Money Lessons My Mom Taught Me

Money Lessons My Mom Taught Me

My mom was hugely influential in teaching me my first money lessons and instilling good financial habits at an early age. The underpinnings of her knowledge and encouragement were invaluable and still are to this day.

Coming from a prosperous family, she learned about hardship at an early age. Separated from her family, they perished at the hands of the Nazis. With $5 in her pocket from the US government, she made her way to the states in her early twenties.

Optimism In Her Future In America

She had lived in the Lodz Ghetto, forced labor camp, and then transferred to a refugee camp for the better part of eight years. Due to a back injury from being severely beaten, she spent a year in a hospital. Devastated from her experiences and losing her entire family, my mom was optimistic about her future in America. She wanted to able to take care of herself despite being destitute.

Mom never finished high school, but she knew at least three languages, was highly praised as a manager of Barton’s Candy, and started up two successful retail businesses. Unbeknownst to my father, or anyone for that matter, she left over a million dollars when she passed away. She worked tirelessly, obsessively saved, and invested her money.

Some of her teachings were extreme, and she was pretty quirky at times. In many ways, my mom was a trailblazer when it came to money. She believed women should be financially independent, have their own bank accounts, and invest their savings. I am forever grateful for all that she taught me, especially her money lessons that were priceless.

Valuable Money Lessons

Although she was not academically educated, she was incredibly savvy and read many books to learn. My children never met my mother, but fortunately, she passed on these valuable lessons to me so I can share them with my children.

Be Resourceful

Anyone who comes off a boat with few dollars must be resourceful and encouraged to be so. We had to make do in our modest household, but we never felt deprived in those years growing up.

Secondhand television sets, used cars, old bicycles were ours without apologies. Learning to borrow things like library books was fun to do. Relying on creativity, imagination, and having a persistent nature are traits that benefited me in my career as an equity analyst and professor now.

Needs Vs. Wants

Growing up, we knew about buying only necessities while everything was luxuries we couldn’t afford. For me, a Spalding to play to catch with my younger brother could be justified since both of us would play with it. However, we had to get a used ball that didn’t bounce very high. She did not allow us to pay a quarter for a can of Coke which had no redeeming value, preferring the money better spent on a quart of milk.

My kids, now in their teens, are living in different circumstances than I did. However, that doesn’t mean they should become spendthrifts. On the contrary, I reinforce the difference between needs from wants as an essential lesson.

Emergency Savings

Mom was an obsessive-saver from the beginning of her newfound life in America.  Settling in the Bronx, she first worked in sewing factories before being eyed by someone who needed a salesperson at Barton’s. There, she learned to speak English and the language of business, learning bookkeeping, managing inventory and sales. She shared an apartment with a friend and became a manager for Barton’s in the Bronx stores.

At first, skeptical of banks, she became comfortable about having her savings and checking accounts, visiting the bank to make deposits. Eventually, she married my Dad and had my brother and me. Savings were her mantra, and setting aside money for potential unknowns she said was always lurking around the corner. Hence, our family emergency fund was born.

Spend Less Than You Earn To Grow Savings

My mother taught me how important it was to save what you earn and not spend it freely. Your money has many jobs to do, starting with paying your bills on time and taking care of your needs. When there is money left over, it is savings for emergencies or your future needs. 

Saving money was only the first step to making more money. By putting it into the bank, you can expand your money through compounding. My mom opened a roll of pennies to explain how you can earn interest on interest. When I had learned the lesson, she took back the pennies to make more significant coins like nickels.

She opened up a bank account for me when I was about six years old. As I accompanied my mother to the bank, where she deposited money from the business, she often would introduce me to the bank officers. The bank had gorgeous Art Deco architecture, and Mom would tell me she felt rich putting her money in this particular bank.

Have Your Own Bank Accounts And Be Financially Independent

Mom kept her financial accounts separate from my Dad, except for joint accounts for the retail businesses. Like my Mom, I have always had my financial accounts different from Craig. Mom encouraged me not to disclose my earnings and investments to anyone, especially my husband. On the latter, I have always been open to Craig, more so than he has been with me, as I share in this post on financial infidelity.

My mother hid some of her money from my father. He played cards with friends weekly for entertainment and low stakes. Dad was a gambler before they were married. To a great extent, I believe that the practice of hiding money was due to her early experience when her family lost everything during the war.

Her encouragement was to have separate bank and investment accounts from a spouse so that I would never need anyone’s help monetarily. Mom went through substantial hardship, building a new life before meeting my dad. She was firmly responsible for her financial independence and was not letting go of her success. As a result, she wanted me to have my own goals to achieve in life and carve my own independence.

Being Frugal, Not Cheap

My mother was proudly frugal, not cheap, as she often discussed their differences. She scorned those who were cheap and focused on buying the lowest-priced items that often reflected the lowest quality. To her, frugality or thriftiness, a word she used more often, was a value proposition to weigh quality and affordability. 

She was happier buying things for other people and us than for herself. Occasionally, I would recognize a new bag or an outfit and compliment her. Instead of mom seeming happy about her purchase, she would pivot to how great a price she paid. Sometimes her expression sounded more like remorse. Her sadness at being the sole Holocaust survivor of her family overwhelmed her with guilt, especially those few times she treated herself better.

The Dangers of Credit Cards

My parents never had credit cards or accepted them in their two retail businesses. Instead, they relied on cash and checking accounts. Neither parent was big on borrowing money for cars or their business. I believe they took a short-term loan for the initial inventory for the first hardware store.

When it came to credit cards, Mom was adamant about their dangers of promoting overspending for things you don’t need. To this day, I use credit cards carefully by paying my balances in full every month. Although Mom is no longer with us, I think she sends spiritual vibes with approval when I pay with cash and checking accounts.

Never Buy Impulsively

My mother’s favorite words, “Do you need it?!” That was driven into my brain even after I no longer was living at home. The message was to buy quality to have it for a longer time but buy it at a lower and preferably bargain price.

Whenever she took me shopping, there was a lesson to share with me. We would go to many stores no longer around now (e.g., Alexander’s, Ohrbach’s, Loehman’s), and she tells me to feel the material and look at the price. It was often exhausting, with little to show for the day. The big treat for me was going to the counter at Chock Full of Nuts and sharing a cream cheese sandwich on raisin bread with her.

To this day, I am rarely impulsive and can overly research what I need to buy. On the other hand, Craig can be excessively impulsive and overspend, an issue that I often write about and can send mixed messages to our kids, especially when they were younger.

Investing Was Her Passion

My mother and a group of her friends began investing in stocks and bonds, much to my father’s dismay. He worried that she didn’t know what she was doing and was not encouraging her even if it was just dabbling. I was proud of my mother but never realized how interested she was in the stock market, knowing her daughter was working for a brokerage firm.

