This is part three of a four part series on personal finance basics. Parts one and two are linked, but not required to read this post.
The story of a mid-20s millennial burdened with student loan debt, still living at home, is so oft-repeated that it has risen to some level beyond cliche. However, living through the 2008 recession has also left this generation in a more mindful state, conscientious of the risks of investing. While developing a fancy investment strategy sounds fun to some, it is more important that your 20s are spent focusing on the fundamentals. Setting yourself up for success means paying off debt and learning how to budget. Practicing this delayed gratification will be hard at first, but will become easier as it develops into habit. Paying Down Debt There are a number of personal finance coaches who espouse the notion of “good debt” and “bad debt”. Good debt has a low interest rate and was used to buy an asset of value, that could appreciate over time (think of a mortgage for a house). Bad debt has high interest rates and might have been used to buy a depreciating asset (think credit card debt or car loans). The reality is all debt is a limiting force that inhibits you from seizing new opportunities. For example… You are working at a medium sized corporation and your friend approaches you with an offer to join her fast-growing startup. You’d take a 50% pay cut, but get significant equity and the chance to take on a lot more responsibility. You’d love the experience, but your large monthly mortgage and car payments mean you’d barely have money for food and gas. These large immovable payments are known as “golden handcuffs”. Don't let them slip on. Your 20s are a time to be humble and thrifty. Just as it’s a bit obnoxious to think that you’ll be in the c-suite by 26, you shouldn’t be trying to live a lifestyle of someone who’s made it. Quite the opposite in fact. The more money you can sink into you student loans and credit card debt, the less interest you’ll end up paying to the lenders you borrowed from. Paying down the principal of your loans aggressively will afford you the flexibility and options to make real choices as you get promotions and raises. Start with your highest interest debt and work your way down (don’t ever forget to make minimum payments on everything). As you pay off debts, it will snowball as you have more cash flow to aim at fewer targets. Restrictions as a Path to Freedom (aka Budgeting) Most people live like this: Income - Consumption = Saving & Payments Budgeting maestros flip the script to something better: Income - Saving & Payments = Consumption What does this actually mean? Most people live their lives feeling guilty because they spend first and save second. Whatever is left over at the end of the month gets pushed into savings, fluctuating significantly month to month. Along with being inefficient, this is a more mentally taxing system of saving. Each purchase is accompanied by a small (or large) pang of guilt, because you see each dollar spent as savings lost. When you save first, by automating your monthly savings, you actually release yourself of guilt, knowing that you can spend whatever’s left, because the saving has already been done. Automation So how can you make this automation a reality? Through your direct deposit preferences or your bank’s online services; you can select a percentage or fixed dollar amount to be regularly moved into specific accounts. Allocating a specific amount to savings and debt repayment allows you to enjoy the rest of the money that’s leftover, guilt-free. Automating your loan repayment means you’ll never miss a payment, and can sometimes get your interest rate reduced slightly. Resources Mint - One stop shop for budgeting and getting a full picture of your finances Mr. Money Mustache - Blog with a cult-following where you can get a “personal finance PHD” Budget Simple - Another, more simplified budgeting tool This is part three of a four part series on personal finance fundamentals. Check out part one and two if you missed them.
The finest digital content, lovingly curated just for you.
Hijacking the New Yorker (Frank Chimero) Why studying nutrition is so difficult (Vox) Helping prisoners at San Quentin Prison (Medium) How to manage your money (NYT) A link between boredom and brain injury (Nature) Before a startup focuses on growth (Sam Altman) Dilbert cartoon writer’s financial basics (My Money Blog) Hiring for the ability to “Get Shit Done” (Elad) Please support the blog by shopping through my Amazon Link.
Richard Branson started was running a small student magazine in his late teens when he started fulfilling mail-in music record orders as a side project. Little did he know this would be the beginning of one of the greatest music companies and brands of all time.
Virgin now adorns airplanes, mobile phones, trains, hot air balloons and financial products, but it all started with a young man’s vision for a funner record buying experience for young consumers. Branson’s company grew to an international behemoth on the wings of his willingness to take risks, commitment to a strong ethical code, and an empowered, talented team. He recounts all this and more in a riveting biography that I devoured and loved. Who should read this; Anyone with an interest in entrepreneurship, lifestyle design, or autobiographies. Major lesson learned; One of the best capitalists in modern history credits his strong ethical code and willingness to take risks for his success. Interesting tidbit; Branson took part in the first successful hot air balloon flights to cross the Atlantic and Pacific Ocean. Buy it here and you’ll support the blog!
The finest digital content, lovingly curated just for you.
Your mom might be on Snapchat very soon (Wired) Applying design thinking to self-improvement (NYT) Sandwich startup principles (Medium) Alternative revenue models for professional esports players (TechCrunch) Warren Buffett deflect criticism for racist lending practices (ZeroHedge) Solar and wind had a great year (Bloomberg) Self-mummifying monks of Japan (Damn Interesting) Living the Dream - the first 1000 days of an entrepreneur (Tropical MBA) Please support the blog by shopping through my Amazon Link.
