Do you remember all those soothing economic numbers that were floating around as recently as February? You know – the record low unemployment rate of 3.5%, and the record high stock market, with the Dow Jones Industrial Average closing at almost 30,000?
It seems like ages ago, doesn’t it?
The coronavirus happened and changed it all – in just three months. The stock market fell by a third before recovering somewhat in April 2020, while unemployment exploded. It reached 14.7% by the end of April, with Goldman Sachs predicting it may go as high as 25% – a level not seen since the Great Depression.
(Source: Trading Economics from data supplied by the U.S. Bureau of Labor Statistics)
Since economic downturns are actually really normal events, the best strategy is to build financial resilience. There’s nothing we can do to stop a crisis from happening, but we can and should get our own financial houses in order to minimize the impact.
The following 7 strategies will help you do just that.
1. Take Any Financial Shocks Off the Table
One of the factors that characterizes economic downturns is financial shocks. One of the best ways to build financial resilience is to prepare for them.
Start by reviewing your insurance policies. If need be, increase the amount of car insurance you have. It should be enough to protect your assets if you’re involved in an accident that’s determined to be your fault. If you do have adequate coverage, get some auto insurance quotes to see if you can lower your premiums.
This is also an excellent time to purchase a private life insurance policy. If you’ve been relying on life insurance from your employer, that may go away if you lose your job. Check out options for low cost life insurance and get a policy today.
And in case of an emergency, you may need a line of credit that can be accessed on short notice. Check with your bank or credit union to see if you can get an unsecured line of credit. Alternatively, you can apply for a personal loan, or even a low interest credit card.
You won’t want to access any lines of credit now, since staying out of debt may be critical to your financial wellbeing. But you’ll want to have open lines of credit available when an emergency hits. Lenders have already started tightening up restrictions for making lines available a few months from now.
2. Cut Costs Wherever You Can
Since income often becomes uncertain during economic downturns, cutting costs is one of the best ways to be prepared in advance.
I’ve come up with 85 ways you can save money in your own household budget. By selecting and implementing just a few you may be able to cut hundreds of dollars out of your budget.
And speaking of budgets, you should have one if you don’t already. Millions of people function without budgets, at least until an economic downturn hits. But sometimes all you need is the right budgeting software to get you moving in the right direction.
Budgeting will show you exactly where your money is going and help you identify which expenses you can cut or eliminate. That will not only reduce your expenses, but it’ll also make extra money available to pay down debt or build up savings.
3. Pay Down Debt Ahead of Time
One of the biggest expenses in many household budgets are debt payments. Whether it’s car loans, student loans, or credit cards, debt payments can take a big chunk out of your budget. If that’s true, begin to pay down debt now and work toward paying off as much as you can.
You may need to implement some aggressive debt payoff strategies. If so, that’s best done sooner than later. If you lose your job, any payment you can eliminate or reduce will improve your resilience.
If you have student loans, look into refinancing them while you’re still employed. Shop around for lenders that specialize in student loan refinances. Since these loans are often large, refinancing them has the potential to get you large savings from a lower payment.
If you have credit card debt, take advantage of 0% introductory APR offers with balance transfer credit cards. Getting a break on interest for 12 to 18 months can help you pay down your credit card balances a lot faster, since the payments you would allocate toward interest can be made toward principal.
4. Pad Your Emergency Fund
One of the very best ways to build financial resilience into your life is by loading up your emergency fund. Even if you already have one in place, now is an excellent time to begin increasing the balance.
During economic expansions, having between one- and three-month’s living expenses in your emergency fund may be sufficient. But in an economic downturn, you may need to expand that to six months or longer.
Sure, you may get unemployment benefits if you lose your job. But that probably won’t come close to replacing your current income. Just as important, emergencies have a way of popping up during times of economic turbulence. The more money you have sitting in your emergency fund, the better you’ll be able to weather it all.
If you’ve got your emergency fund sitting in a local bank or credit union, you’re probably earning interest of something only just above zero. You can and should fix that problem.
