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3 Reasons Most Stock Pickers Don’t Beat the Market

It’s always been tough to be a successful stock picker on Wall Street.

It’s not that mutual fund managers can’t beat the market, but it’s very difficult to do so year in and year out: Large-cap stocks have delivered long-term, annual realized returns of about 7% after inflation during the past 100-plus years. For the 15-year stretch through December 2016, 92% of U.S. large-cap, actively managed equity funds underperformed the S&P 500, according to data collected by S&P Dow Indices.

Even during April, the 25th best month of performance in the past 26 years for such large-cap managers, only 63% of mutual funds beat their respective benchmarks, according to Bank of America Merrill Lynch.

And the pressure on stock pickers is mounting because of exchange-traded funds, which feature lower trading costs and returns that are often competitive with or better than those of professionally managed funds.

Debating investing in individual equities or actively managed funds versus passive vehicles, such as ETFs? Here’s why it’s so difficult to pick a winner.

The fee hurdle

Before ETFs became so popular, mutual fund managers faced a simpler task: Pick stocks that performed better than the overall market, ideally better than the stocks their competitors picked. But with more investment choices comes more pressure. Active managers must now outperform by enough to make up for their funds’ higher costs relative to ETFs.

That additional burden can be significant. Equity mutual funds charged an average of 1.28% in annual administrative expenses — or what’s called an expense ratio — in 2016, compared with the 0.52% charged by the average equity ETF, according to data from the Investment Company Institute.

To match investors’ expectations from ETF returns, some portfolio managers create funds that mimic an index without completely duplicating it — what’s known as closet indexing. That can result in bloated or overly diversified portfolios that get dragged down by less-than-stellar picks. In addition, mutual fund managers often impose high redemption fees to discourage short-term trading, typically defined as holding shares for less than a year.

But costs alone don’t explain why stock pickers face such a challenge. Dynamics within the market also are partly to blame.

» MORE: Investing in ETFs vs. mutual funds

Market correlation

When unrelated assets move in lock-step — what’s known as correlation — it’s that much harder for stock pickers to find the ones that will go up even more than the average.

The past seven years have been tough in this regard. Among the 11 sectors of the S&P 500, the average correlation to the broader index ranged from 70% to 95% between 2009 and 2016, before dipping to as low as 57% in February and March, according to figures compiled by Convergex, a U.S. brokerage firm.

This has provided “some oxygen for active managers to outperform,” wrote Nicholas Colas, chief market strategist at Convergex, in an April report. Even Goldman Sachs has proclaimed the current market conditions —  notably rising return dispersion — as a potential boon to skillful stock pickers.

The problem is, if analysts are right, these dynamics are likely temporary, which puts the longer-term fate of stock picking at peril. And remember, in addition to beating the market, active managers must also provide better returns than a comparable ETF to make up for their higher fees.

» MORE: How to buy stocks

‘An inherent disadvantage’

One theory got some buzz earlier this year: The odds are stacked in favor of indexes, and it’s not a fair fight for stock pickers.

Returns for a particular index are heavily skewed to a few of its biggest winners, so a portfolio manager generally must invest in these stocks just to keep up with the index’s performance. Picking a subset of stocks increases the odds those picks will underperform versus the index, according to a 2015 paper written by J.B. Heaton, Nick Polson and Jan Hendrik Witte, with a February update by Hendrik Bessembinder of Arizona State University.

“Active managers do not start out on an even playing field with passive investing. Rather, active managers must overcome an inherent disadvantage,” the authors concluded. And Bessembinder notes that compounding only increases that disadvantage over time.

» MORE: What is an ETF?

What’s an investor to do?

There are many advantages of index-based funds and ETFs for individual investors. But that doesn’t mean you should dump all of your individual equities or actively managed funds and convert to just any passive vehicle. Not all index funds and ETFs are created alike. There are even some actively managed ETFs which come with higher fees.

Still, the explosion of these assets has given investors more options. If you’re dissatisfied with the longer-term performance of your mutual funds, consider making the switch. Do your homework first, paying attention to fees, commissions and the assets included in the ETFs you’re considering.

If you think you can beat the odds stacked against professional stock pickers, tread with caution. Don’t invest with money you’ll need for short-term expenses or put your entire retirement nest egg at stake.

Anna-Louise Jackson is a staff writer at NerdWallet, a personal finance website. Email: ajackson@nerdwallet.com. Twitter: @aljax7.

Help Your Teen Use Summer Job Earnings Wisely

Teens with summer jobs might be earning their own money for the first time — but it won’t be the last. The money habits they learn now could last for decades.

Here’s how to help your teen make the most of a job and those paychecks.

Encourage goal-setting

Susan Beacham, founder and CEO of financial education company Money Savvy Generation and co-author of the “O.M.G. Official Money Guide for Teenagers,” suggests teens ask themselves a few questions — perhaps with parental prompting — before job searching: Why do they want to work, and what needs or wants will the job address?

This helps them determine the kind of job to pursue, Beacham says. For example, your child might want hourly work in a potential career field, or maybe he or she wants to make money to contribute toward family finances.

And ideally, goal-oriented teenagers are more thoughtful come payday. Bailey Steger, a 17-year-old working at a restaurant in Half Moon Bay, California, just learned that she’ll be responsible for paying for most of her college expenses besides tuition. She’s now saving more of her earnings.

As an example, Steger mentions recently wanting to buy a cute — but pricey — shirt. Her mom reminded her that she’d have to dip into the paycheck she’d just received to buy it. And, just like that, Steger says, “that shirt wasn’t that cute anymore.”

