There are federal goals and requirements you need to meet to get one, but it can never hurt to shoot your shot all the same. 

Peer to Peer

P2P is a new type of small business financing made possible by the popularity of the internet. 

A P2P is a website that connects potential borrowers with lenders, tracks your records, and handles the transfer of funds. 

With it, there are no banks involved, unless one is funding the lender. Regardless, it can be a useful alternative to regular loans for small businesses looking to get a start. 

It is only available to people in certain states, though, so double-check that you’re eligible for this one. 

Convertible Debt

Convertible debt is an unusual type of financing that involves taking out a loan with the intention of turning the debt into equity in the future. It is usually a collective agreement between the borrower and an individual investor or investor group. 

It is an easier loan to manage than most; although, you do have to be okay with relinquishing some control of your business in exchange. 

Where to Get a Small Business Loan

Your bank is going to be the first obvious answer. However, that doesn’t speak to the full possibilities of a small business loan. You don’t have to go through a traditional institute, and many organizations offer small business loans online instead of looking for any number of loan options we just talked about. 

One notable example of this is Lendio.

Lendio is a great option for any small business looking to raise a bit of capital and serves as a sort of as a P2P/matchmaking loan service. 

You fill out an online form, and the site then matches you with any of its lending partners whose terms meet yours. 

The application is fast, you have your answer within 72 hours, and the loans you have access to are very personalized. However, some of the loans have high-interest rates, and there have been reports of hard credit inquiries with some of the lenders. 

Another option open to you is to use BlueVine. 

BlueVine actually offers three types of financing: traditional term loans, factoring, and lines of credit. 

While the traditional loans and lines of credit are certainly great, its BlueVine’s factoring service that is the real selling point here. You can use your invoices as collateral on the factoring funds you get and apply for up to five million dollars. Like the part on factoring above mentioned, though, you don’t have access to the service in every state, so double check again. 

Aside from the factoring, BlueVine’s application process is quick and easy. It also goes easy on you for your credit score, although you aren’t going to be getting a five million dollar loan with a score of 300 anytime soon. 

There are only two real downsides to the service. The first is that you may face large fees depending on the terms of the loan you take, and the second is the limited universal accessibility of factoring. 

Federal tax notices are on the way: What to do if you still owe for 2017

Tax Day 2018 is (finally) over. But if you didn’t pay everything owed to the IRS for your 2017 federal taxes, you haven’t heard the last from them this year.

The IRS announced that tax notices will soon be sent to people who filed on time but didn’t pay their taxes in full. If you fit that description, you’ll likely receive a letter or notice in the mail from the IRS sometime within the next few weeks.


What does this mean for you?

If you filed your 2017 federal taxes on time and paid your taxes in full by the April 18 filing deadline, you probably won’t find a notice from the IRS in your mailbox.

However, if the IRS discovers a correction on your return that increases the amount you owe, you could still get a notice. Keep in mind that if you filed electronically, it may be less likely your return contained common errors.

If you filed your taxes but didn’t pay everything you owe, the bill you receive may include interest and penalties on top of the unpaid balance.

As the IRS notes, interest generally accrues on any unpaid tax, starting from the due date of the return and ending when you pay off the full balance. You can also be hit with a failure-to-pay penalty if you file a return but don’t pay all the tax owed on time.

Why should you care?

IRS interest and penalties can be severe. In fact, paying the tax you owe with a personal loan, for example, may actually be cheaper in the long run than paying IRS interest and penalty fees.

As of April 1, 2018, the IRS charges 5% interest for tax underpayments. Generally, interest begins adding up from the due date of your return until the date you pay your tax in full, and it compounds daily.

It’s important to note that interest accrues on the unpaid tax as well as on any interest or penalties that the IRS charges you for not paying on time. All that interest can add up quickly.

Late or failure-to-pay penalties can also inflate the total amount you owe. The current failure-to-pay penalty is 0.5% of your unpaid tax for every month (or partial month) that the tax goes unpaid, from the due date of the return until the tax is paid in full, up to a maximum of 25%.

That rate can increase or decrease based on different circumstances, such as an installment agreement, but it’s still best to pay your taxes on time and in full to avoid paying penalty fees whenever possible.

What can you do?

If you get a bill from the IRS this summer, the best thing you can do to stop interest and penalties from piling up is to pay the full amount you owe immediately.

The IRS provides several ways to pay.

  • DirectPay. This service allows you to pay your tax electronically from your checking or savings account. And it’s free!
  • Electronic Federal Tax Payment System. This is another free government service and allows you to pay by phone or online.
  • Debit or credit card. The card issuer may charge a processing fee for the transaction, but the IRS doesn’t. Fees vary by issuer.
  • Check or money order. The check or money order should be made payable to the United States Treasury (or U.S. Treasury). You can deliver it in person or mail it to the address specified on your IRS tax notice.

If paying in full isn’t possible right now, you may have other options.

  • Request an online payment plan. To qualify for the long-term payment plan, you must owe $50,000 or less in combined tax, penalties and interest, and have filed all your tax returns. To qualify for the short-term payment plan, you must owe less than $100,000 in combined tax, penalties and interest.
  • Apply for an installment agreement. You may be eligible to apply for an installment agreement through the IRS. The agreed-upon monthly payment can be directly debited from your bank account or paycheck. Fees may apply.
  • Ask the IRS to delay collection until your financial situation improves. You’ll likely have to fill out a form requesting the IRS to delay collection and provide proof of your financial situation. The IRS may or may not agree to your request. But even if it does agree, penalties and interest will be charged until you pay the full amount.
  • Request an offer in compromise. This could let you pay your tax bill for less than you originally owed. You’ll need to meet stringent eligibility requirements, and the offer terms tend to be similarly strict. The process starts by completing the Offer in Compromise Pre-Qualifier.

Remember: Paying the tax you owe in full by the filing deadline every year is the best way to avoid tax debt, interest and penalties.

It’s a good idea to check your paycheck withholdings to make sure enough tax is being withheld from your paycheck throughout the year. Adjusting your W-4 could help you avoid a big tax bill next April.


About the author: Evelyn Pimplaskar is an assigning editor with Credit Karma, covering checking, savings, personal finance and taxes. With nearly 30 years of experience in media, marketing, public relations and journalism, Evelyn’s wri… Read more.