There are high-yield online savings accounts paying interest rates as high as 2%. That may not sound like a lot of money, but it’s more than 20 times the 0.06% being paid at average banks and credit unions. You owe it to yourself to earn as much interest on your emergency savings as you can get.
5. Establish an Advanced Savings Strategy
While an emergency fund will protect you against short-term expenses and income disruptions, now is also an outstanding time to begin building savings for longer-term needs.
One such need could be a run of unemployment that exceeds the amount of money you have in your emergency fund. By having a second-tier level of savings, you’ll have funds available if your emergency fund is exhausted.
You may also want to begin building savings for goals like paying off your car loan or having extra money available to cover the out-of-pocket costs not covered by your health insurance plan. Still another possibility is that you may need to start a business if you lose your job and find yourself unable to get a new one.
For medium term savings goals, you’ll want to put your money where it’ll be just out of immediate reach (so you won’t grab it for short-term needs), but where you’ll also earn even higher returns.
You can do that by investing in peer-to-peer lending platforms, like LendingClub. There you’ll have an opportunity to earn double-digit returns on your investment, with relatively low risk. Investigate other ways you can earn high interest on short-term investments so you’ll have funds available for whatever the future may hold.
6. Invest in Yourself
Most people don’t think of investing in themselves as an investment. But when you consider that your income is probably your single biggest asset, it’s one of the very best investments you can make.
The most obvious way to invest in yourself is to improve or acquire any skills or certifications that may help you in your job or your career. You may be one skill or one credential short of your next promotion. And even if you aren’t promoted, that skill or credential could be the one that lands you your next job.
You may also want to consider acquiring any skills you need to create a second income (more on that in the next section), or even in preparation for the launch your own business.
You can often take courses at local community colleges to acquire very specific skills. And some certifications require only the completion of a correspondence or online program to earn. The results can add thousands of dollars per year to your income – and just as important – make you more valuable to your employer. That will matter because during an economic downturn the people who are laid off first are the ones with the least value to the employer. By improving your skill set and qualifications, you’ll make yourself much less expendable.
There are also plenty of ways to invest in yourself that can help you make additional money outside your job. Think about what it is you would like to do, or what you have an interest in, and begin studying ways to earn money from it. Sometimes just acquiring a single skill will enable you to convert a hobby into an income source.
Speaking of which…
7. Build a Passive Income Stream or Side Hustle
One of the very best ways to build financial resilience for an economic downturn – or even during good times – is by creating additional sources of income.
One of the very best sources of additional income can be had by building passive income streams. There are actually dozens of ways to create passive income, it’s just a matter of choosing the one that’ll work best for you. For example, I’ve managed to create seven different income sources, some of which are passive. The great thing about passive income streams is that they give you the ability to earn money while you’re busy doing other things.
Still another option, and one you should definitely consider, is creating a side hustle. Not only will this generate an additional source of revenue that will add resilience to your finances, but it could represent the beginning of what will eventually become a full-time business if you lose your primary job.
One of the best ways to build a side hustle is by making money online. I’m doing that with this blog, but there are plenty of other ways you can make it happen. You owe it to yourself to investigate the opportunities. One of the big advantages of making money online is that you won’t have any geographic restrictions. If you have to relocate, maybe to take another job, your online business will come with you.
Don’t be intimidated by the idea of creating a side hustle. According to a recent article on Fortune, nearly half of Americans under 35 currently have a side hustle. You could be one of them – all it takes is an idea and a commitment.
The Bottom Line
No one knows exactly how the coronavirus recession will play out. But that’s the case with every economic downturn we’ve ever had. Recessions can’t be avoided, and neither can the financial dislocation they bring. But by building financial resilience into your life, you can minimize and even eliminate the worst a recession can throw at you.
Reevaluate every area of your finances – your insurance coverage, expenses, savings, and income – and look for ways to improve each.
Even if you think it’s too late for you to prepare for this recession, now is an excellent time to get ready for the next one. After all, it’s already on your mind, so you have all the motivation you’ll need.
And don’t underestimate your ability to protect yourself during this recession. The worst course of action is inaction. You may not be able to get your finances exactly where they need to be right now, but you may surprise yourself at how much you can improve your situation in just a few months. That will matter too, because it’s likely we’ll still be in this recession even then.