Teens who know why they’re working also tend to be more focused employees. A camp counselor wrangling kids in 90-degree heat might feel more positive if he plans to pursue a career in early childhood education. And a teen saving for a car might view her eight-hour shift as eight hours’ worth of pay going toward new wheels.

Discuss investing opportunities

Saving for goals isn’t the only smart step teens can take with their summer earnings. Beth Kobliner, author of “Make Your Kid a Money Genius (Even if You’re Not),” suggests teens invest part of their earnings in a Roth IRA if they can. Workers invest post-tax income in these individual retirement accounts. They can withdraw contributions without penalties at any time, but they must pay taxes and fees to tap interest earnings before age 59 1/2.

Investors can contribute no more than they earn in a year to a Roth IRA, up to $5,500 per year. If your child earns $1,000 at her job this year, she can only contribute that much to her IRA.

Roths help young workers bank toward retirement and teach the power of compound interest. Say an 18-year-old invests $500 of his earnings this summer. If he invests $1,000 more each year with a 6% return until he’s 65, he’ll end up with $47,500 in contributions and $215,798 in earnings for a total of $263,298. If he’d waited until he was 28 to invest $500 and contributed the same amount each year at 6%, he’d have earned only about $138,000 at age 65.

Contributing to a Roth also encourages the savings habit. Automatic transfers from a checking account to an IRA can make contributing effortless, Kobliner says. Young investors can have a certain amount transferred every payday. The extra money for a cute — or not that cute — top just won’t be in the checking account to spend.

Building this investing habit might benefit teens later, Kobliner says. When they’re on their own and possibly cash-strapped, they’ll likely be capable of finding extra money to invest. “It’s like flossing,” Kobliner says. “It’s a good routine that sticks if you learn it early.”

Make the abstract concrete

Beacham points out that teenagers are more likely to absorb and use money concepts when they aren’t abstract.

When your child learns the pay rate and hours for her new job, get out the calculator to determine how much she’ll earn over the summer. This will give her a realistic expectation of her earnings and perhaps prompt her to think about what she’ll do with it.

Printing paychecks or receiving physical copies also solidifies how much your teen has earned — and can thus save or invest. With direct deposit alone, that money might seem easier to spend. And when it comes to explaining that IRA, point your child toward a compound interest calculator. That way, he can input hypothetical timelines and contributions and see that money multiply.

Whether it’s handing teens a calculator or asking why they’re working, parents can help them be more thoughtful with their earnings — now and in the future.

Laura McMullen is a staff writer at NerdWallet, a personal finance website. Email: lmcmullen@nerdwallet.com. Twitter: @lauraemcmullen.

How Costly Is Bad Credit? Many Don’t Know, Survey Shows

It’s 2017: Do you know what your credit score is?

Good credit is important for many reasons beyond qualifying for the best loan rates. And the very first step in building it is knowing your starting point. But a NerdWallet survey finds that while more than a quarter of Americans (26%) check their credit scores monthly or more often, nearly 1 in 8 (12%) have never checked their scores.

In an online survey of more than 2,000 U.S. adults, commissioned by NerdWallet and conducted by Harris Poll in April 2017, we asked Americans what they knew about the impact of bad credit, as well as factors that do and don’t affect credit scores. Here’s what we learned:

  • About half of Americans (49%) don’t know that having bad credit can limit a person’s options for cell phone service. There are ways to get a cell phone without a credit check, but consumers with poor credit have fewer options.
  • Almost a quarter of Americans (23%) think a person has just one credit score. Most consumers have many scores, and they can vary based on the information used to calculate them. The score provider and score model your lender will consult depends on the reason you’re looking for credit: there are auto-specific and mortgage-specific scores, for instance.
  • More than 2 in 5 Americans (41%) think carrying a small balance on a credit card month to month can help improve a person’s credit scores. This is a common misconception. To avoid interest charges, pay off credit cards each month.
What you don’t know about credit can cost you

About 40 million Americans have a FICO credit score lower than 600 [1], and many might not understand the impact it can have on their everyday lives, even if they’re not applying for loans or saddled with high-interest debt.

The everyday effects of bad credit

Having bad credit is expensive, and not just because of the high interest rates lenders charge. More than 2 in 5 Americans (43%) don’t know that having bad credit can negatively impact the price of car insurance, and more than half (52%) don’t know that it can negatively impact the cost of utility deposits. These expenses are often cheaper or nonexistent for those with excellent credit, even though they don’t involve borrowing money.

Bad credit can even limit housing opportunities. Many landlords check applicants’ credit reports, but almost a quarter of Americans (23%) don’t know that having bad credit can negatively impact a person’s ability to rent an apartment. And almost half (49%) don’t know that bad credit can limit the ability to get a cell phone. Consumers with bad credit might be restricted to prepaid phones and miss out on carriers’ best plans. It might even be challenging to get certain jobs with poor credit.

Bad credit means fewer credit card choices

More than 1 in 5 Americans (21%) believe that a person with a credit score above 600 will qualify for any credit card he or she wants. Another 40% aren’t sure if a score above 600 qualifies a person for any credit card. In fact, 600 is a below average score and won’t give consumers access to most of the cards on the market.

Consumers with excellent credit have almost eight times as many credit card options as consumers with bad credit do. [2] Those with bad credit miss out on the cards with the best rewards and lowest interest rates, as well as the best purchase protections and travel benefits.

Misconceptions surround credit scores

Why do so many Americans have bad credit? Here’s one possibility: Increases in the cost of living have outpaced income growth for the past 13 years, according to NerdWallet’s annual household debt study. Many consumers might be maxing out credit cards to bridge the gap and then falling behind on payments or defaulting.