At one point, I found out that she had a retail broker, Michael, at my firm (Drexel Burnham Lambert), where I was a telecom analyst. One day, he approached me, telling me he was buying  ATT shares on a call I had made. I was baffled as I realized my mother wanted me to meet him and share her “secret of investing.”

About 15 years later, I learned that she had quite an investment portfolio of largely blue-chip stocks, various bonds, and some money markets. According to her broker, she called most of the shots in her portfolio and amazed him with her investment prowess.

Negotiation Skills

You would not want to be on the other side of the bargaining table with my mother. Everything is up for negotiation, and she is going to work to get what she wants. My parents dragged my brother and me to these “Gift Shows” to visit showrooms filled with household goods and gifts that they would buy for their housewares store. When my Mom had made her selections, and it was down to volumes and prices, my Dad would suddenly disappear.

As the buyer for the business, my mother was well-liked but somewhat feared for her negotiation skills. She taught me that you need to value yourself first before engaging with the salespeople who had wiggle room in their price points, and she tried to find the lowest levels possible. Often successful, she would buy more as her business grew and remembered who had treated her well.

Negotiating is an essential skill, especially for women, whether for your business or getting better compensation. I wished I had my mom’s bargaining smarts. It did not come as naturally for me as for my mother. However, my 16-year-old daughter is advocating for herself in a way that would have made her grandmother very proud.

Money Isn’t Everything

When you don’t have money to pay your bills and basic living expenses, money is everything. Mom never wanted money to be our only priority and thought the obsession with money was a danger in society. My mother always recited my grandmother’s favorite saying, “Poor or rich, money is good to have.” Money has its purpose, but it has its limitations.

Our family encouraged us to focus on what we value, besides money. Value like time, energy, health, family, friends, community, work, ethics, and love of learning have their worth. As financial scandals became more commonplace in the investment world, she worried that I was working too hard and not spending enough time with family. Hence, money isn’t everything.

The Importance of Education

For someone who didn’t finish high school, academic education was a significant priority in our home. I received my MBA in accounting and finance (and went to law school after my Mom passed away), and my brother, Mark, became a doctor, something my mother wanted for him from the day he was born.

However, she stressed lifelong learning through reading and picking up new skills. We all were avid readers in our home growing up, and that continued in our respective homes. Education was an excellent equalizer in society. Mom believed educated people would be welcome everywhere.

Being Grateful And Generous

Her family owned the largest bakery in the city where she grew up. As a result, my mother was a great baker in her own right. As gratitude to many people who helped along the way and neighbors, she often baked elaborate cakes and cookies. My mom always made more food and invited others who had were worse off to join us for meals on holidays and other occasions.

When buying presents, she was generous to a fault, seeking the best quality for others. Then she would be less price-conscious because giving to others was more important to her.

Final Thoughts

Moms are so influential as our first and most respected teachers. Through hardship and strive, they share their experiences that instill in us lessons they want us to learn. I remember my first money lessons, which shaped my financial habits to this day.

My mom was not always right, especially when hiding her investments from my dad. She passed us the best she had to give my brother and me. In turn, I am sharing my knowledge with my children, knowing that they will have their own experiences with finances. What we all want to do is to impart the best of what we know as parents.

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What has your Mom taught you that you wish to share? We would love to hear from you!

 

 

 

Yes, Money Can Buy Happiness

Yes, Money Can Buy Happiness

“Money is of no value; it cannot spend itself. All depends on the skill of the spender.”

Ralph Waldo Emerson

 

“Whoever said money can’t buy happiness simply  didn’t know where to go shopping.”

Gertrude Stein

 

Money Can Buy Happiness

Wealth can buy happiness, according to supporting evidence. However, it is up to you as well.

That is good news! I grew up with the notion that an excess of money may lead to feeling miserable. However, wealth alone is not a guarantee of a happy life. It can help you with your goals, make relationships more accessible, and allow you to be satisfied. Money can buy happiness when you can gain financial security for peace of mind. That is the icing on the cake.

Money Can Buy Happiness In Several Ways:

 

#1 Earning $75,000 A Year May Make You Happy

A classic study by Princeton University researchers Angus Deaton and Daniel Kahneman found a $75,000 salary to be an optimum level for two types of happiness: day-to-day emotional mood and more profound life satisfaction.

Their work studied 450,000 Americans polled over two years by Gallup and Healthways. The study asked respondents about their satisfaction, income, and adversities like lower income, divorce, and health issues. The more that income fell below the $75,000 benchmark, the unhappier people felt. However, those who made more than that amount did not report a more significant amount of happiness.

Another study at Purdue University and the University of Virginia found $95,000 to be an excellent salary for life evaluation or satisfaction and $60,000-$75,000 associated with emotional well-being.

Lifestyle Inflation

Researcher Andrew Jebb found that earnings above the ideal threshold coincided with a lower level of happiness. This result suggests the more you make, the more you tend to spend, leading to lifestyle inflation.

Jebb pointed to a degree of happiness through the fulfillment of both basic needs and increasing material needs. Evaluations tend to be more influenced by people comparing themselves to other people. There is an old adage, “Keeping Up With The Jones” used for increased spending.

More recently, Matthew A. Killingsworth’s 2021 study disputed the relevance of making more than the threshold of  $75,000 income did not lead to greater happiness. Killingsworth’s research suggested that “higher incomes are associated with both feeling better day-to-day and being more satisfied with life overall.”

I can assure you that earning $75,000 or $100,000 in NYC and living on your own would make your heart sing. For that matter, when someone earns half a million but has $550,000 in hard-to-reduce costs, they are not going to be a happy camper. That person may have a spending problem in need of fixing.

#2 You May Not Be Spending Your Money The Right Way

 

Consumers can realize more happiness if they spend their money according to core principles recommended by psychologists Elizabeth Dunn, Daniel Gilbert, and Timothy D. Wilson work in the Journal of Consumer Psychology.

Dunn and her colleagues have been proponents of the relationship between money and happiness. Following these tenets may add more satisfaction for consumers:

Buy More Experiences

For some of us, spending money on a new dress, a purse, gadgets, or other material goods makes us feel good. The question is, what produces longer-lasting benefits: material possessions or experiential purchases?

An experience can be a walk on the beach, an exotic or family vacation. True, not all experiences are good. The benefit of a great experience may allow for revisiting those happy memory years. When my children were younger, we often picked pumpkins at a farm, had apple cider, and visited the animals that roamed around. We all remember the fun we had. I’m sure we bought our kids souvenir t-shirts, lanterns, and hats, but they never used the purchases.

Giving to Others

Ever feel a high from helping someone in need? I have, and I am sure I am not alone.

The smallest gesture can mean so much to another that we are sometimes embarrassed that we didn’t act sooner. Making donations to your favorite charities feels good. Slipping a small bill to someone on the street provides us with an even greater satisfaction because it is an intimate form of giving.