It’s never too late – or too early – to build financial resilience in an economic downturn. Today isn’t too soon to get started.
The post How to Build Financial Resilience in An Economic Downturn appeared first on Good Financial Cents®.
How to Avail Home Loan Subsidy Under Pradhan Mantri Awas Yojana?
Pradhan Mantri Awas Yojna (PMAY) – Credit Linked Subsidy Scheme (CLSS) is a government scheme launched with an aim to make buying home easier for:
- Economically Weaker Section (EWS)
- Low Income Group (LIG)
- Middle-Income Group 1 (MIG-I)
- Middle-Income Group 2 (MIG-II)
The scheme offers subsidized home loan interest rates based on your household income. The benefit can be availed not only on the purchase of a new/resale house but also on the construction, extension or improvement of existing kucha/semi-pucca houses. To avail the home loan subsidy, you must be first eligible for it. In this post, we will guide you on how you can avail subsidy under the PMAY scheme.
To access PMAY benefits, you must fulfill the following eligibility criteria:
PMAY Basic Eligibility Parameters:
- The scheme is for beneficiary families comprising of a husband, wife and unmarried children. An adult earning member of a family irrespective of marital status can be treated as a separate household in MIG category.
- The beneficiary family should not own a pucca house in the name of any family member across India.
- In the case of married couples, either of the spouse or both together in joint ownership will be eligible for a single subsidy.
- The beneficiary families should not have benefited under any government housing scheme including PMAY.
- Home loan borrowers, who availed the subsidy but later on switched to another lender for a balance transfer, will not be eligible to claim the benefit again.
- Beneficiary families under the MIG income group mandatorily need to furnish their Aadhaar numbers to avail the benefit of the subsidy.
PMAY Eligibility Parameters as Per Income Criteria:
- Eligible Family Income: The annual household income as per the income category must be:
- EWS – Upto Rs. 3 lakh
- LIG – Between Rs. 3 lakh and Rs. 6 lakh
- Woman Ownership: Woman ownership is mandatory. The house, whether new or existing, should be in the name of an adult female member of the family or in joint ownership with the wife (if married). The condition is not mandatory in case of house construction or extension/renovation of an existing kuccha/semi-pucca house. The house can be solely in the name of a male member of the household, provided there is no adult female member in the family.
- Carpet Area: The maximum carpet area of the house under the scheme must be:
- EWS: Upto 30 sq. mts.
- LIG: Upto 60 sq. mts.
2. MIG (I & II)
- Eligible Family Income: The annual household income as per the income category must be:
- MIG-I: Between Rs. 6 lakh and Rs. 12 lakh
- MIG-II: Between Rs. 12 lakh and Rs. 18 lakh
- Woman Ownership: Woman ownership is not mandatory.
- Carpet Area: The carpet area of the house under the scheme must be:
- MIG-I: 160 sq. mts.
- MIG-II: 200 sq. mts.
Process to Claim PMAY Interest Subsidy Benefit
The home loan interest subsidy under PMAY is routed through 2 central nodal agencies – Housing & Urban Development Corporation (HUDCO) and NHB. These government institutions channelize the subsidy to the pre-listed lending institutions, which further help the eligible beneficiaries to avail the interest subsidy benefit.
The process to claim PMAY interest subsidy benefit is given as follows:
- After your home loan is disbursed, the lender will send the required details to the National Housing Bank (NHB) for data validation and other checks.
- NHB after due diligence approves the subsidy to eligible borrowers.
- The subsidy amount will be disbursed to the lender for all eligible borrowers.
- On receiving the subsidy amount from NHB, the lender will credit the same to the respective home loan account of the borrower and will be adjusted in the loan accordingly.