The finest digital content, lovingly curated just for you.
Apple watch and continuous computing (Stratechery) Don’t waste time on personal branding (Fast Company) Making it in America with a little help from friends (Player’s Tribune) Lois Von Ahn on raising venture capital outside of Silicon Valley (Quora) PayPal adds Bitcoin entrepreneur to its board (Fortune) How to Hire (Medium) Al Jazeera terminates digital video and tv operations (Intercept) Google’s parent company, Alphabet, in one chart (Business Insider) Please support the blog by shopping through my Amazon Link.
The finest digital content, lovingly curated just for you.
Five (difficult) steps to financial freedom (Minimalists) Are media titans sleeping on Netflix? (NYT) Interview with a lawyer who retired at 33 (Mr Money Mustache) Other people do not know you financial situation (Behavior Gap) Counterintuitive career advice (Slate) The car company winning the race to a mass market electric car isn’t the one you think (Wired) but also read cars and the future (Stratechery) Please support the blog by shopping through my Amazon Link.
The finest digital content, lovingly curated just for you.
Interviewing Jeff Bezos about the future of Amazon (Wired) Discovering the internet’s blind spot (Medium) Emerging from the Dark Ages of podcasting (New Republic) Please support the blog by shopping through my Amazon Link.
The finest digital content, lovingly curated just for you.
Political spin is nothing new (WSJ) The argument for buying lottery tickets (Bloomberg) Wisdom from the president of Pixar (Venture Hacks) Police are assigning everyone a threat score (Washington Post) Principles to guide your year (Laura Simms) Every “Best Rapper Alive” since 1979 (Complex) 10 questions to figure out if your work matters (Seth Godin) Please support the blog by shopping through my Amazon Link.
The Saturday edition separates the posers from the warriors.
The forthcoming age of killer bots (Verge) How to make eggs (NYT) Silicon Valley is beating Wall Street (Medium) Calming your brain during conflict (Harvard Business Review) A dozen lessons from Charlie Munger (Waiters Pad) The Wave (Player’s Tribune) A guide to startup equity (GitHub) Profanity, growing up, life, parenting (LA Review of Books) Be sure to share your favorite links and do your shopping through my Amazon Link. This is part two of a four part series on personal finance basics. Part one is suggested, but not mandatory pre-reading. The beauty of having a blog is that you can share lessons you learn, right as you learn them. Hopefully, this post provides a useful nugget of info that you can apply sometime in the future.
As mentioned in part one, it’s important to be mindful of your credit score and work to improve it. A less commonly mentioned method of doing this is increasing your credit limit (the total amount you are allowed to charge to your credit card). One method to improve your score is to increase your credit limit. This works by lowering your credit utilization ratio, which is the percentage of your available credit that you are using. Credit utilization accounts for 30 percent of your FICO score, meaning the lower your credit utilization, the higher your score. You can get a higher spending limit by contacting your creditor and submitting a request. Make sure you read below before you make a move. 1. Your credit can automatically increase There is a chance that you won’t have to do anything for your credit limit to increase. Credit card issuers periodically review their customer’s data and decide to increase their credit limit. A creditor is more likely to increase your limit if it is relatively low. The higher your limit, the less likely you’ll be automatically bumped up. The best way to get an automatic increase is to ensure your account has relatively low limits. The higher your limit, the less likely it is that your issuer will hike it for you. 2. Don’t ask too soon Don’t request a limit increase within six months of getting a new card, as it could be an instant red flag that could lead to denial. Creditors usually review accounts semi-annually and want to see some history of good behavior before considering increasing their trust in you. 3. Don’t ask for too much It’s also wise to be conservative with your request. The size of your request factors into the creditor’s decision to approve, or deny, your increase. Plan on asking for an increase between 10 to 25 percent of your current limit. If you ask for too much and get declined, you’ll have to wait at least three months before asking again. 4. Only request an increase for your best credit card You shouldn’t be requesting increases on all your cards. When an issuer pulls your credit report to review your payment history, it causes a temporary dip in your credit score. If you are applying for increases on multiple cards, this will be a red flag that can both hurt your score and serve as cause for rejection. If you make one strong case to your favorite company, your chance of success is greatest and you’ll save time. What are creditors looking for? I’ve already mentioned a few key components, but a creditor’s review is not pure math. They want to see a strong payment history, you should be paying your whole balance off every single month. Late payments are a red flag that indicate you shouldn’t be trusted with a larger balance. When talking to the company, mention your loyalty, but don’t be afraid to mention that you are willing to take your business elsewhere. Maintain this practice for a few years, and you’ll slowly build up a substantial credit allowance. This is part two of a four part series on personal finance fundamentals. Click here to check out part one. |
Topics
All
If you want to support this blog, buy your Amazon products through this link.
Archives
August 2020
|