Another theory is that Americans simply don’t understand how credit works. Our survey found many misconceptions about credit scores, including the number of scores people have and the factors that go into them.

What’s a credit score?

A credit score is a three-digit number, usually on a scale of 300 to 850, that estimates how likely someone is to repay borrowed money. If you make regular payments to a lender — on a credit card or auto loan, for example — you probably have credit scores.

More than 1 in 10 Americans (11%) think everyone starts out with a perfect credit score. Actually, you must build your scores from scratch — but they don’t start from zero. Want to measure your progress? Your scores won’t necessarily be listed on your credit report, although almost two-thirds of Americans (64%) think they are. The free credit reports available once per year from AnnualCreditReport.com don’t include scores. However, you can get free scores from various sources, including NerdWallet.

The components of a credit score

Five basic factors go into most credit scores: payment history, credit utilization, length of credit history, types of credit in use and new credit.

Payment history: One of the best things you can do for your credit scores is to make payments on time, 100% of the time. You’re best off paying your entire credit card balance, but at least pay the minimum by the due date. Creditors won’t report payments that are only a few days late to credit bureaus, but pay 30 days or more late and you can tank your scores.

Credit utilization: This refers to the proportion of your available credit you’re using at any given time. Between 1% and 30% is ideal, but people misunderstand these numbers.

Possibly because using credit helps your scores more than not using it at all, more than 2 in 5 Americans (41%) think carrying a small balance from month to month can help improve a person’s scores, while one-fifth (20%) think it can hurt it. In fact, whether someone carries a small balance probably doesn’t affect his or her scores at all.

“The idea that you have to carry debt to have good credit is a dangerous, expensive myth that needs to die,” says NerdWallet columnist Liz Weston, author of the book “Your Credit Score.” Carrying a balance will mean you pay interest, but it probably won’t have any impact on your credit — just your wallet.

Length of credit history: This includes the total time you’ve had credit — starting from your first credit card or loan — and the average age of all your credit accounts. It’s a good idea to keep your oldest account open and avoid closing other older, unused accounts unless you have a good reason, like they charge annual fees or you need to shed a joint account. If you do choose to close other accounts, keep length of credit history in mind to limit the negative effect on your scores.

Mix of credit accounts: Having a mix of account types doesn’t have a large impact on credit scores, but it might be helpful to have both revolving accounts, such as credit cards and lines of credit, and installment loans, such as mortgages, auto loans or student loans. You can build and maintain good credit with just one type of account.

New credit: The final factor concerns the number of new accounts you’ve opened or applied to open. When you apply for a credit card or loan, a “hard” inquiry appears on your credit file. Checking your own scores results in a “soft” inquiry that won’t hurt your credit. But hard inquiries aren’t great for your scores, so you’ll want to limit the number of applications you submit.

The exception is when you’re “rate shopping” for a mortgage or auto loan. In these cases, it’s smart to apply at several different lenders to get the best rate. The credit bureaus count multiple inquiries as a single inquiry as long as they’re made within a certain time frame, usually a few weeks.

How to improve bad credit

Improving your credit means working on the five factors above. However, you also might be able to improve your credit by catching mistakes on your credit reports. Most consumers have one at each of the main credit bureaus: Experian, TransUnion and Equifax. You can obtain each of these reports for free once per year.

Once you receive your reports, read each one closely and dispute any errors. Incorrect information could hurt your credit, denying you access to low loan rates, superior credit products and other benefits of good credit.

People trying to build credit commonly run into a catch-22: They need a loan or credit card to increase their scores, but they can’t get approved for a loan or credit card because their scores are low or nonexistent. For example, it’s hard to find good credit cards for bad credit.

Those with poor credit have a few options:

Credit-builder loans: These loans typically have low interest rates, regardless of your credit scores. But there’s a catch: You don’t receive the money from the loan until you pay it off. These loans exist solely for the purpose of building credit. The lender puts the money into a savings account, and you can claim it once you’ve paid the balance in full. The bank will report your payments to the credit bureaus, which should help your scores, provided you’ve made all the payments on time.

Secured credit cards: With a secured card, you put down a security deposit that’s usually equal to the card’s credit limit, but sometimes is less. This reduces the issuer’s risk. Not everyone who applies for a secured card gets approved, but they’re still a good option for those with bad credit.

Secured cards aren’t prepaid, so it’s critical that you pay off your charges each month. After “graduating” to an unsecured card or closing the account in good standing, you’ll get your deposit back.

Secured personal loans: If you want to build credit but also need a loan, a secured personal loan might be the way to go. These allow you to borrow against a car, savings account or other assets, including such things as a recreational vehicle or furniture. The rate will likely be higher than it would be on a credit-builder loan, but you’ll have access to the loan money.

“You don’t need to carry credit card debt to have great credit scores,” Weston says. “But you do need to have credit accounts and use them responsibly.”

Methodology

This survey was conducted online within the U.S. by Harris Poll on behalf of NerdWallet from April 6-10, 2017, among 2,250 adults ages 18 and older. This online survey is not based on a probability sample, and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables, please contact cc-studies@nerdwallet.com.

Footnotes

[1] According to Ethan Dornhelm, principal scientist at FICO, there are about 40 million U.S. consumers with credit scores below 600. There are an additional 53 million Americans who can’t be scored because they have too little information on their credit file or no credit file at all.

[2] According to the NerdWallet database of more than 1,200 cards, there are 7.7 times as many cards available to those with excellent credit compared to those with poor/bad credit.

7 Tax Tips for New College Grads

Graduating from college brings huge life changes — many of which have big effects at tax time. Here are a few ways you can save a little money — or even snag a refund — come filing time.