PMAY – CLSS Scheme Details
EWS/LIG – Features & Benefits
|Eligible annual household income||Upto Rs. 3 lakh||Between Rs. 3 lakh and Rs. 6 lakh|
|Carpet area of the dwelling (max.)||30 sq.m.||60 sq.m.|
|Subsidy calculated on a max. loan of||Rs. 6 lakh||Rs. 6 lakh|
|Interest subsidy (% p.a.)||6.50%||6.50%|
|Subsidy amount (max.)||Rs. 2.67 lakh||Rs. 2.67 lakh|
|Maximum loan tenure (in years)||20 yrs.||20 yrs.|
|Discount rate to calculate Net Present Value (NPV) of the interest subsidy||9%||9%|
|Woman Ownership||Mandatory (except for loan availed for construction)||Mandatory (except for loan availed for construction)|
|Validity of the scheme||31 March 2022||31 March 2022|
|Applicability||Loans approved on/after 01/01/2017||Loans approved on/after 01/01/2017|
Note: The details in the table are as per the information framed by the Government of India under PMAY. The information is subject to change as and when there is a change in the scheme by the Government of India.
MIG-I/MIG-II – Features & Benefits
|Eligible annual household income||Between Rs. 6 lakh and Rs. 12 lakh||Between Rs. 12 lakh and Rs. 18 lakh|
|Carpet area of the dwelling (max.)||160 sq.m.||200 sq.m.|
|Subsidy calculated on a max. loan of||Upto Rs. 9 lakh||Upto Rs. 12 lakh|
|Interest subsidy (% p.a.)||4.00%||3.00%|
|Subsidy amount (max.)||Rs. 2.35 lakh||Rs. 2.30 lakh|
You’re Budgeting WRONG If You Do Any Of These 5 Things
(The following is an abbreviated transcription from a video Linda & I recorded. Please excuse any typos or errors.)
For most people, budgeting is a scary word.
If you feel that way about budgeting, you might be doing one of these five things wrong (or maybe all of them).
When you’re doing any one of these things, it’s just going to make budgeting really difficult and not a lot of fun for you.
We’re going to talk about what these things are and hopefully how to fix it so that you can actually enjoy budgeting and get a ton of benefit from it.
And, if you hate budgeting (or scared of it), just know you are not alone.
Linda actually hated budgeting before I got her on board. I am convinced from all the people, the readers, the podcast listeners, everybody else over the last 10 years who we’ve talked to, the reason so many people hate budgeting is that they’re doing it the wrong way.
Using The Right Tool For The Job
So I do a lot of work around the house and I have often found myself in a position where I’m really far away from the workbench, or really far away from the garage, and I have something else going on and I need to hammer this nail in. And so I’ll try to grab something. I’m like, “What is around that I can kind of hammer this nail in?” Do you want to know what? Nothing works good at hammering a nail in except for a hammer.
And so this is what it’s like for so many people when they’re budgeting using the wrong tools, the wrong methods. Well, of course it’s not working well. And of course it isn’t fun. And of course you hate it because they’re doing it the wrong way.
But when you use a tool the right way, it is actually a lot of fun. And it gets the job done a whole lot quicker and easier.
Linda and I discussed the 5 budgeting things you may be doing wrong, and you can watch our discussion here (or read the transcript below):
1. You Aren’t Actually Budgeting
Bob: Number one is that you aren’t actually budgeting. So this is a funny thing. A lot of people think that their budgeting when they’re just tracking their money and they’re using Mint or some app to see where their money went.
Linda: So tell us what the difference is.
Bob: So tracking your money and knowing where it went is a good first step. That is an important part, but it’s not budgeting. Budgeting is actually telling your money where you want it to go and actually having a plan in place to make sure that it goes where you want it to go.
2. You Aren’t Budgeting For Fun Things
Linda: Yep. Okay. So number two is not budgeting for fun things. So there are big things that we need to budget for, right? Like a house payment and savings, you know?
Bob: Groceries. We need to eat.
Linda: But you have to budget for things that are fun. Things that fill your soul.
Bob: And if you don’t, you’re not going to last, right.
Bob: Could we have ever done this without doing that?
Linda: No. No. So we really enjoy going out to eat. I mean, it is peach season in Tennessee right now and-
Bob: And our grocery budget has expanded to pull in the dozens upon dozens of peaches nearby.