This example is “prosocial spending.”  There is a positive impact on our social relationships when we practice this type of giving. Give a book to a friend you enjoyed or a tasty treat can improve your bond with that person.

Treat Yourself To Small Pleasures As Antidote To Hedonic Buys

When we make small purchases, we are treating ourselves with relatively inexpensive pleasures. Happiness is closely associated with the frequency of these treats. As financial resources are relatively finite, we are better off making smaller purchases.

Dunn and her colleagues point to the lesser likelihood of adapting to this more secondary and more limited spending. On the other hand, we adapt more quickly to the more expensive purchases if habitual. These are “hedonic buys,”  consumed for luxury purposes.

Let’s say you buy high-end specialty coffee drinks like cardamom lattes at $9 a pop daily from Starbucks ‘ Reserve Roastery. Over a short period, you may get accustomed to this rather expensive habit, and it is no longer unique.

When we buy showy sportscars or a bigger house, it may be consistent with our spending habits. We may not even enjoy these consistent expensive purchases as much because we are so used to these luxury goods. As mentioned earlier, this is classic lifestyle inflation, with more spending “required” to feed your happiness.

Extended Warranties Are “Overpriced” Insurance

Extended warranties can be a waste of money for consumers. From appliances to electronics, extended warranties may cost up to 50% of the product cost. On the other hand, retailers enjoy higher margins for this kind of insurance. I try to avoid those heavy-handed sales pitches we receive at the counter by saying I am in a hurry.

Extended warranties are often unnecessary. Consumer Reports recommends that you research the manufacturer’s initial warranty, which usually covers the product for at least 90 days. For most products, that is enough.

Pay Now, Consume Later

In our credit card-oriented society, we are conditioned to spending consumption and pay our bills later. We get immediate gratification from our purchase which doesn’t last as long as our card balances. Delaying gratification may sometimes allow us to feel the pleasure longer.

When booking a vacation, pay for it in advance rather than purchase it on your credit card. Your enjoyment may last longer.

Think About What You’re Not Thinking About: Remember The Details

We often focus on the best qualities of a purchase. By doing that, we minimize or ignore other features that may be critical. I know I have experienced this in some of our most significant purchases, only to regret it later.

Let’s say you want to buy a vacation home. You may be drawn to a cottage for its location and its charm, ignoring some of its downsides. Having a limited budget for your second home, you need to understand potential costs. Buying this cottage may require a lot of updating inside and outside of the building. Had you considered those costs, it may have helped you to negotiate the price down.

Related Post: How To Overcome Biases In Financial Situations

Beware Of Comparison Shopping

We are told to comparison shop to spend more consciously, but there may be a downside. Searching for a particular product available through different brands, we may use several websites like BizRate and Shopping.com. The sites may help us compare them. Retailers know comparison shoppers are ideal audiences for promotions because they have high intent to purchase.

The authors say these sites may offer comparisons based on available options rather than the attributes buyers seek. They may be purposely distracting you from what you are explicitly buying.. Don’t let them throw you off your game!

Follow The Herd Instead Of Your Head

You should read available reviews and pick movies, reading, and restaurants based on better customer ratings. By paying close attention to the happiness of others, you may better glean what you prefer. Be aware of what makes you happy.

I have found some reviews can be helpful through artificial intelligence, though, at times, they are faulty. Netflix recommends the next film we should watch. However, after I watched a murder mystery, Netflix suggested I watch Chitty Chitty Bang Bang. Hmmm.

#3  Buy What Fits Your Personality And You Will Be Happy

Spending increased our happiness when the purchases were for goods and services that match our personalities.

This ambitious 2016 study by Cambridge University psychologist Sandra Matz and others reviewed thousands of bank transaction records of customer purchases across categories. They studied Big Five personality traits: Openness to Experience, Conscientiousness, Extraversion, Agreeableness, and Neuroticism.

The study proved that money could buy happiness if spent according to the proper psychological fit. Our personalities influence our spending for experiential purchases, material goods, or to buy for others.

Our psychological fit matters. We look for similar traits when we choose our friends or colleagues, so we match up with each other. It also plays into how we each spend money individually according to our psychological makeup.

#4 Trade-Offs Between Time And Money

The relationship between time and money is well known. An old proverb, “time is money,” equates the two variables. However, we put different values on time and money. Time is a limited resource, but we don’t treat it as such and waste time often. Whether it refers to 24 hours per day or a lifetime, time is finite, and money may regenerate.

Saving money versus saving time was the theme of the Harvard Business School 2017 study by Ashley V. Whillans. Rising incomes around the globe have often come with stresses of time. 

Buying Some Time

This study set out to examine how to reduce stressful feelings of time scarcity. The growth of the sharing economy has made time-saving services for household chores increasingly available. Participants allocated discretionary income at $80-$99 per month to buy time-saving benefits such as meal delivery, house cleaning, and lawn services.

Their study found that people realized greater life satisfaction when linked to spending money for these time-savers by reducing stress.

Marital Bliss

In a 2018 Harvard Business School study led by Whillans, over 4,000 cohabitating adults (i.e., committed adults) extended the above research. Disagreements about household chores are a primary source of relationship conflict. 30% of the respondents cited disagreements over household chores as the number one reason for divorce.

They found that time-saving purchases promoted relationship satisfaction based on bought “marital bliss.”

There is a Chinese proverb:

“If you want happiness for an hour, take a nap. If you want happiness for a day, go fishing. If you want happiness for a year, inherit a fortune. If you want happiness for a lifetime, help someone else.”

#5  Money Can Buy Happiness. Find Financial Security:

  • Spend less than you earn.
  • Don’t spend to impress others.
  • Create an emergency fund for times of unforeseen circumstances.
  • Minimize debt by paying your credit card balances in full.
  • Reduce spending when you cannot pay balances fully.
  • Automate bill payments to timely pay your bills and regularly contribute to your retirement plan.
  • Save diligently and deploy into retirement and investment accounts.
  • Invest early with diversification to minimizes risk, using long-term strategies.
  • Money isn’t everything.

 

Final Thoughts

Various studies consider the relationship between money and happiness on our well-being. Indeed, if you can meet your basic needs and find financial stability, you should be happier than someone who cannot. The world has many unhappy millionaires and billionaires because money cannot solve problems like disappointments, health challenges, or broken relationships. Money can buy happiness!

My grandmother always said, “Poor or rich, money is good to have.” Managing your money well can’t hurt.

Related Posts:

Why You Need An Emergency Fund (And How To Invest It)

10 Ways To Better Manage Your Spending

 

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What makes you happy? How does money affect your satisfaction levels? Do you use time-saving services to smooth stress levels?