1. Take interest in interest

Student loan payments are a fact of life for many new graduates. But up to $2,500 of the interest portion of those payments can be tax-deductible if your modified adjusted gross income, or MAGI, is below $80,000 for singles ($160,000 for married couples filing jointly). And you can still qualify for the tax break if the loan’s in your name but your parents make the payments — though if you want the deduction, they can’t claim an exemption for you on their tax return.

2. Get a move on

You can’t deduct job-search expenses if you’re looking for full-time work for the first time or in a new career field, but moving to a new city for that first job can come with major tax breaks.

The cost of movers, utility hookups, storage, and even hotel stays during your drive to the new city can all be deductible. Be sure to check the rules, though — they’re detailed. Your first 9-to-5 must be at least 50 miles from your old home, for example, and only expenses racked up within a year of your start date count. Moving expenses your employer pays might not count, either.

3. Let your boss help

“One of the biggest and most frustrating things that we see is people not taking advantage of their benefits offered through their workplace,” says Alex Hopkin, an associate planner at Gen Y Planning, a financial planning firm for millennials.

Contributing to a company 401(k) can shelter up to $18,000 per year from income taxes — and you’ll get a jump start on retirement saving, plus free money if your company offers a match. If you’re enrolled in a high-deductible health plan, contributions to a health savings account could shelter another $3,400 per year if you’re single and $6,750 if you have family coverage. And putting money into a flexible spending account could keep another $2,600 out of your taxable income. Be sure not to procrastinate, Hopkin says — you might be able to sign up for your company 401(k) at any time, but enrollment for HSAs and FSAs usually happens just once a year.

4. Don’t sideline that side gig

New grads planning to freelance or be their own bosses can claim huge deductions for business expenses. That means keeping careful records and filing a Schedule C. And be sure to set aside about 25% of what you earn for the IRS, Hopkin advises.

“In your workplace, chances are you’re having the taxes withheld. But for any sort of side gig, you’re responsible for those taxes,” she says.

5. Keep learning

A degree can take you a long way, but many people need extra certifications or classroom training to move up in their career field. That’s when the Lifetime Learning Credit can come into play.

If your MAGI is below $65,000 as a single filer or below $131,000 as a married person filing jointly, you could claim a tax credit of up to $2,000 per year for post-secondary work at eligible educational institutions. You don’t need to be in a degree program — a single class can suffice.

6. Save yourself

Start stashing cash for retirement now, and that money could balloon over time. Saving can also cut your tax bill. For example, you might be able to deduct up to $5,500 of contributions to a traditional IRA each year.

And if you’re single and have an adjusted gross income, or AGI, of less than $31,000 (or $62,000 if married and filing jointly), you might qualify for the Saver’s Credit. That can slash your tax bill by up to 50% of the first $2,000 (for single filers) or $4,000 (married filing jointly) you contribute to an eligible retirement plan.

7. Be a tax deal-seeker

Chances are your tax situation is as uncomplicated as it’ll ever be, so don’t overpay for tax software or help. Most major tax software companies offer free packages to people with simple tax situations, and the IRS’s Free File program provides free tax software to people who make less than a specific AGI (currently $64,000). If you need human help, the Volunteer Income Tax Assistance program or other programs could hook you up with a pro at little or no cost.

Tina Orem is a staff writer at NerdWallet, a personal finance website. Email: torem@nerdwallet.com.

To Travel Cheap, Steer Clear of These Booking Flubs

Habits can be hard to break, but certain travel-planning tendencies could be costing you. To help you save money, we’ve identified five mistakes you won’t want to make again.

Mistake 1: Not logging in

Your casual travel browsing could be working against you. That’s because creating an account and logging in to a travel website can unlock better prices, according to Maureen Thon, a spokesperson for travel company Expedia. “A lot of people don’t realize, but if you just log in to a travel site when you visit it to do your searching, you can actually find a deal that way,” she says.

At Expedia, you’ll need to sign up for the Expedia+ rewards program with your email address and basic information to access member-only deals. Log in to your account to score 10% off 70,000 hotels and nearly 10,000 activities, according to Thon.

Over at Hotels.com, become a rewards member and sign in to your account to unlock lower rates. Plus, you can get one night free (just pay taxes and fees) after you collect 10 nights.

Mistake 2: Waiting too long

If you’re waiting for a magic moment to book, you might miss out.

Kate McCulley is a travel blogger, known as Adventurous Kate, who has visited more than 60 countries. She says people often ask her if there’s a best time to book flights, but it’s not as easy as buying on a certain date or at a certain time.

Your best bet? Start researching early. “Generally the best time to book a flight is three to six months out,” McCulley says.

Mistake 3: Being inflexible

Most travel experts agree that starting your travel shopping a few months ahead of departure is in your best interest, but if you enjoy traveling on a whim, be open to last-minute deals.

Say you want to travel to Paris on June 2; you’ll be pretty much bound to whatever the airfare prices are that day. But if you’re easygoing about where and when you’ll be jet-setting, you’ll reap better deals, says Matt Kepnes, a travel blogger and author better known as Nomadic Matt.

“Having some sort of flexibility in your planning is going to go a long way,” Kepnes says. Be ready to pounce on cheap flights when they pop up.

Mistake 4: Forgetting to bundle

Many people know about bundling home and auto insurance, as well as cable and internet. Well, welcome another pair: Bundling your hotel and airfare is also a savings strategy.

Consumers can find package deals that combine flights and hotel stays at a discounted rate at travel websites like Travelocity and Orbitz.