Linda: Yeah. Or another good example is like going out for donuts on Saturday morning. Anything that you just really enjoy doing that has to be part of your budget because then it’s like, “Oh, well I have money to spend on this.” And you pretty much have to spend it. Right?
Bob: Yeah. And so while doing this might slow down your progress towards paying off your debt or retirement savings or something like that because you think, well, I don’t want to do any fun stuff. I just want to do the essentials so I can pay off my debt as soon as possible. And it’s like, you can maybe make that work and sustain that for a little bit. But for most people it’s worth reducing that just a little bit to have a little bit more fun in your budget.
Bob: If you’re going to enjoy the budget, and if you’re going to stick with it for years and years to come. So it’s a better move in the long run for most people to just make sure that there’s stuff allocated for fun stuff.
3. You Are Trying To Do It Solo
Bob: Number three, if you’re married and you’re trying to do it solo-
Linda: It’s a bad idea.
Bob: And I do know for most of you, this isn’t by choice. You have a spouse who just isn’t interested, but there are things you can do to kind of sweeten the deal for your spouse and to try to get them interested in the whole budgeting concept. And we go into this in detail in a real money method course, but there’s a couple tips that we can kind of share. Like how did I get you on board? Like what helped?
Linda: The thing that helped me was things that I got freaked out about were in the budget. So when we had car problems, there was money sitting in the budget so there was not that freak out moment for me of like, where the heck are we going to get this money?
Linda: It was just sitting there. So another one was the rewards. When we hit a milestone, we would do some celebrating.
Linda: It was small for us, but it can be whatever you want it to be. You know? And then the other thing was budgeting for things that I needed, that I wanted and that I needed in my life. So yeah. It not being perfect, but actually us sticking with it was huge.
Bob: Good enough to get us both on board.
Bob: Yeah. So bottom line, if you have a spouse, who’s not on board, it’s just more difficult. Now, if you can’t get them on board, you still need to move forward. It’s still beneficial that you’re at least trying and attempting and doing the best that you can in those circumstances. And I think some of the best advice here is just to be asking God and to be praying about how you guys can both get on the same page.
4. You Don’t Have A Reason Why You Are Budgeting
Bob: All right. Number four is that you need a reason why you are budgeting. You know, as humans, we are just hardwired for significance and meaning, and we need to have a reason why we’re doing everything that we’re doing.
Linda: So one of my first introductions into budgeting was pre-Bob if you can believe it. My brother came over and helped me set up a really simple budget so that I could save for my first car. And that gave me so much incentives because I was like, “I really want a car. I have got to get to the place where I can have a down payment, but also be able to pay for it each month.”
Bob: And the budget was what was going to help you get there.
Linda: Exactly. So I knew that that’s why I was doing it. And I stuck to it because I had this goal out in front of me. So having a reason why was a huge part in me sticking to it.
5. You Are Using A Method That Isn’t Holding You Accountable
Bob: Yeah. All right. Number five is that you’re using a budgeting method of some sort that isn’t actually holding you accountable. So over the last 10 plus years, I’ve been looking at budgeting stuff left and right, budgeting apps, budgeting spreadsheets, budgeting software.
As a financial blogger, I’ve been reviewing all this stuff. I’ve been testing all this stuff out. And the one common problem that I’ve seen over and over again is so many of these tools they might be fancy, have all these bells and whistles, look really shiny, but they don’t actually hold you accountable to the budget. And so without that accountability, most people just fall off the wagon and fail.
Bob: But I’ll give you a tip. There are two different ways that you can create a budget and actually have that accountability. So the first one is the cash envelope system.
Linda: Which we all know.
Bob: So we all know this, you put the cash in the envelopes, then you spend it. And when it’s gone, it’s gone.
Linda: This is what our parents did. Right?
Bob: Our parents, our grandparents were all doing this and this method and it actually works and actually holds you accountable. But the problem for most of us is that we don’t want to use paper cash on every purchase that we made.
Our Real Money Method
Bob: And so being able to have the convenience of a debit or credit card is what most people in the 21st century want. And so the other way to do this and have accountability is with a Real Money Method.