 

 

 

 

 

 

 

 

 

 

 

 

 

10 Reasons Why You Should Know Your Net Worth

10 Reasons Why You Should Know Your Net Worth

How are you today? I mean, how are you financially?

Know Your Net Worth:

  • It is a crucial benchmark at a particular time.
  • Will allow you to set near-term and long-term goals.
  • Track changes for better money management.
  • Highlight your liquid asset balances.
  • It helps you get a loan for a house, car, college tuition, or new business.
  • Pay down high-cost debt.
  • Refinance your mortgage loans.
  • Encourage you to save and invest more.
  • Buy your own home, rather than high rent.
  • Provides the best road map to building your wealth.

 

You need to know the difference between net worth and net income.

What Is Your Net Income

Your net income is based on your gross or pre-tax income and reflects your annual salary or based on hourly wages times the number of hours you worked.

Gross income consists of commissions earned and interest income from investments.

Deductions for taxes and pension and retirement accounts will be your net income for the year.

Using A Budget May Help You To Control Spending

 Net income pays your monthly bills, your monthly loans, and other items in your budget.

For a better description of what goes into your budget plan, see our post, “How To Control Spending With A Simple Budget.”

Having a reasonable budget plan and spending less than you earn will add to your net worth.

That is your roadmap to building wealth and greater financial flexibility. Take that road!

How To Calculate Net Worth

Your net worth is your personal balance sheet that provides a snapshot of your financial position at that time.

Net worth is all that you own less than all that you owe.

It is total assets less total liabilities.

An excel spreadsheet of different assets and liabilities discussed below is an excellent tool for putting all of your categories in one place. Update this spreadsheet periodically. You should do it on at least a quarterly basis. However, if you are true to your monthly budgeting, reviewing your monthly net worth is better.

Try putting it on a spreadsheet first, but you can use Personal Capital’s net worth app for tracking your investments. Frankly, any way you can keep on top of your net worth to build the amount will work.

10 Key Reasons Why You Need To Know Your Net Worth:

1. Key Benchmark

Your net worth is an important benchmark that measures your household’s successes. 

2. Set Goals

Knowing your net worth is essential to set your immediate and long-term goals and planning your family. Your net income is likely at a lower level early in your career than in the later years when your net income should rise from the potential upside coming from promotions, training, and better jobs. With careful planning and a budget plan in place, your net worth should increase over time.

3. Track Progress

You should track changes in your net worth as early as possible to make sure you are making progress in managing your money correctly.

4. An Emergency Fund Is Essential

You must have liquid or cash-like assets for the potential problems that are likely to arise. An ample emergency fund should provide some needed padding for unexpected events like a lost job. Liquidity can vary among different assets we own. A money market account is typically far more liquid than your car or your home.

5. For Borrowing

When you go for a loan to buy a house, a car, for college tuition, or invest in a new business, you will want to review your net worth to make sure you can afford the incremental costs you will be taking on. Your bankers will want to review your financial statements, including an income statement with your earnings history and your net worth.

6. Pay Off Debt

Pay down your high-yielding debt, typically your credit card debt, which uses the magic of compounding interest against us if we only make the minimum interest payments.  The average credit card interest rate for April 2021 is 19.49%. Get rid of credit balances in full on a monthly basis.

7. Refinance Mortgage Debt

You could pay off all or some of your mortgage debt if your interest rate is over 5%. If it is significantly above that, you should be seeking to refinance your mortgage.  On the other hand, if you pay a low-interest rate, don’t make any changes. 

8. Build Assets

Add to your retirement accounts to the limit,  earn your employer’s match,  and increase investments in a low-cost index fund. While stocks can be volatile year-to-year as it was in 2018 and again, early 2020, longer-term, S& P 500 annual returns have averaged 9.9% since the 1920s. If you are not facing imminent retirement, stocks remain a great place to invest your money.

 If you don’t own your home and pay high rent in, say New York City or San Francisco (the most expensive cities to rent one-bedroom apartments in the US), you may consider buying a home while mortgage rates are still relatively low at under 4%.

9. Financial Planning

Your road map to building wealth starts with knowing your net worth and making valuable changes like reduced spending, increased saving, and investing. Your net worth statement is the basis for having a financial plan to achieve short-term and long-term goals, and make adjustments to your budget. 

10. Financial Security

Having financial security means not worrying about money and living comfortably with peace of mind. Knowing your net worth is having a tool to measure your financial security at any point in time. There are terrific apps like Personal Capital that can help you build your net worth, track spending and all key variables to this statement, and make changes.

How do you calculate your net worth?

List all your the assets that have current monetary values in the following categories:

Cash and cash equivalent assets are those financial assets that quickly convert into cash. These assets include cash on hand, prepaid cards, savings accounts, checking accounts, money market accounts, certificates of deposit, savings bonds, and emergency funds. You can also include short-term IOUs, money expected from tax refunds. You can get these amounts off your latest monthly statements. List these individually based on their current balances.

Other monetary assets include your taxable investment accounts, retirement accounts, real estate investment funds, pensions, and cash value of life insurance policies. List these at their current market value.

Monetary assets are more liquid, meaning they can convert them into cash more quickly with little to no loss in value.

Tangible assets would include your most significant investments that are part of your lifestyle.

Real Estate

These real estate assets are your primary home and another real estate you own, including vacation or second home, timeshares, land, and rental property. Separate your primary home from the other real estate.

Use current conservative market values for real estate. Appraised values may not reflect actual sales or liquidated values.  You should not be inflating your net worth unrealistically.

You would need to approximate the value of your home, cooperative, condominium, cars, boats, and any other large items. To approximate real estate values, you can look at Zillow, Chase Home Estimator, or real estate websites for your zip code.

Your Business(es)

If you own your business or businesses, use conservative market values. It can be a complex matter. A simple rule of thumb is to look at sales at simple companies or a multiple of revenues, such as 0.6 times annual revenues.

Personal Property Is Tricky To Value

Unless you have a meaningful fleet of cars and boats, you should not add these to your assets even though they relate to those assets that you include. These assets depreciate too fast and sell too slowly to add much to your net worth. If you have that fleet, you can look at Kelly Blue Book, Edmunds, or AutoTrader for cars. Similarly, for boats, you can consult Boat Trader.

What Else Goes Into Total Assets

Art, rare books, rugs, and antiques may be a large part of many households’ net worth. Unless they are highly desirable or rare, these assets tend to wildly low liquidated values to count on if you needed money in a pinch. Musical instruments have their value, but they are challenging to peg, and their sales are less predictable to raise capital.

This category has a lot of sentimentalities but is complicated for the owners to peg its value. In my opinion, these assets should not be counted on unless you work with an estate professional steeped in knowledge and has a terrific network to help you sell the items.

