Use the Grace You’ve Got

So you’ve just graduated and the last thing you want to hear about is the debt you’ve accumulated over the last 4 years.  Luckily for you, you likely won’t have to deal with your federal student loans for at least another 5 months or so.  Stafford Loans – subsidized or unsubsidized – give you a 6-month grace period after you graduate, leave school, or drop to less than half-time enrollment before you have to start paying them off, and Perkins Loans have a 9-month grace period.  You might not be so lucky if you went to graduate school and used the GradPLUS loans, however, and neither are your parents if they took out PLUS loans your behalf: the repayment period for PLUS loans starts immediately after you graduate.  In that case, you have probably already received several notifications in the mail.

But even if you don’t have to start paying your student loans for another 6 months or so, you should be thinking about your repayment strategy.  We will break down the pros and cons of different repayment options for you in a future post, but while you are in your grace period, here are three pieces of advice you should consider. 

  1. Subsidized loans.  There is no reason to pay off your subsidized loans right now.  Their interest is subsidized throughout the grace period, up until repayment kicks in.  So, if you have the money  to pay them off and have already decided to do so,  keep it in a savings account earning interest for the next 5 months and only pay off the loans towards the very end of your grace period.
  2. During your grace period.  Do not touch your loans while they are in the grace period (besides paying off unsubsidized loans if you want to, even though you are not required).  You can change your repayment options at any time and you will probably have a better sense of what you can afford and whether you might need to extend your repayment timeline or lower your payments towards the end of the grace period, once you have bought most of your furniture and have worked for a few months.  Also, if you consolidate loans that are still in their grace period with loans that are not, you will actually lose that grace period. 
  3. At end of your grace period.  When your grace period is running out, do not dump all of your savings into your federal student loans.  While you may choose to pay more than the minimum monthly payment, their rates aren’t high enough to warrant emptying your bank accounts.  You need a cushion, including for making future repayments.  Paying a little more in interest is always better than becoming delinquent.  

The bottom line: use the grace period you’ve been given.  If you have a 6 month period until you have to repay your student loans, use it.  And use some of money you make during that period to create a cushion for yourself – it may come in handy.

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New Legislation That Will Affect Your Wallet

I’ll be honest. I hadn’t been paying much attention to the new credit card legislation. I figured it wouldn’t actually affect me that much, since I always pay my credit card bill on time and in full (which everyone should do in the first place as paying 18% interest on credit card debt really is not the best use of your money).

The big piece of good news is that credit card companies are required to inform me of any major changes in my rewards programs. Besides that, what this new legislation means to us, never-late-full-balance-payers, is still unclear. The WSJ reasoned, along the lines of the threats coming from the credit card companies themselves, that rewards programs will have to be trimmed down to compensate for the loss in revenue due to the new legislation. Personally, I recently noticed that Discover raised the minimum amount of accumulated cash back that I can redeem for a check or credit from $20 to $50 (that is, my accumulated cash back will sit with them for longer until I can actually get a hold of it).

According to NY Times, however, the new bill might also lead credit card companies to focus more on their rewards programs to get people to spend more money. This also makes perfect business sense, since I am the best kind of customer. I help them collect revenue from vendors by spending money on my card and I am never behind in my monthly payments. Hopefully, they’ll keep that in mind when they think about their rewawrds program. The legislation will not kill competition between cards, and if my card’s rewards program goes dry, I could always take my spending elsewhere.

Get More Greens When You Eat Out

Tuesday night is our dining out night. While eating out does not have to be a weekly event for you, if you are going to pick a day, Tuesday should be the day. Fresh fish usually comes in on Tuesdays and Fridays, and a new batch of prepared food is typically made on Tuesdays (see Anthony Bourdain’s article in the New Yorker here).

Regardless of whether you are a foodie, you should always try to make your reservation through OpenTable.com. Sign up for free and for each reservation you make (and actually show up) OpenTable awards you 100 points. Once you accumulate 2000 points, you receive a $20 check from OpenTable, which you can use at any participating restaurant. That works out to getting $1 back each time you have dinner – not much, but wouldn’t it be great to get $20 off a meal every once in a while?

Note: Some restaurants offer 1000 points for tables booked at odd hours, which is like giving you $10 off your meal.

Under the Mattress is not Your Only Option

Way back when, people used to stow away their funds under the mattress and with banks lining up to file for bankruptcy, I don’t blame you for going to back to the tried and true method. There are, however, two other options before you start putting your savings under the mattress or in your checking account, where they are earning you zero money.

The first option is opening up a savings account at a credit union. Credit unions function like regular banks, but they are smaller and usually offer better interest rates. This might come in handy should you need to borrow money for a car, a home, or other expenses in the future, since some credit unions require that you be a customer anyway. The downside to credit unions is that they usually have one branch and there are few ATM locations (but this is a savings account and you are not supposed to be accessing these funds for a night out on the town). You can go to the Credit Union National Association’s website to find credit unions near you.

The second option is opening up a savings account online. For example, EmigrantDirect and Ing Direct are offering a variable annual savings rate of 1.65% and 1.50%, respectively, and require no minimum balances. This is a pretty good deal when you compare them to savings accounts offered by some of the major banks, which usually earn less than 0.25% a year and require minimum balances anywhere from $300-2,500 to avoid fees. The downside is that the savings account is online, so if you want to access the funds, you will have to transfer them to your checking account (but again the point is that you are not supposed to have easy access).

You can easily set up a direct deposit from your paycheck straight to your savings account. While leaving them under your mattress or in your checking account may be convenient, any extra money (especially what little) you may have should be put to work. For example, your $500 in an Ing Direct Orange Savings Account will have grown into $507.50 a year later. $7.50 is nothing to boast about, but it is $7.50 more than if you didn’t put it in a savings account and that puts you slightly above the inflation curve.

Welcome!

Money Under Your Futon was first conceived during a lunch break at TGIF at Tyson’s Corner. After a long day of swiping our credit cards, our conversation inevitably got to personal finance – namely, taxes. It was tax season and we had talked about different forms, deductions, and credits several times over the last few months, much to the amusement of our friends.

When we graduated, we were befuddled by the many personal finance decisions we suddenly had to make, from the simple, such as opening a bank account that had ATMs beyond campus borders, to the more complicated, such as 401k versus Roth IRAs. We found there was no single comprehensive source for people who had just started working – either they were catered towards adults balancing retirement and paying for their children’s college or they were outdated. Over the past two years, we have researched personal finance topics way beyond the interest of the average person, picking and choosing resources as relevant to our needs.

After seeing our efforts come into fruition in the shape of cash back, free flights, and lavish dinners (not just TGIF) and realizing that too many people our age do no take advantage of many financial opportunities, we created this blog. Because we live in the DC area, some of the entries may be region-specific, but we hope most of them will be relevant outside the beltway as well. Enjoy!