This is a system that we developed that basically allows you to use your bank account to budget. And it’s a system that creates real accountability for you. And as a result, most people who have failed with other software in the past are finding a lot of success with this. So if sticking with a budget or staying accountable to it is something you’ve struggled with in the past, we’ll have the link to it up above or down in the direction below, and you can check it out.
All right. So now it’s your turn. Let us know down in the comments what you’d add to this list or maybe where you’re guilty and where you’re going to begin making some changes and hit the like button to let us know if you liked it. And if you haven’t gotten a free budgeting spreadsheet yet, definitely check that out.
What other budgeting tips do you have? Let us know in the comments below!
How to Invest in REITs–All About Real Estate Investment Trusts
A REIT or REIT mutual fund makes a great addition to a diversified portfolio of investments. Learn what a REIT is and several of the best REIT mutual funds.
REITs are an important asset class for a diversified portfolio of mutual fund investments. A REIT (Real Estate Investment Trust), as the name suggests, invests in real estate. This article will describe these investments, why they are an important consideration as you build your portfolio of investments, and some of the REIT mutual funds and ETFs that make REIT investing a snap.
What is a REIT?
To qualify as a REIT, a company must satisfy three criteria:
- It must invest most of its assets in real estate;
- Its income must come mostly from real estate; and
- It must pay out 90% of its taxable income to shareholders
Each of these criteria is important, but pay special attention to the last one. Because of this 90% payout requirement, you should consider at least two things before investing in a real estate investment trust:
- They are often better held in a 401(k), IRA or other tax-deferred retirement account. In a taxable account, you’ll end up paying taxes on the dividends that REITs are forced to payout each year. And these dividends are taxed as ordinary income.
- Because REITs can keep only 10% of their taxable earnings, they must borrow or sell more shares to raise capital. This isn’t a problem, per se, but REITs can be highly leveraged, which may increase risk.
Types of REITs
There are two major types of REITS–Mortgage REITs and Equity REITs.
- Mortgage REITs: As the name suggests, mortgage REITs invest in mortgages, not property.
- Equity REITs: These REITs own property such as apartment buildings, shopping centers, office buildings and industrial parks.
Most of the mutual funds focused on real estate investing are equity REITs.
REIT Mutual Funds
Mutual funds that invest in REITs often own REITs that focus on all of the above areas. As with other funds, REIT funds can be actively managed or based on an index. The primary index in the U.S. is the MSCI US REIT index. Examples of some REIT/real estate focused funds include the following (links are to the Morningstar snapshot of each fund):
- Vanguard REIT Index fund (VGSIX) (Disclosure: I own shares of this fund)
- Alpine International Real Estate (EGLRX)
- Fidelity International Real Estate (FIREX) (Disclosure: I own shares of this fund)
- Third Avenue Real Estate Value (TAREX)
There are many other REIT and real estate focused funds available. To determine what’s best for you, you’ll have to do your own research and seek professional advice if you so chose. The above funds, even the two I own, are listed here just to give you an idea of what’s available.
One publicly traded REIT that is well regarded is the Realty Income (NYSE Ticker: O). This REIT pays a monthly dividend and has consistently paid dividends for over 500 months consecutively. I should add that the payment of dividends, by itself, doesn’t make it a sound investment. One must always consider the price of the investment compared to its intrinsic value.
One of the advantages of a REIT fund as part of a diversified portfolio is that they often move in the opposite direction of the stock market. In technical jargon, REITs are not highly correlated to the stock market. That is, REITs tend to (not always) zig when the market zags.
My Asset Allocation
My portfolio consists of 10% in REITs. I use the Vanguard REIT Index fund, admiral shares, mentioned above. It provides an excellent diversification with an asset class with good long-term results. It’s also a recommended asset class by Paul Merriman.
Listen to our podcast on REITs:
REITs are a great way for everyday people to invest in commercial real estate and get above-average returns. Find out if you’re ready to invest in REITs!
The post How to Invest in REITs–All About Real Estate Investment Trusts appeared first on The Dough Roller.
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