You don’t always have to book your entire trip in one sitting, either. Thon of Expedia said she recently booked a flight to Denver on Feb. 20 and had until Feb. 23 to add a Denver hotel to her trip at a discount of up to 50% off.

Travel search site Kayak found savings of up to 32% by choosing a flight and hotel package versus booking flight and hotel separately, according to David Solomito, a travel expert at the company. He says exact savings may vary throughout the year and be based on destination.

» MORE: The cheapest way to rent a car

Mistake 5: Missing out on coupons

The hotel or flight price you see isn’t always the price you have to pay. Savvy shoppers know to search for coupons and online promo codes before ordering something online, and savvy travelers should learn to do the same.

Look for coupon codes at websites like Groupon, follow travel websites on social media, and sign up for email alerts to have deals sent to you. Pay particularly close attention to potential savings opportunities around major holidays and annual sale periods such as Black Friday.

Courtney Jespersen is a staff writer at NerdWallet, a personal finance website. Email: courtney@nerdwallet.com. Twitter: @courtneynerd.

Payday Loans Are Dying. Problem Solved? Not Quite

Payday loans — the “lifesavers” that drown you in debt — are on the decline.

Fines and regulatory scrutiny over high rates and deceptive practices have shuttered payday loan stores across the country in the last few years, a trend capped by a proposal last summer by the Consumer Financial Protection Bureau to limit short-term loans.

Consumer spending on payday loans, both storefront and online, has fallen by a third since 2012 to $6.1 billion, according to the nonprofit Center for Financial Services Innovation. Thousands of outlets have closed. In Missouri alone, there were approximately 173 fewer active licenses for payday lenders last year compared to 2014.

In response, lenders have a new offering that keeps them in business and regulators at bay — payday installment loans.

Payday installment loans work like traditional payday loans (that is, you don’t need credit, just income and a bank account, with money delivered almost instantly), but they’re repaid in installments rather than one lump sum. The average annual percentage interest rate is typically lower as well, 268% vs 400%, CFPB research shows.

Spending on payday installment loans doubled between 2009 and 2016 to $6.2 billion, according to the CFSI report.

Installment loans aren’t the answer

Payday installment loans are speedy and convenient when you’re in a pinch, but they’re still not a good idea. Here’s why:

Price trumps time

Borrowers end up paying more in interest than they would with a shorter loan at a higher APR.

A one-year, $1,000 installment loan at 268% APR would incur interest of $1,942. A payday loan at 400% APR for the same amount would cost about $150 in fees if it were repaid in two weeks.

“While each payment may be affordable, if it goes for years and years, the borrower could end up repaying much more than what they borrowed,” said Eva Wolkowitz, manager at the Center for Financial Services Innovation.

You’re in the hole much longer

Payday installment loans are often structured so that initial payments cover only interest charges, not principal.

“The longer the loan is, the more you’re just paying interest upfront,” said Jeff Zhou, co-founder of Houston-based Fig Loans, a startup that makes alternatives to payday loans.

Add-ons add up

On top of high interest rates, lenders may charge origination and other fees that drive up the APR. Many also sell optional credit insurance — not included in the APR — that can inflate the loan cost. Lenders market this insurance as a way to cover your debts in case of unemployment, illness or death. But the payout goes to the lender, not the borrower.

About 38 percent of all payday installment borrowers default, according to the CFPB.

Americans still want small-dollar credit

The demand for payday loans in any form isn’t going away soon. Twelve million Americans use payday loans annually, typically to cover expenses like rent, utilities or groceries, according to The Pew Charitable Trusts.

“The original two-week loan originated from customers’ demand for the product. Likewise, customers in many cases are demanding installment loans,” Charles Halloran, chief operating officer of the Community Financial Services Association of America, a payday lending trade group, said in an email.

Income growth is sluggish, expenses are up and more Americans are experiencing irregular cash flow, said Lisa Servon, professor of city and regional planning at the University of Pennsylvania and author of “The Unbanking of America.”

“It’s a perfect storm that’s very good for the expensive short-term creditors, not so much for the average American worker,” she said.

What’s the alternative?

While Americans want small-dollar loans, 81% said they’d rather take a similar loan from a bank or a credit union at lower rates, according to recent Pew surveys.

Banks are waiting for the CFPB to finalize its proposed rule for payday lending before entering this market, according to Pew. As the fate of the CFPB remains unclear under the Trump administration, banks may not offer cheaper payday loans anytime soon.

In the meantime, if you need fast cash, try a credit union. Many offer payday alternative loans capped at 28% APR to members. Nonprofit community organizations also make low- or no-interest loans for utilities, rent or groceries.

Amrita Jayakumar is a staff writer at NerdWallet, a personal finance website. Email: ajayakumar@nerdwallet.com. Twitter: @ajbombay.

This article was written by NerdWallet and was originally published by USA Today.

How to Invest Without Sacrificing Your Values

Social values may not be the first thing that comes to mind when investing in the stock market, but there are numerous ways for investors to align their portfolios with their beliefs and passions.

Values-based investing has been around a while — religious groups have a lengthy history with it — but due to rising demand and better access to data, investors today have more values-based investment choices than ever before. As well, these investments often perform competitively: A 2016 TIAA Global Asset Management study concluded that investing indexes with socially responsible objectives achieved similar long-term performance as broad market benchmarks.

Here’s how to align your investments with your convictions and the impact that doing so can have.

Define your values

Think about your passions — causes you support through donations or activism, religious or political beliefs and the businesses you frequent. Now, merge those values — think climate change policies, corporate diversity, human rights, animal testing or faith-based ideals — into the criteria you use to select investments.