Let My Mistakes Provide A Valuable Lesson

When I worked on Wall Street, my company restricted analysts from investing in financial securities. If I could buy certain securities on that rare occasion, I was often not allowed to sell that security when I wanted to. So, on either side of the trade, I was burned and finally abandoned investing until I left my career as an equity analyst.

So, what investments did I make?

A large part of our assets was in art, rugs, rare books, and antiques.

These assets are on our walls (art), in our bookcases (rare books such as the first edition of the Federalist Papers), on the floors (ancient rugs), and antique furniture (signed in the mid-1760s by the cabinetmaker).

Ever try to sell an 18th-century Tiger Maplewood card table? We have! And we are still waiting for that sale.

Beautiful stuff, but they can’t pay the bills! So I don’t include these personal assets. The few pieces we have sold were at prices 70% below what we paid for them.

I digress, but a worthwhile lesson for those who are collectors.

List all your liabilities according to their current balances.

Mortgage

Your mortgage loan balance is probably your most significant liability.

The home equity loan balance

Separate mortgage loan balances for the other real estate property (listed above in assets)

Other Loans

Student loans at the current balance

Loans associated with the business(es)

Personal loans

credit card account balances (you should break these out individually)

Professional services unpaid

Taxes owed

Total Liabilities

Total Assets minus Total Liabilities= Your Net Worth

How can you build your net worth? Start with writing out the ways.

You should look at your net worth statement with your budget to see what areas of growth and reduction in spending could build your net worth.

Look at your potential trade-offs.

Increasing your assets by increasing your savings could increase your net worth.

Making more income at your job would boost net worth.

Cutting your spending in areas that you can allow you to put more money into interest-bearing bank accounts or stock investments.

Investing in financial securities can expand your wealth.

Choose to invest based on your risk appetite and where you are in your life cycle.

Where should I invest my money to maximize my net worth?

Stocks are riskier but generate higher returns than keeping your savings in bank accounts at low returns.

According to Bankrate, the best annual percentage yield (APY) for bank savings accounts in April 2021 ranges from  0.40%- 0.60% for the top banks. Check for minimum balances and monthly fees that can go up to $15. These low rates will not make your net worth grow but will provide liquidity.

Having cash on hand is critical for your emergency fund. In November 2018, 76% of families reported having at least $400 in liquid accounts, according to the Federal Reserve.

Your net worth will grow faster if you invest in a diversified basket of stocks, which will provide more significant upside potential long term.

The younger you are, the more able you are to ride out the more significant risk found in stock investing, with the benefits of compounding effects.

Homeownership remains a worthwhile investment despite the slide in property prices in 2008-2009 but is less liquid than financial securities.

After household net worth plummeted in the Great Recession in 2008 to $58.996 trillion, having been impacted by declining home and stock market values, household net worth has improved to $130.0 trillion at the end of 2020, though consumer debt growth continues to dampen net worth for many families

Savings and investments in financial securities will enhance your net worth and are more liquid. Liquid net worth is a great benchmark for understanding your financial flexibilities when there are emergencies or opportunities. 

Decreasing your loans or debt liabilities will increase your net worth.

Reducing your debt levels will also improve your net worth situation.

Your mortgage loan deserves your careful attention

When borrowing, research rates for different time frames. Look at taking a 15-year mortgage loan versus a 30-year mortgage loan. The shorter borrowing time results in paying less overall interest. While your monthly payments will be higher for the 15-year loan, total borrowing costs will be lower.

Taking on a mortgage loan is a high cost, but home prices had generally kept pace with inflation until 2008-2009, when subprime mortgages played a massive factor in declining home values.

The median household net worth for 2019 was $121,700, up 18% from 2016,  according to the Federal Reserve’s latest survey.  

The Fed has kept the fed funds rate at zero to 0.25% in 2021. According to the latest Bankrate numbers, fixed mortgage loan rates remain low at 3.110% for the 30-year and 2.400% for the 15-year. 

Final Thoughts

If you receive a sizable tax refund this year, earned a higher bonus, inherited money, or experienced a sudden windfall, what would you do with the proceeds?

Lower your debt where possible, Then allocate to saving to invest more. Pay off your credit card debt. Card balances are likely your highest-cost debt, so use your tax refund or bonus to lower this amount. If there is some money, pay off more of your student debt. The way to build wealth is by growing your assets faster than your liabilities.

Thank you for reading! If you found this of value, consider reading other articles on our blog, and join us by subscribing to The Cents of Money.

What are some of the things you are doing today to increase your assets, reduce your liabilities, and raise your net worth? Where can you reduce your spending to put more money into savings and investments? We would love to hear from you!

 

 

 

 

 

 

 

 

 

 

 

 

 

The Pros And Cons of Credit Cards

The Pros And Cons of Credit Cards

“Once you get into debt, it’s hell to get out. Don’t let credit card debt carry over. You can’t get ahead paying eighteen percent.”

Charlie Munger, Vice-Chairman, Berkshire Hathaway

 

For me, credit cards have always been a double-edged sword, a fight between good and evil, or in Biblical terms, a blessing and a curse. Growing up, my parents predominantly used cash, using their retail business’s checking account to pay bills. I was the first in my family to go to college and the first to have a credit card. My parents celebrated the former and not so much the latter. They only accepted cash from their customers, refusing to believe in the benefits of the credit card. That’s where I probably get my reluctance to use credit cards instead of cash at times.

They may have been onto something though it may have been something else altogether. My mom, I still believe, may have been irked by the fact that women, on their own, could not get their cards until the passage of the Equal Credit Opportunity Act of 1974. Before that, women needed to have a man (husband or father) cosign for a credit card. How was it fair that my Dad, not my Mom, the brains behind all our finances, could get a credit card? Just saying why I think my Mom, until the day she died in 2000, never had any interest in a credit card (pardon the pun!).

The Credit Card Landscape

Credit cards are a financial tool. But like buying a new buzz saw, you need to use it with care. Some people collected credit cards like baseball cards when I was growing up. That seems like a formula for disaster to me. Clearly, we are not yet a cashless society with nearly 1 in 4 people unable to get approval for a credit card due to lack of credit history or discipline. Roughly 33 million people in the US are unbanked or underbanked, meaning they largely use financial products outside the banking system.

When COVID hit our shores in March 2020, new card applications dropped 40%. Inquiries for all kinds of loans–auto and mortgages–dropped substantially as our priorities changed during the pandemic.  The irony is that the use of credit cards increased out of necessity due to fear of touching cash on the risk of getting a coronavirus-related infection. That behavior is just another example of the strange happenings in 2020. Growth in new card applications should resume in 2021. 

