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Fixed and Variable Interest Rates: Which One's For You?

Fixed and Variable Interest Rates: Which One's For You?

Fixed interest rates are stable, but variable rates may save you money.

Which may be right for you? Read this article to find out!

First, some housekeeping—what’s the difference between fixed and variable interest?

It’s exactly what it sounds like. A fixed interest rate remains the same throughout the life of the loan. Variable rates, however, are typically tied to another interest rate. If that rate changes, your rate changes.

So what does that mean for you?

In general, fixed interest rates are safer. Because they’re locked in, they won’t suddenly skyrocket if the economy changes. However, their rates are initially probably higher. You’re trading overall payment for stability.

Variable rates, then, can seem like a better deal. Historically, data shows that borrowers pay less on variable rate loans than fixed rate loans. But there are two important things to consider…

  1. Past performance never guarantees future returns. Just because variable rates saved people money in the past doesn’t mean they will in the future.
  2. Variable rates can have catastrophic outcomes. In 2008, families with adjustable rate mortgages suddenly found their interest rates skyrocketing. Many weren’t able to pay their bills and foreclosed, which contributed to the Great Recession.

The takeaway is that variable rates are not to be treated lightly. Consult with a licensed and qualified financial professional before you borrow money. Their knowledge of the current financial landscape can help you choose an interest rate type that works best for you and your goals.

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This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies that may be available to you. Before taking out any loan or enacting a funding strategy, seek the advice of a licensed and qualified financial professional, accountant, and/or tax expert to discuss your options.

So You Want to Buy Life Insurance for Your Parents...

September 28, 2020

So You Want to Buy Life Insurance for Your Parents...

Playing Monopoly as a young kid might have given you some strange ideas about money.

Take the life insurance card in the Community Chest for instance. That might give the impression that life insurance is free money to burn on whatever the next roll of the dice calls for.

In grown-up reality, life insurance proceeds are often committed long before a policy holder or beneficiary receives the check they’re waiting for. Final expenses, estate taxes, loan balances, and medical bills all compete for whatever money is paid out on the policy.

If your parents don’t have a policy or if you think their coverage won’t be enough, you can plan ahead and buy a life insurance policy for them. Your parents would be the insured, but you would be the policy owner and beneficiary.

A few extra considerations when buying a life insurance policy for your parents: <br>

  • Insurable interest still applies. If your parents already have a significant amount of life insurance coverage, you may find that some insurers are reluctant to issue more coverage. Insurable interest requires that the amount of coverage doesn’t exceed the potential financial loss. (In other words, if your parents already have enough coverage, a company may not want to insure them for more.)
  • Age can limit coverage amounts. Assuming that your parents are older and no longer generating income, coverage amounts will be limited. If your parents are younger and still have 20 or more years ahead of them before they retire, they can qualify for a higher amount of coverage.
  • Age can limit policy types. Certain types of life insurance aren’t available when we get older, or will be limited in regard to length of coverage. Term life insurance is a good example. Your options for term life insurance will be fewer once your parents are into their sixties. The available term lengths will also be shorter. Policies with a 30-year term aren’t commonly available over the age of 50.

How Can I Use The Life Insurance For My Parents? <br>
Depending on the amount of coverage you buy – or can buy (remember, it may be limited), you could use the policy to plan for any of the following:

  • Final expenses: You can expect funeral costs to run from $10,000 to $15,000, maybe more.
  • Estate taxes: Estate taxes and so-called death taxes can be an unpleasant surprise in many states. A life insurance policy can help you plan for this expense which could come at a time when you’re not flush with cash.

Can Life Insurance Pay The Mortgage Or Car Loans? <br>
It isn’t uncommon for parents to pass away with some remaining debt. This might be in the form of a mortgage, car loans, or even credit card debt. These loan balances can be covered in whole or in part with a life insurance policy.

In fact, outstanding loan balances are a very big consideration. Often, people who inherit a house or a car may also inherit an additional mortgage payment or car payment. It might be wonderful to receive such a generous and sentimental gift, but if you’re like many families, you might not have the extra money for the payments in your budget.

Even if the policy doesn’t provide sufficient coverage to retire the debt completely, a life insurance policy can give you some breathing room until you can make other arrangements – like selling your parents’ house, for example.

You Control The Premium Payments. <br>
If you buy a life insurance policy for your parents, you’ll know if the premiums are being paid because you’re the one paying them. You probably wouldn’t want your parents to be burdened with a life insurance premium obligation if they’re living on a fixed income.