Values-based strategies go by a variety of names. There’s sustainable, responsible and impact investing, as well as the confusingly similar socially responsible investing. These approaches examine company characteristics — particularly those related to environmental and social issues and corporate governance practices — to determine suitability for investment.

You may include, or exclude, investments based on whether they support your values. For example, you may want to exclude companies that manufacture tobacco products — or to include corporations with gender equality in leadership positions.

Many mutual funds and exchange-traded funds use one or both of these screening options. Negative screening excludes companies based on certain values and has historically been the approach for socially responsible and faith-based strategies. Positive screening seeks to include companies that explicitly support certain values. This approach has gained popularity in recent years among investors who care deeply about environmental, social or corporate issues.

Review your investment choices

Of the total assets under professional management in the U.S., more than 20 percent — or about $8.7 trillion — was invested following sustainable principles in 2016, according to a Forum for Sustainable and Responsible Investment report sponsored by the MacArthur Foundation, Bloomberg and several financial institutions.

While you could do the painstaking research to identify individual stocks that align with your values, it’s often easier to choose from the mutual funds and ETFs created by investment firms.

If you have an account with an online broker, check its values-oriented offerings. For example, Charles Schwab maintains a list of what it calls “socially conscious” mutual funds and ETFs, with over 100 of the funds available on its OneSource platform. Fidelity and Merrill Edge also have tools to identify investments that support specific values.

Meanwhile, investment app Stash has “I believe” mission-driven themes, including “Clean & Green,” “Do the Right Thing” and “Equality Works.” Motif Investing recently launched automated portfolios that address one of three social goals: sustainable planet, fair labor or good corporate behavior. This is in addition to its other “motifs,” themed collections of up to 30 stocks or ETFs users can customize.

Like any investment decision, it’s important to do your homework. That includes researching a fund’s performance, assets and fees. Morningstar provides free sustainability ratings for about 20,000 global mutual funds and ETFs.

The value of values

Values-based investing can be a tough sell for investors who doubt their ability to make a difference, but they should not give up hope, says Janet Brown, president of FundX Investment Group, which recently launched a sustainable investment fund.

“We have to somehow get the point across that money flows can change corporate behavior,” she says.

The feeling of engagement is important, particularly because shareholder activism is a key component of impact investing. Trillium Asset Management, a firm specializing in sustainable investments, recently submitted a shareholder proposal that resulted in Tractor Supply Co. committing to reduce greenhouse gas emissions. Trillium also used proposals to prompt reforms in sustainability reporting and minimum wage policies at Chipotle.

The market may seem like an unconventional place to express your values. But if finding investments that align with your values gets you more excited, engaged and invested, you should hold your convictions close as you make those decisions.

Remember, socially responsible strategies shouldn’t dictate your portfolio. Aim to express your values while investing in a variety of assets — stocks, bonds, mutual funds and ETFs — as well as different components within each. As with all investing, diversification and risk management remain critical within values-based investing strategies.

Anna-Louise Jackson is a staff writer at NerdWallet, a personal finance website. Email: ajackson@nerdwallet.com. Twitter: @aljax7.

This article was written by NerdWallet and was originally published by The Associated Press.

Who’s Going to Pay for That? Maybe You (and Your Insurance)

Everybody knows accidents happen, but in the eyes of the law (and insurance companies), there’s almost always someone to blame.

If you or your family are responsible for accidental damages to someone else — either property damage or injuries — that person may be able to make a liability claim against you and your insurance. Liability insurance claims can fall under your auto, homeowners or renters, and umbrella insurance, depending on the accident.

Liability insurance is only for damages to someone else — meaning you’re “liable.” It doesn’t pay for your own family’s injuries or damage to your own belongings, and it doesn’t cover intentional injury or damage.

The blame in liability cases is not always clear-cut, and who’s at fault may be disputed. If an insurer denies a liability claim, or an injured person thinks the payout is insufficient, they can hire an attorney and take the case to court.

Here are some common scenarios and who’s likely to blame.

1. Classic fender bender

The situation: Jim is driving home in heavy traffic when he’s suddenly cut off by another driver. A second later, the driver slams on the brakes and Jim just doesn’t have time to stop, so he rear-ends the car and damages the back.

Who’s liable: Even if the other driver was being a jerk, Jim is likely liable for the accident because he failed to maintain a safe driving distance. The other driver can make a claim against Jim’s car insurance to pay for damage to her car.

In some states blame can be split if both drivers share fault. For example, if the other driver’s brake lights were out and Jim couldn’t tell she was stopping, she could be found partially responsible in some states.

See this State list: Contributory negligence and comparative fault laws from Matthiesen, Wickert & Lehrer in Hartford, Wisconsin.

Another route: The other driver can make a claim for her car damage on her own collision insurance, if she has it.

» MORE: What does car insurance cover?

2. Food poisoning at a barbecue

The situation: The Jacksons decide to throw a backyard barbecue, but Uncle Joe calls a few days later to report he spent the next day in the hospital with food poisoning. Joe blames the potato salad, saying it sat in the sun too long. Nobody else has complained of illness to the Jacksons, who think it was just an unfortunate coincidence.

Who’s liable: It’s hard to say whether the Jacksons caused the illness through negligence, but Uncle Joe can still file a claim with their home insurance company.

“If someone’s coming at you, injured and looking for money, the first thing you should do is look at your insurance coverage,” says Bob Passmore, assistant vice president at the Property Casualty Insurance Association of America.

Home insurance and renters policies typically include medical payments coverage that will pay for medical bills up to a certain dollar amount. Some policies offer only $1,000 in medical payments, but you can usually buy more. Typically, no one has to determine fault or negligence for this coverage to pay out, Passmore says. If medical bills are higher, a claim could be made against your homeowners liability insurance, for which negligence has to be shown.