Credit Card Statistics:

  • About 176 million or  67% of Americans have a credit card with about 3.1 cards per person.
  • The average card balance is $5,897 per person end of 2020.
  • Roughly 58% of cardholders carry some kind of balance.
  • The average FICO score for credit cardholders was 735.
  • The current credit card interest rate averages were 14.58%, but for those with fair credit scores, the rates rise to 23.13%For new credit cards.
  • The average rate was 17.87%.

 

Advantages of Credit Cards

 

1. Convenience

Compared to cash, credit cards are a suitable financial product. Before COVID, retail businesses were increasingly not accepting cash from customers. Credit cards provide fast payments, transfers between accounts, and withdrawals.

There are far more shopping options with a card. It is easier to make, change, and cancel travel, hotel, and car rental arrangements.  When traveling overseas, credit cards allow you to realize currency conversions automatically.  Let’s face it, carrying a lot of cash is hard –bills and change– around in your pockets, jingling around. That said, I do like window shopping without my wallet, so I don’t feel tempted to spend money unnecessarily.

2. Build Up Your Credit

For those who lack credit history, like young people, becoming an authorized user on your parents’ credit card is a rite of passage. This is an excellent way to build up a credit history so long as your parents’ credit scores are strong. Otherwise, it won’t help your credit situation at all.  Most states do not have minimum ages for your child to become an authorized user. I’d suggest you teach your kids about the responsibility of using a card safely and responsibly first.

Getting a new card may be a second chance to improve your credit score. You have missed payments, hurting your credit score in the past. If you are ready to be responsible, you should consider getting a secured card, putting some cash on account. You don’t need a massive number of cards to strengthen your payment history and length of credit history. Understand common credit mistakes and how to avoid them.

Related Post: 6 Ways To Raise Your Credit Score

3. Easy To Track Spending

You should regularly review your credit card bills helps you track your spending. It is easy to do (except when you know you spent a lot of money) and an excellent way to improve your financial discipline. Although spending cash is the best way to feel pain immediately, regular examination of the amounts you are consuming is a realistic way to correct yourself. The credit bills provide a purchase record when making returns.

One particular month, I recall seeing a very high bill with several items that seemed uncharacteristic of me. It was a posh store with a great salesperson.  Looking around,  I realized that the dress  “I had to have” was still in the bag with the tags on along with new shoes. Who did I buy that for? Not me, apparently so I returned those things and stayed clear of that salesperson.

4. Automate Your Payments

Paying your bills, especially credit cards, are so much easier when you use the automation feature. Most cards have this feature that you can set on or before the due date so you are not late on your bill payments. Also, consider paying more than once a month if the lower amounts feel better to digest. As payment history accounts for 35% of your credit scores, automating payments is one way to help you not miss the due date.

5. So Many Perks

Having a credit card may entitle you to perks. Typically, the card use may provide perks such as cashbacks, rewards, airline points, merchant discounts, hotels, travel insurance, welcome bonuses, access to tough-to-get tickets, and free museum passes. Before signing up a specific perk, make sure it aligns with your needs. One time I ordered four tickets for Hamilton on Broadway for my family, only to realize they were preview tickets for the opening in LA, 3000 miles away. The issuer reimbursed us and waived the fees.

6. Protections For Consumers, Not Necessarily For Businesses

Credit cards offer several features for consumers. When you lose cash, it is gone forever. The good news is that money is typically not attached to your personal information, like the loss or theft of your credit cards. Some cards provide zero-liability fraud protection. In a fraud situation, just notify your issuer to cancel your card. Alternatively, the issuer can get you a new account number at no charge. Safety is important.

Typically, when you lose your credit card, your losses are capped at $50 so long as you let the issuer know promptly. There may be a higher fee and responsibility for any charges that aren’t yours if you delay reporting them. I once thought I lost my card, I called the card company quickly to find that my card fell out of my wallet into a nook in my bag. Paying the fee was a fine for a lesson learned to at least look for your card first.

Cards often have spending limits. Occasionally, you may want to lift the limit if you know you may be spending more for an overseas trip, for example, where you plan to shop for jewelry. A cardholder can let their issuer know that they want to “opt-in” to allow for transactions that may put you over your credit limit. You can let them know the specific dates you’ll be traveling. Spending limits are a good feature, especially if you’re prone to overspending.

The Credit CARD Act of 2009 enhanced more protections for consumers that do no apply to businesses. With this law, issuers need to notify consumers of significant interest rate hikes at least 45 days beforehand. Also, fees, previously hidden, must be better disclosed clearly. There are some other practices that improved with the CARD Act discussed here. Still, it is always important to read the tiny fine print, especially when it comes to credit cards.

Disadvantages of Credit Cards

 

 

1. Overspending Leads To Higher Debt

Spending beyond your means can be the root of all evil related to your finances. Credit cards enable people to shop impulsively.  Having a card rather than a finite amount of cash gives you the ability to borrow more than you should. Overuse of your card leads to carrying high-cost debt on your balances. Paying double-digit interest rates on these balances can be overwhelming.

The convenience of using credit cards as compared to cash may encourage higher spending, according to studies. In the now-classic MIT study by Drazen Prelec and Duncan Simester, MBA students held an auction for tickets to sporting events. One event was a desirable basketball playoff game, and the other was a regularly scheduled baseball game. Those participants were encouraged to buy tickets using credit cards spent up to 100% more than those paid in cash. They called this the credit card premium.

Other studies seem to validate the MIT findings that we tend to spend more with a credit card than cash. For me, spending cash for purchases gives me an immediate pain instead of a nearly month delay of having to pay my credit card balance.  to me, mental accounting bias and overspending

2. Irresponsible Use of Your Credit Card

When you pay your card bill in full every month, you don’t pay any interest. Your credit card provides a lot of benefits without the pain of paying high interest costs. Unfortunately, many people just pay the minimum amount due at the end of the month, carrying a balance forward. The issuers prefer cardholders to carry balances as it is a lucrative income stream for the companies. 

At an average balance of $3,000 with an average interest rate of 16%, it can take 16 years to pay off that balance at the monthly minimum rate, roughly 3%-4% using a credit card interest calculator. That assumes that you haven’t used a credit card during those years. It is a vicious cycle. The magical powers of compounding that work so well when investing or saving for retirement works against you when you are paying interest charges on interest accumulated. If you cannot use your card responsibly, you should work hard to reduce your spending. Some people have too many credit cards, maxing out their limits, losing control of their spending.

Watch out for the particularly punitive penalty interest charge when you are late on your credit card payment. The penalty interest rate could be as high as 29.99%, above your regular interest rate, and may stay in place for some time.

3. Lower Your Credit Score

Just as you may raise your credit score, misuse of your credit cards can destroy your score. Missing payments, applying for credit too many times, and using more than the 30% limit of your available credit all can hurt your scores. Even closing a credit card account, you don’t use will result in a decline in your score. Your credit score reflects your creditworthiness to lenders, landlords, and other professionals and could negatively impact you.

