What You’re Saving For
This is the fourth part of a four part series on personal finance basics. Check out parts one, two, and three when you get a chance.
There are a multitude of reasons to save, such as; a down payment on a house, your child’s college tuition, and retirement. Priorities will change over time, but saving is always a prudent idea. The issue arises when you don’t know what you’re saving for, it needs to feel important so give yourself some objectives.
1. Emergency Fund
What happens if you lose your job or are injured and can’t work for 8-12 weeks? Can you support yourself? Recent surveys have indicated that more than 50% of Americans do not have enough in the bank to cover three months’ expenses. This should be your first and most pressing priority.
Experts generally recommend having six months worth of living expenses in your emergency fund, but you should have even more if you are starting a family or have a significant mortgage.
Cut back on all your expenses and tighten the budget until you get this done. Once you’ve put together the 6 months of dough, put it in a separate account that you can’t touch for everyday expenses.
2. Investing in Assets
Assets are the opposite of disposable goods (toilet paper, food, cleaning supplies). They are going to stick around and make a positive impact on your balance sheet. Assets can come in many forms, think stocks, bonds, real estate, etc., and starting to build assets will benefit you years down the road.
3. Opportunity Fund
Are you going to be buying a house, proposing to someone, or paying for a wedding sometime soon? Those are all expensive propositions and you should start setting money aside now.
You might be thinking to yourself, “that’s all well and good, I have an emergency fund and want to start investing, but I have no idea where to start.”
You’re not alone.
Lots of people feel out of their depth since this isn’t something you usually learn in school. Plenty of people dedicate their lives to learning how to invest in stocks and bonds, but the most important thing is that you stick to a plan once you get started.
The biggest investing mistakes are made when investors don’t have a plan and make emotional decisions.
Investing is its own unique language. Roth IRAs, 401ks, brokerage accounts, the list goes on and on. What do you need to know?
There are entire books written on the subject so don’t expect a sufficient education here. To start:
Odds and Ends
It’s best to save at least 10% of your income. Over the years, try to work up to 20% before you get married or have kids.
Take more risks in your 20’s and 30’s as long as you pledge not to sell out of your positions when the market inevitably corrects every 5-7 years.
Life insurance is a must-have for anyone with a family or a co-signer on private loans. Make sure your loved ones are taken care of.
A Random Walk Down Wall Street by Burton Malkiel
A Wealth of Common Sense by Ben Carlson
This has been a four part series on personal finance basics. Check out parts one, two, and three if you missed any of them.
A Wealth of Common Sense
By: Ben Carlson
Life Skills: 4 out of 5
Entertaining: 2 out of 5
Being social animals, humans are adept at relying on experts to provide advice in areas of importance like law, medicine, and tax accounting. This pattern extends to the world of financial advice and investing, but can also get investors into trouble.
In his book, Chartered Financial Analyst Ben Carlson draws from his years of professional investing experience to deliver straightforward advice to any investor, big or small. The fundamental truth that making investment decisions and philosophies focused on the long term (decades) instead of short term (week to week), will save people from themselves.
Most investing mistakes are either emotional overreactions or overconfident beliefs, fueled by the cognitive biases that plague our decision-making. Implementing Carlson’s practical advice will benefit readers young and old.
Who should read this; Anyone who wants to start investing or is considering working with a financial advisor.
Major lesson learned; Complexity in financial products and plans serves more to confuse (read: dupe) investors than elicit greater returns.
Interesting tidbit; Carlson’s book is named after his blog.
Buy it here and you’ll support the blog!
Budgeting and Getting out of Debt
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.
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.
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.
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.
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.
How to Improve Your Credit Score
This is the first in a four-part series on some basic personal finance fundamentals.
My interest and education in personal finance came from my father, who regularly shared quality financial blogs and media with me throughout my youth. I'm by no means an expert, but, through conversations with my peers, I've realized I have some important information to share.
In hindsight, it's ridiculous that this basic human skill is not taught in our classrooms. I can't change that, but I can help you make better financial decisions, starting with improving your credit score.
What is a credit score?
It’s a number calculated from the data in your credit report and is used by lenders to determine your creditworthiness for a mortgage, loan or credit card.
Why is it important?
A good credit score plays a key role in your financial well-being. The better it is, the easier it is for you to qualify for a mortgage or car and student loans. Your score will affect whether or not you are approved, as well as what interest rate you are charged. Someone with a better credit score will usually pay less interest on their debt.
What is a good credit score?
Scores range from 300 to 850.
300-629 = Bad credit
630-689 = Average credit
690-719 = Good credit
720 and up = Excellent credit
How is it calculated?
The five primary variables are the length of your credit history (how long have you been paying loans or had a credit card?), credit mix (what type of credit? auto loans, student loans, mortgages), payment history (do you regularly pay on time?), amounts owed (how much debt are you taking on?), and new credit (how often are you opening new lines?).
How do I improve my credit score?
How should I get started if I’m a total noob?
Open a credit card and only use it for your usual purchases you consistently budget for every month (gas for your car, groceries, cell phone bills). Don’t tempt yourself by connecting it to Amazon or taking it when you shop at the mall.
Check out Credit Karma for credit card reviews and to get your credit score. You can also use WalletHub, a newer service that offers daily credit score updates.
Stay tuned for parts two through four throughout the month of January.
If you want to support this blog, buy your Amazon products through this link.