As the economy reacts to the COVID-19 pandemic, millions of Americans are adjusting to reductions in income, uncertainty about their earning potential, or a loss of employment all together. No one knows how long the economy will take to get back to normal, or what exactly that normal will look like. During times like these, it's more important than ever to get clarity around your personal finances.
Personal Finance 101: Cash, Asset, and Debt Management
Cash management is something you do every day, even if you don’t realize it. From checking the balance in your bank account, to keeping tabs on your paycheck, or saving for an upcoming purchase. Most of us actively manage our cash without outside help, while some use budgeting tools to get a better understanding of monthly cash flow. The bottom line on cash management is, it's important to understand how much cash you have saved, and what your net cash flow is every month.
For most people, asset management is done through an employer sponsored program such as a 401k or through an Individual Retirement Account (IRA), both of which are tax-advantaged investing tools used for retirement savings. Typically, an outside party manages these assets, which allows for people to set a long-term strategy and avoid actively managing performance. For those that are active managers, auditing this element of your financial picture for performance can be challenging. However, index funds serve as a good benchmark to compare performance, especially if you are paying an on-going fee to a financial advisor.
The third category is debt management. This is sometimes referred to as “liability management” because it represents the other side of your personal balance sheet. Debt management is as much a part of your holistic financial picture as the cash you have in your wallet or the assets in your retirement account. It’s easy to view debt as outside of your control because it is money owed, instead of money earned or held, but it is actually a category where you have a lot of power to make changes and unlock cost-savings opportunities.
The Big Three: Home Loans, Auto Loans, Student Loans
The most common types of debt are home loans, auto loans, and student loans.
With home loans, it’s common to work with a loan originator from your existing bank or to choose a lender recommended by your real estate agent. In fact, the majority of people decide to work with the first lender they’re connected to without shopping around to compare to rates. When you don’t seek out alternatives, you have no way of knowing if you are being offered fair terms or if you’re overpaying. If you’re a customer of Own Up, you know that our service solves this problem. If you’re new to Own Up, learn more about how we help our customers easily and transparently compare home loan options so they can save time and money.
A similar behavior exists with auto loans. Most people choose financing offered through the car dealership, which leads to them overpaying. The car salesperson, just like the mortgage loan originator, is motivated to get you to take the offer that pays the biggest commission, even if that means you pay more. Dealerships pressure you into selecting the options they offer in order to expedite the sales process, often capitalizing on your fear that if you go elsewhere it may jeopardize the sale price.
With student loans, which is one of the largest forms of debt today, students have a plethora of options to choose from including subsidized, unsubsidized, private loans, and parent loans. With so many options, all with different terms, it’s challenging to understand the best mix for your specific needs. With the recent passage of the CARES Act, student loans owned by The U.S. Department of Education are now eligible for 0% interest and payment deferment through September 30th, 2020. That’s welcome relief for eligible student loan holders, but for those that are not eligible, exploring refinancing options and optimally managing this source of debt represents a significant cost-saving opportunity.
Taking Action: Debt Management as a Stimulus
Lowering the cost of your debt over time serves as a financial stimulus that can have a profound effect on your personal financial wellbeing. Lowering monthly payments is equivalent to generating more income – the age old ‘a penny saved is a penny earned’ adage holds true. Even more importantly, these savings exist for the life of the loan, which can translate to thousands of dollars over the coming years. Those savings can be put towards important healthcare or education expenses, invested for compounding returns, or held in cash for uncertain times like we’re currently experiencing.
So how can you act on this advice? It starts with a fresh mind set about your financial picture. Reducing the cost of debt is a critical, but often overlooked aspect of your financial profile.
Understand each of your debt obligations - the total amount, the financial institution you’re working with, the terms of the loan and the interest rate. Identify financial institutions you trust and seek out their offers, and compare them to each other. Money is a commodity, so it’s critical that when you take out a loan, you don’t overpay.
Begin to actively monitor interest rates. Macroeconomic events, like COVID-19, can lead to lower interest rates, as can changes to your credit score or a reduction in your total debt obligations. Rates are constantly fluctuating based on market conditions and your eligibility for those rates may change over time too. Moreover, if your credit score improves or if you pay down your debts below certain thresholds, you may be eligible to refinance into a lower rate.
At Own Up, we believe that debt management deserves just as much attention as cash and asset management. While cash management will always be the top priority and has the most immediate impact on your everyday life, our goal is to help you gain clarity into the cost of your debt, and make it easier to search and compare the best lending options available to you.