4. Read The Fine Print

Just like any contract you sign, make sure to read the terms and conditions of the credit cards you are considering. Despite legislation to protect consumers, issuers are well known for hiding information about their perks, fees, charges, and other liabilities from consumers. In recent years, consumers have been able to compare credit cards more quickly. Among my favorite sites are WalletHub, NerdWallet, and CreditCards.com, which have a ton of good information on credit card features.

Be aware that you are usually subject to mandatory arbitration if you have a dispute with your card issuer. This has been relaxed in recent years but is still in the terms and conditions. It is one of my pet peeves and a project I assign my law students to look at the fine print. The average consumer can’t fight the legions of arbitration attorneys that support card issuers.

Exercise Financial Discipline By Using These Rules:

  1. Shop wisely for a credit card, finding the perks that most suit you.
  2. Read the terms and conditions carefully even after you made your selection.
  3. Pay your credit card bill in full, so you don’t carry a  balance.
  4. Have an ample emergency fund, so you don’t put high unforeseen costs on your card.
  5. Spend below your means always and make savings and investing a priority.
  6. Don’t close any credit card. Instead, cut your card in a million pieces or simply put it in a drawer.
  7. If you have multiple cards, decide how to use them for different categories and don’t max out their limits.
  8. Avoid cards with annual fees unless they have essential features you will use.
  9. Don’t get addicted to credit cards. Limit the number of cards you have.
  10. When it comes to paying your card bills, automate and don’t procrastinate. The penalty rate is punitive for a reason.
  11. If your child is an authorized user of your credit card, teach them how to use the card wisely and safely.
  12. Be aware of behavioral biases of spending more when using your credit card instead of cash.
  13. Review your credit card bills for errors, poor judgment on your part, or correct impulsive spending.
  14.   Use cash for some of your discretionary spending.

 

Final Thoughts

Credit cards serve an essential purpose as a financial tool in an increasingly cashless society. Used wisely, the advantages of credit cards will outweigh their disadvantages. Practice financial discipline in all aspects of money management. We have had our druthers about using credit cards, learned a hard lesson or two.

Thank you for reading! If you found some value in this article, please share it with friends, family, and colleagues. Consider subscribing to our growing community at The Cents of Money!

 

 

 

 

College Graduates: Build Wealth By Avoiding 11 Common Money Mistakes After Landing Your First Job

College Graduates: Build Wealth By Avoiding 11 Common Money Mistakes After Landing Your First Job

Congratulations! You graduated from college and landed your first job! It’s an exciting and scary new chapter all rolled in one. You’ll be making some serious money for the first time in your life, but you’ll also be responsible for some serious adult bills.

Before you sign a lease for an apartment or purchase a new car, avoid the most common money mistakes made by college graduates. We have assembled a list of blunders to steer you towards a financially fit future.

 

1. No Emergency Fund

In this next phase of your life, it’s essential to save money, specifically for emergencies. When you least expect it, your car may need a repair, you need expensive dental work, or you perhaps get laid off from your job. These unexpected events happen to all of us, so it’s important to plan for them.

Commit to building up an emergency fund that can cover six months of your basic living expenses. You can open interest-bearing savings account like an FDIC insured money market deposit account (MMDA) just for this purpose. This way, the money is readily accessible and earns a little interest. 

By having this safety net available, you won’t have to reach for your credit card and ramp up debt for emergencies. Instead, you’ll have peace of mind that you’ll be ready for these unplanned expenses.

2. No Monthly Budget

Chances are you were living on a meager financial diet at college, where students find frugal ways to get by. Now that you’re living a more independent life, you need to have a budget and keep your spending in control. Don’t get rid of all your ramen noodles until you have a fully-funded emergency fund set up!

Don’t rush to sign that apartment lease with a breathtaking view without creating a budget first. Figure out your necessary expenses like rent, utilities, food, and commuting expenses. These needs come first before you dive head-on into your wants like a brand new car.

You may be making more money than ever, but your income has to cover your higher cost of living. The temptation to indulge in wants may run high. It’s your money. Yes, but you need to be wise to start on a path to wealth.

Review your spending regularly to see how you’re doing and find potential cost reductions. There are free apps like Personal Capital, Mint, PocketGuard to help you track your daily spending and help you reach your goals.

3. Living Beyond Your Means

Living beyond your means is overspending. When you strike out on your own, you may find your newfound freedom is costly. Put the brakes on large or repeated impulsive spending. Living beyond your income is a recipe for financial disaster.

Your goal is to spend less than you earn so you can save money and invest some of your earnings. While it is easy to justify higher spending, you want to have some money left in your accounts after your year of hard work. This is among the most common money mistakes you can make. 

Overspending can happen when you feel you deserve a high life and seek instant gratification. Or when your friends are hitting up bars and expensive restaurants every weekend. Resist the urge to buy designer clothing for work, an expensive new car, or go on lavish vacations. Don’t fund a costly lifestyle on credit cards when you can’t afford it.

4. Getting Rid of Your Roommate

After graduating college, the last thing you may be thinking about is living with a roommate again. However, your housing costs are going to be a significant portion of your budget. Are you ready to hand over most of your hard-earned paycheck to your landlord?

A roommate may not have been in your plans, but by absorbing all of the costs of rent, utilities, and renter’s insurance, you may be deferring other financial goals that you may have, like paying off your student loans or saving to purchase a place. Sharing expenses with a roommate, you may not see very much may provide you with worthwhile savings.  Those savings can give you the financial flexibility you may not otherwise have.

5. No Student Loan Repayment Plan

One of your most considerable new responsibilities will be to make regular student loan payments. Don’t put off paying these loans or extending the time further into the future. Go for the standard repayment plan with equal monthly payments up to ten years.

There is usually a grace period, allowing you six months to financially settle down before payments are due. If you live at home or have a roommate, why not start making payments right away?  It’s a good idea to schedule automatic debit payments from your bank account and linking your paycheck deposits.

By doing so, you may be able to shave a 0.25% interest rate reduction on certain federal loans over their life. That’s saving money!

Having several loans can be complicated. Organize your payments from multiple sources into a spreadsheet. If you have varying due dates, contact the loan servicers to see if you can synchronize payments, or spread them out across the month, to make it easier. Alternatively, you can automate all your payments so you don’t miss a bill.

6. Ignoring Company Freebies

What’s in your company goodie bag? Many answers to your financial future are in your benefits package, yet some don’t look close enough. There are different types of company benefits that add meaningfully to your compensation. As a new employee, you may overlook some essential features trying to make sense of it all.

Beyond the paid vacation, holidays, and sick time, look for perks like flexible work options, paid gym memberships, professional development grants, paid smoking cession offers, or student loan repayment programs that will directly benefit you.