Another route: Uncle Joe can use his own health insurance for his medical bills.

» MORE: Understanding homeowners insurance

3. A party guest drives home intoxicated

The situation: The Novaks host a family holiday get-together. Aunt Charlene has too many glasses of wine before she gets behind the wheel, and she causes a crash on the way home. She goes through someone’s fence and hits their patio furniture.

Aunt Charlene has property damage liability insurance in her auto policy, as required by her state, but her limits are so low that her policy won’t cover all the damage. The fence owner says that because the Novaks served the alcohol, they’re liable for the costs to fix all the damages. The Novaks think that’s on Charlene, who should have known she was too drunk to drive.

Who’s liable: This one depends on where the Novaks live. They are probably not liable for the costs beyond what Charlene’s car insurance will cover, says attorney Joseph Matthews, author of Nolo’s “How to Win Your Personal Injury Claim.”

Some states have “social host” laws that can hold someone accountable if they provide alcohol to a guest in their home who then gets into a car accident, Matthews says. However, many of these laws focus on alcohol served to minors, he says.

Aunt Charlene isn’t a minor, so the Jacksons are only liable for the damage if they live in a state with social host laws that apply to adult guests. In that case, the fence owner would likely have to prove Charlene was clearly drunk at the party and one of the Novaks knew she would be driving, Matthews says.

Another route: The fence owner can make a claim on their own homeowners insurance.

4. Children injuring children

The situation: Some elementary-school-age children are playing at their neighborhood park when little Suzie Smith pushes Johnny Jones at the top of the playground set. Johnny falls off, injuring his head on the way down, and must go to the ER. Johnny’s mother calls an ambulance, then threatens Suzie’s parents with a lawsuit.

Who’s liable: Since Suzie is a child, her parents are liable for Johnny’s injury. Medical payments coverage, part of their homeowners insurance, can pay out up to a small amount no matter who’s at fault — typically $1,000 with the option to buy more.

But if Johnny’s seriously injured, the Smiths’ medical payments coverage through their homeowners insurance may not be enough. Rather than sue, the Joneses can file a claim against the Smiths’ homeowners liability insurance. On top of reimbursement for medical bills, they may also receive compensation for Johnny’s pain and suffering.

Another route: The Jones family can use their health insurance for Johnny’s medical bills, but it won’t pay for pain and suffering.

5. Her tree falls on his roof

The situation: A nasty windstorm causes a large tree in Jane’s yard to fall on her neighbor Ed’s roof. Ed and Jane agree that it really is a lot of damage, but disagree about whose insurance should pay. Ed thinks that since it’s Jane’s tree, she’s at fault and her homeowners insurance should pay for the damage.

Who’s liable: Ed’s homeowners insurance likely covers the damage, even though someone else owned the tree, Passmore says. Ed’s home insurance would pay for the damage because nobody was negligent or careless in this case.

There may be an exception if something was wrong with the tree, such as rot, and Jane knew about it but did nothing. In that case, Ed would have to prove that Jane knew about the rot and was negligent by ignoring it — a difficult case to make, Passmore says.

6. Injured slipping on ice

The situation: It’s been a cold and icy winter, but Sally’s neighborhood is starting to thaw and she goes for a walk.

On the sidewalk in front of the neighboring Henderson home, Sally loses her footing on a sheet of ice and fractures her wrist trying to break her fall. When she approaches the Hendersons about her fall, they say they did what they could, but there was just no way they could have prevented ice from forming in that particular spot.

Who’s liable: Who is at fault depends on where the accident took place, Matthews says. In some areas, the city or county has a legal duty to keep sidewalks in a safe condition, including snow and ice removal, he says.

But in many places it is the responsibility of property owners to keep the sidewalk clear and safe. If that’s the case in their neighborhood, Sally can file a claim against the Hendersons’ homeowners insurance, Matthews says.

Property owners can only do so much to clear walks, and Sally should know that one thing that happens in winter is that ice forms on sidewalks, Matthews says. Her claim could be reduced or denied if she were in any way careless, if she knew the ice was there or if the Hendersons took reasonable steps to keep the walk clear.

Another route: Sally can use her health insurance for her medical bills.

7. A dog hit by a car

The situation: Leonard, who rents an apartment, decides to take his dog to the park to let her burn off some energy. As he’s playing with her off leash, she’s distracted by a Frisbee across the road and runs toward it. Suddenly a car comes racing down the road and hits the dog. The driver stops, gets out and says he’s sorry about the dog. Then he notes the considerable damage to his car, saying Leonard should have to pay.

Who’s liable: “One of the foreseeable consequences of letting a dog off leash is that it might run into the road,” Matthews says. Therefore, Leonard is most likely liable for the damage to the car, and the driver can file a claim against Leonard’s renters insurance. This is especially true if he lives in an area with laws requiring dogs to be on leashes.

Leonard’s liability might be reduced, Matthews says, if:

  • He can prove the car was speeding
  • He can prove the driver was distracted
  • The park was designated as an “off-leash area” for dogs

Another route: The driver can file a claim on his own collision insurance, if he has it.

» MORE: Understanding renters insurance

8. An angry dog approaching

The situation: While walking through his neighborhood, Arnold sees a dog rushing at him, snarling and barking. Startled, Arnold falls back and sprains his ankle. The dog never reaches Arnold because the owner, Jen, has installed an invisible electronic fence to keep the dog on her property. Jen thinks she’s not to blame because Arnold and the dog never made contact.

Who’s liable: Arnold’s minor injuries are likely covered under Jen’s homeowners policy’s medical payments coverage.