Buying insurance for your parents is a great idea, but many people don’t consider it until it’s too late. That’s when you might wish you’d had the idea years ago. It’s one of the wisest things you can do, particularly if your parents are underinsured or have no life insurance at all.

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Pros and Cons of Simple Interest

Pros and Cons of Simple Interest

Brace yourself: You’ve been brought here under false pretenses.

This post is not so much about a list of pros and cons as it is about one big pro and one big con concerning simple interest accounts. There are many fine-tooth details you could get into when looking for the best ways to use your money. But when you’re just beginning your journey to financial independence, the big YES and NO below are important to keep in mind concerning your unique goals. In a nutshell, interest will either cost you money or earn you money. Here’s how…

The Pro of Simple Interest: Paying Back Money <br> Credit cards, mortgages, car loans, student debt – odds are that you’re familiar with at least one of these loans at this point. When you take out a loan, look for one that lets you pay back your principal amount with simple interest. This means that the overall amount you’ll owe will be interest calculated against the principal, or initial amount, that was loaned to you. And the principle decreases as you pay back the loan. So the sooner you pay off your loan, you’re actually lowering the amount of money in interest that you’re required to pay back as part of your loan agreement.

The Con of Simple Interest: Growing Money<br> When you want to grow your money, an account based on simple interest is not the way to go. Setting your money aside in an account with compound interest shows infinitely better results for growing your money.

For example, if you wanted to grow $10,000 for 10 years in an account at 3% simple interest, the first few years would look like this:

  • Year 1: $10,000 + 300 = $10,300
  • Year 2: $10,300 + 300 = $10,600
  • Year 3: $10,600 + 300 = $10,900

In a simple interest account, the 3% interest you’ll earn is a fixed sum taken from the principal amount added to the account. And this is the amount that is added annually. After a full 10 years, the amount in the account would be $13,000. Not very impressive.

But what if you put your money in an account that was less “simple”?

If you take the same $10,000 and grow it in an account for 10 years at a 3% rate of interest that compounds, you can see the difference beginning to show in the first few years:

  • Year 1: $10,000 + 300 = $10,300
  • Year 2: $10,300 + 309 = $10,609
  • Year 3: $10,609 + 318 = $10,927

At the end of 10 years, this type of account will have earned $429 more! And that’s even at a typically lower 3% rate and without continuing regular contributions to the account! Just imagine the possibilities with a higher interest rate and a financial plan for your future.

Don’t forget: Simple isn’t always the way to go, and that can be a good thing.

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3 Easy Ways To Save For Retirement (Without Investing)

November 6, 2019

3 Easy Ways To Save For Retirement (Without Investing)

Our retirement years will be here sooner than we think.

Ideally, you’ve been putting away money in your IRA, 401k, or other savings accounts. But are you overlooking ways to save money now so you can free up more for your financial strategy or help build your cash stash for a rainy day?

1. Pay Yourself First.
If you’re making contributions to your 401k plan at work, you’re already paying yourself first. But you can also apply the same principle to saving. (If you open a separate account just for this, it’s easier to do.) If you prefer, you can accomplish the same thing on paper by keeping a ledger. Just be aware that paper makes it easier to cheat (yourself). With a separate account, you can schedule an automatic transfer to make the process painless and fuhgettaboutit.

Here’s how it works. Whenever you get paid, transfer a fixed dollar amount into your special account – before you do anything else. If you don’t pay yourself first, you might guess what will happen. (Be honest.) If you’re like most people, you’ll probably spend it, and if you’re like most people, you might not really know where it went. It’s just gone, like magic.

Paying yourself first helps to avoid the “disappearing money” trick. Hang in there! After a while, as the money starts adding up, you’ll impress yourself with your savings prowess.

2. Got A Bonus From Work? Great! Keep it.
What do you think most people are tempted to do if they get a bonus or a raise? What are YOU most tempted to do if you get a bonus or a raise? Probably spend it. Why? It’s easy to think of 100 things you could use that extra cash for right now. Home repairs or upgrades, a night out on the town, that new handbag you’ve been coveting for months… Maybe your bonus is enough for you to consider trading in your car for a nicer one, or getting that new addition to your house.

Receiving an unexpected windfall is fun. It’s exciting! But here is where some caution is wise. Pause for a moment. If you had everything you needed on Friday and then get a raise on Monday, you’ll still have everything you need, right? Nothing has changed but the calendar. If you hadn’t gotten that bonus, would your life and your current financial strategy still be the same as it was last week? Consider putting (most of) that extra money away for later, and using some of it for fun!

3. Pay Down That Debt.
By now you’ve probably heard a financial guru or two talking about “good” debt and “bad” debt. Debt IS debt, but some types of debt really are worse than others.

Credit cards and any high-interest loans are the first priority when retiring debt – so that you can retire too, someday. Do you really know how much you’re paying in interest each month? Go ahead and look. I’ll wait… Once you know this number, you can’t “unknow” it. But take heart! Use this as a powerful incentive to pay those balances off as fast as you can.

The cost of credit isn’t just the interest. That part is spelled out in black and white on your credit card statement (which you just looked at, right)? The other costs of credit are less obvious. Did you know your credit score affects your insurance rates? Keeping those cards maxed out can cost more than just the interest charges.

Every month you chip away at the balances, you’ll owe less and pay less in interest. (You’ll feel better, too.) And you know what to do with the leftover money since you knocked out that debt. Hint: Save it.

But keep this in mind – life is about balance. It’s okay to treat yourself once in awhile. Just make sure to pay yourself first now, so you can treat yourself later in retirement.

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What Does “Pay Yourself First” Mean?

September 18, 2019

What Does “Pay Yourself First” Mean?

Do you dread grabbing the mail every day?

Bills, bills, mortgage payment, another bill, maybe some coupons for things you never buy, and of course, more bills. There seems to be an endless stream of envelopes from companies all demanding payment for their products and services. It feels like you have a choice of what you want to do with your money ONLY after all the bills have been paid – if there’s anything left over, that is.

More times than not it might seem like there’s more ‘month’ than ‘dollar.’ Not to rub salt in the wound, but may I ask how much you’re saving each month? $100? $50? Nothing? You may have made a plan and come up with a rock-solid budget in the past, but let’s get real. One month’s expenditures can be very different than another’s. Birthdays, holidays, last-minute things the kids need for school, a spontaneous weekend getaway, replacing that 12-year-old dishwasher that doesn’t sound exactly right, etc., can make saving a fixed amount each month a challenge. Some months you may actually be able to save something, and some months you can’t. The result is that setting funds aside each month becomes an uncertainty.

Although this situation might appear at first benign (i.e., it’s just the way things are), the impact of this uncertainty can have far-reaching negative consequences.

Here’s why: If you don’t know how much you can save each month, then you don’t know how much you can save each year. If you don’t know how much you can save each year, then you don’t know how much you’ll have put away 2, 5, 10, or 20 years from now. Will you have enough saved for retirement?

If you have a goal in mind like buying a home in 10 years or retiring at 65, then you also need a realistic plan that will help you get there. Truth is, most of us don’t have a wealthy relative who might unexpectedly leave us an inheritance we never knew existed!

The good news is that the average American could potentially save over $500 per month! That’s great, and you might want to do that… but how do you do that?

The secret is to “pay yourself first.” The first “bill” you pay each month is to yourself. Shifting your focus each month to a “pay yourself first” mentality is subtle, but it can potentially be life changing. Let’s say for example you make $3,000 per month after taxes. You would put aside $300 (10%) right off the bat, leaving you $2,700 for the rest of your bills. This tactic makes saving $300 per month a certainty. The answer to how much you would be saving each month would always be: “At least $300.” If you stash this in an interest-bearing account, imagine how high this can grow over time if you continue to contribute that $300.

That’s exciting! But at this point you might be thinking, “I can’t afford to save 10% of my income every month because the leftovers aren’t enough for me to live my lifestyle”. If that’s the case, rather than reducing the amount you save, it might be worthwhile to consider if it’s the lifestyle you can’t afford.

Ultimately, paying yourself first means you’re making your future financial goals a priority, and that’s a bill worth paying.

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Preparing to buy your first home

January 23, 2019

Preparing to buy your first home

Home buying can be both very exciting and very stressful.

Picking out your dream home is thrilling, but credit scores, applications, and mortgage underwriting requirements? Well, not so much. Don’t let yourself be deterred. Here are a few moves to make before you amp up your home buying search that will help increase the fun and decrease the stress.

Know what you can afford
One of the first steps to home buying is knowing how much you can afford. Some experts advise that a monthly mortgage payment should be no more than 30% of your monthly take-home pay. Some say no more than 25%. If you stretch past that you could become “mortgage poor”. Consider this carefully. You might not want to be in your dream house and struggling to pay the utility bills, grocery bills, etc., or find yourself in a financial jam if an emergency comes up.