If that is not sufficient, Arnold will have to prove Jen was negligent. In any liability claim, “you’re going to have to show that there was something the owner should have done that would have prevented your injury from occurring,” Passmore says.

Another route: Arnold can use his own health insurance for his medical bills.

The liability claim process

If you’ve been injured or your property was damaged and you think someone else is to blame, the first step is talking to them, Passmore says. Discuss what happened and ask about their insurance.

Follow these steps to initiate a claim against them:

Step 1

Ask for their insurance company’s name, the full name of the person who owns the policy and their policy number. You can write a letter directly to the insurance company to notify them that you’ll be a pursuing a claim.

If you didn’t get the name of the insurer, or the person responsible won’t give you the name, send them a letter by certified mail that notifies them that you’re seeking compensation for the incident. They have a duty to notify their insurer, and if they don’t they could lose their coverage.

» MORE: Sample letters from Injury Claim Coach:

Step 2

Snap some photos of injuries or visible damage with a time and date stamp.

Step 3

Expect a call from an insurance adjuster or investigator, who must determine if your injury or damage was caused by negligence. They’ll want to talk to you, the insured person and any witnesses, and see any photos you took or medical records of your injury.

Typically, you can determine who was at fault by asking some basic questions, Matthews says:

  • Did they have a legal duty to try and prevent the injury or damage?
  • Did they fail to fulfill that duty?
  • Did you, the injured, act reasonably to avoid the accident? If not, the claim payment could be reduced.

If someone wants to file a claim against your insurance, contact your insurer immediately, Passmore says. Let your insurer or agent know what happened from your point of view, and tell them to expect a claim.

Lacie Glover is a staff writer at NerdWallet, a personal finance website. Email: lacie@nerdwallet.com. Twitter: @LacieWrites.

Ask Brianna: How Can I Take a Vacation and Not Rack Up Debt?

“Ask Brianna” is a Q&A column from NerdWallet for 20-somethings or anyone else starting out. I’m here to help you manage your money, find a job and pay off student loans — all the real-world stuff no one taught us how to do in college. Send your questions about postgrad life to askbrianna@nerdwallet.com.

This week’s question:

“I want to travel this summer, but I don’t have a ton of money. How can I go on an adventure without piling on credit card debt?”

We all need time to recharge (while making our friends jealous with artfully filtered Instagram photos). But travel can be pricey: An American Express survey found respondents expected to spend, on average, $941 per person on summer trips in 2016.

Booking travel on credit cards is convenient and can help you rack up rewards for future flight and hotel savings. But if you won’t be able to pay off the balance soon after you return home, a leisurely vacation might lead to months of anxiety and big interest charges.

The best way to avoid debt is by saving for adventures in advance. However, for last-minute travel this summer, you can still plan a thrifty trip by prioritizing low-cost airfare, opting for nontraditional lodging and picking unexpected destinations. Here’s how to save and spend wisely when you’re ready to get out of Dodge.

Start a travel fund

If you have the luxury of several months to plan, set up a savings account specifically for travel. You can schedule recurring transfers from your checking account or set up direct deposit from your paycheck.

John Schneider, who runs the blog Debt Free Guys with his husband, David Auten, says they each save $50 per pay period in a travel “slush fund.” They didn’t set up online access to the account, so they must withdraw money from it in person at their credit union. That discourages the couple from dipping into the fund to cover daily expenses, Schneider says.

Of course, make sure to save at least $500 for home emergencies before shifting your resources to a travel fund. Just starting to save for summer vacation now? You won’t have much time, so if you put some expenses on a credit card, set a spending limit and make a realistic plan to pay off the balance. Stay vigilant while you’re away: Keep a running tally of your expenses so you can cut back on the souvenir shopping if necessary.

Pick locations based on airfare

Getting to your destination will often be the biggest drag on your wallet. According to the Bureau of Labor Statistics, for domestic trips of at least one night, transportation accounted for 39% of the total cost in 2013, followed by food and alcohol (27%) and lodging (26%). For international trips, transportation was more than half of the cost.

There’s always camping or driving to your destination, which is often cheaper than flying. But for destinations farther afield, websites like Airfarewatchdog, Google Flights and Skyscanner will let you compare airfares to your preferred destination. They’ll also show you what locations fit your budget on the dates you’re free.

If you’re loyal to a specific airline, use any miles you’ve earned; check the airline’s fare calendar and pick a vacation spot that way. If you travel a lot, consider springing for a branded airline credit card. They often provide free checked bags, notes Matt Kepnes, author of “How to Travel the World on $50 a Day.” But avoid carrying a balance. Interest can quickly cancel out baggage savings.

Live large beyond hotels

Steer clear of pricey hotels and choose lower-cost options like hostels, Airbnb, staying with local hosts for free on Couchsurfing and renting vacation homes on VRBO and HomeAway. If you have your own kitchen, you can cook and make drinks at home to cut down on food and alcohol costs.

Schneider also recommends house swapping, especially if you’re traveling internationally. For a monthly or annual fee, services like HomeExchange and Love Home Swap will let you list your place and swap it with other members. Home Exchange says swapping saves members “up to 58 percent on typical vacation costs.”

You can also save money on housing — and airfare, for that matter — by traveling to less popular summer destinations. Costa Rica between May and November is one option; it’s the rainy season, which locals call the green season. You’ll explore unconventional locales, make new friends and save some of your own green.

Brianna McGurran is a staff writer at NerdWallet, a personal finance website. Email: bmcgurran@nerdwallet.com. Twitter: @briannamcscribe.

This article was written by NerdWallet and was originally published by The Associated Press.

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