Get your finances ready for home buying
If you’re scouring listings, hunting for your dream home, but you’re not sure what your credit score is – stop. There are few things more disappointing than finally finding your dream home and then not having the financial chops to purchase it. You’ll need to get your finances in order and then start shopping. Focus on these areas:

Credit score: Your credit score is something you should know regardless of whether you’re home shopping. Usually, to get the best mortgage rates, you’ll want a score in the good to excellent range. If you’re not quite there, don’t despair. If you make payments toward your other obligations on time and pay off any debt you’re carrying, your credit score should respond accordingly.

Down payment: A conventional mortgage usually requires a 20 percent down payment. That may seem like a lot of money to come up with, but in turn, you may get the best interest rates, which can save you a significant amount over the life of the mortgage. Also, anything less than 20 percent down and you may have to purchase Private Mortgage Insurance – it’s a type of insurance that protects the lender if you default. Try to avoid it if you can.

Get pre-qualified before you shop for a home
Once you have your credit score and down payment in order, it’s time to get pre-qualified for a mortgage. A prequalification presents you as a serious buyer when you make offers on houses. Mortgage pre-approval doesn’t cost you anything, and it doesn’t make you obligated to any one house or mortgage. It’s just a piece of paper that says a bank trusts you to pay back the loan.

If you go shopping without a pre-approval, expect to get overlooked if there are other bidders. A seller will likely go with the buyer who has been pre-approved for a mortgage.

Prepare your paperwork
Getting approved for a mortgage is going to require you to do a little legwork. The bank will want to see documentation to substantiate your income and lifestyle expenses. Be prepared to cough up income tax documents such as W-2’s, paystubs, and bank statements. The sooner you get the paperwork together, the easier it will be to complete the mortgage application.

Shop for the best mortgage
Mortgage rates differ slightly depending on the lender, so shop for the lowest possible rate you can get. You may wish to use a mortgage broker to help. Also, get familiar with mortgage terms. The most common household mortgages are a 30-year term with a fixed rate, but there are 15-year terms, and mortgages with variable interest rates too.

Do your pre-home-buying homework
With a little legwork early on, home buying can be fun and exciting. Get your finances in order and educate yourself about mortgage options and you’ll be decorating your dream home in no time.

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This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies that may be available to you. Before taking out any loan or enacting a funding strategy, seek the advice of a financial professional, accountant, and/or tax expert to discuss your options.

Savings accounts vs. CDs – which is better?

December 12, 2018

Savings accounts vs. CDs – which is better?

Interest rates are on the rise, which might not be great news if you carry revolving debt.

But savings accounts and certificates of deposit (CDs) might start looking more attractive as places to put your money. Currently, both savings accounts and CDs might be good options, so which is better? In large part, whether a savings account or a CD is the better tool for saving depends on your savings goal.

Access to funds
Savings accounts offer more flexibility than CDs if you need to withdraw your money. However, be aware that many banks charge a fee if your balance falls below a certain threshold. Some banks don’t have a minimum balance requirement, and some credit unions have minimum balance requirements as low as a penny. It could be worth it to shop around if you think you might need to draw down the account at any moment.

CDs, on the other hand, have a maturity date. If you need access to your funds before the maturity date, which might range from six months to up to five years depending on which CD you choose, expect to sacrifice some interest or pay a penalty. Accessing funds held in a standard CD before its maturity date is called “breaking the CD”.

“Liquid CDs” allow you to withdraw without penalty, but typically pay a lower interest rate than standard CDs.

Interest rates
CDs are historically known for paying higher interest rates than savings accounts, but this isn’t always the case. Interest rates for both types of accounts are still hovering near their lows. Depending on your situation, it might be better to choose an account type based on convenience. If interest rates continue upward, CDs may become more attractive.

In a higher interest rate environment, CDs might be a great tool for saving if you know when you’ll need the money. Let’s say you have a bill for college that will be due in thirteen months. If you won’t need the money for anything else in the meantime, a twelve-month CD might be a fit because the CD will mature before the bill is due, so the money can be withdrawn without penalty.

If your goal is to establish an emergency fund, however, a CD might not be the best option because you don’t know when you’re going to need the money. If an emergency comes your way, you won’t want to pay a penalty to access your savings. Keep an eye on current rates, and if CD interest rates start to increase, then you might consider them for longer-term savings if you won’t need the funds until a fixed date in the future. For emergency savings, consider a savings account that keeps your money separate from your checking account but still provides easy access if you need it.

Depending on your situation, a CD or a savings account may be the better fit. Shop around for the best rates you can find, and make sure you understand any penalties or fees you might incur for withdrawing funds.

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This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies for saving and/or investing that may be available to you. Market performance is based on many factors and cannot be predicted. Before investing or enacting a savings or retirement strategy, seek the advice of a financial professional, accountant, and/or tax expert to discuss your options.

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