Some of the valuable offerings in your package may need your immediate attention, like an employer-sponsored 401K plan that you may need to opt into for participation. Look for insurance plans, such as health insurance, to know the details of the plan.

7. Turning Down Free Retirement Money

Why would a 22-year-old be thinking about retirement?  After finding out where the restroom is in your new workplace, your employer-sponsored 401K retirement plan is next. Seriously, it’s that important.

The best time to start contributing to retirement is now, especially if your company is giving you free money for your retirement account. Many employers increase your account by matching part or all of your contributions.

When you make contributions early, even if it is small amounts initially, you can fuel your money through compound growth. Compounding is when you earn interest on interest, which magnifies your growth over 40 or more years.  Automating contributions from every paycheck takes care of it in one step.

Waiting will cost you tons of money in the long run. If your younger brother starts investing $100 a year at age 25, but you wait to invest the same amount until age 35, you’ll have less than half in your bank account at age 65. So even though your sibling only contributed $12,000 more over a ten-year time frame, he’ll have $162,000, and you’ll only have $89,000.

8. Skipping Health Insurance

You’re young and healthy and rarely think about big doctor’s bills. Should you break your leg skiing or hurt yourself playing basketball and require surgery, you may be looking at a very high bill if you don’t have health insurance.

If you’re under 26 years of age, you can continue to stay on your parents’ health insurance plan. Depending on your employer and employment type, you could potentially get your own plan. Ensure you check the monthly premiums and deductibles to truly understand the cost and your new healthcare coverage details.

9. Racking up Credit Card Debt

Credit cards can be beneficial but can tempt college students and recent graduates beyond their means. It’s fun to collect credit card rewards, airline miles, or cash back. However, they can also be financially toxic if you don’t handle them with care.

If you find yourself in a situation where you can’t pay the balance off in full, you should always pay the minimum on time to not dent your credit score with late or missing payments. But if you only pay the minimum amount required, you will be building a mountain of high-cost debt you can’t easily shed.

Say you charge a $1,500 vacation on your credit card that has a 19% interest rate.  If you repay the credit card company only the minimum amount each month, you’ll start with a $60 payment. But to pay the whole amount, plus interest, you’ll have to make a total of 106 payments and pay them $889 in total interest. That’s more than half the amount of your vacation extra!

10. Ignoring Your Credit Score

Building a good credit score may not even be on your radar. But if you want to rent your own apartment, purchase a car, or buy a home in the next couple of years, having a good credit score is crucial.

Be patient about getting your credit to where you would like to be. It can take years and effort to build credit on your own and earn a good score. Good financial habits matter and can help the process along. Monitor your credit report and track your score periodically.

First, you need to build your credit file. Start opening a couple of accounts that report to the primary credit bureaus. Separately, you can become an authorized user on a parent’s credit card so long as they have a solid credit score.

Establish your track record as a borrower over time by handling your payments properly.  Your credit will benefit from paying your bills on time. Don’t carry a credit card balance which can increase costly debt, become a challenge to manage, and may get you turned down for an apartment lease.

11. Delaying Investing

A regret I share with many people is not investing earlier. The best time to start investing is now, even in small increments. When you are young, you have time on your side, so don’t waste it. Having a long-term perspective when investing allows you to ride out the volatility rather than bailing out of the market. Compounding power can fuel our investment returns to higher heights.

Once you have set aside some money for emergencies and automated contributions for your retirement account, use some savings to open a brokerage account and buy a low-cost index fund that tracks the market. These funds provide you with essential diversification from the start. With confidence and learning the ropes, you can expand your portfolio as you turn savings into investments. Understand your risks but avoid being reckless.

Final Thoughts

Avoid common money mistakes that can derail your financial future. You are just starting your professional career and earn a living that will hopefully rise significantly over time. Missteps can become very costly. By handling your money well, you will a clearer path to building your wealth.

Thank you for reading!

This article originally appeared on Your Money Geek and has been republished with permission.

6 Ways To Raise Your Credit Score

6 Ways To Raise Your Credit Score

Our financial lives depend on our creditworthiness. When we go for a loan, lenders review our credit report and our FICO credit scores to determine our annual percentage rate (APR). Generally, the higher our score on a 300-850 score, the lower the borrowing rate we will pay on our loans for our car, mortgage, or college tuition.

7 Reasons Why You Need To Review Your Credit Report And Score:

 

  • People want to know where you stand before making important financial decisions.
  • I am borrowing for a home purchase.
  • Car loan or lease.
  • Student loan.
  • She is hecking for inaccuracies, identity theft, and fraud.
  • He was getting a job.
  • We are renting an apartment.

 

Can You Improve Your Credit Score?

The short answer is yes, you can!  We will go over tips to increase your scores. First, let’s talk about how the FICO Scores formula is calculated with its five different criteria of the total:

Payment History: 35%

This category carries the most significant weight in your score and is the most critical factor. The longer the credit history, the better. Having a sound track of not missing payments and being on time works in your favor.

So those who are new to being approved for their credit cards need to show a consistently positive pattern.  These are different account types such as credit cards, retail or store accounts, installment loans, mortgages, and finance company accounts.

Credit Utilization: 30%

As a significant influence on your credit score, credit utilization is the ratio of your total outstanding revolving credit balances divided by full available credit. Revolving credit refers to your credit cards and credit lines you may have but does not include your car loan (unless on your credit card) or your mortgage.

The utilization ratio is known as the balance of debt to available credit or debt-to-credit. It measures how much credit you have used for the amount available to you. You don’t want to “max out” your cards. You should not be above a 30% ratio as it will impact your score. I would stay in the mid-20s range so as not hitting the 30% level.

Credit History: 15%

How you handle credit is essential to lenders. The length of time of your oldest credit account and the average age of all of your accounts determine your credit history. The older the account, the better your credit score. If you are new to obtaining credit, it will take time to benefit from showing up in your score.

Credit Mix: 10%

Lenders favor some variety of borrowing in your mix of credit. A borrower handling different kinds of debt products may reflect less risk to lenders. When you don’t yet have a credit card, you may be at higher risk. That said, don’t go out and get different kinds of loans for the sake of improving your mix.

New Credit: 10%

When you apply for new credit, that inquiry is reported on your credit report for up to two years. That is called a hard inquiry and can negatively impact your credit score, particularly if you are making multiple inquiries. However, don’t let it stop you from doing comparison shopping for the same type of loan.

A soft inquiry occurs when you are checking your credit score or report. Soft inquiries do not generate negative hits.

Related Post: Common Credit Mistakes And How To Avoid Them

6 Ways To Increase Your Credit Score:

 

1. Check Your Credit Report For Errors

Reviewing your report for inaccuracies and missing information may be the fastest and easiest way to improve the score. An FTC study reports that 5% of consumers had errors that may carry enough weight to result in getting a lesser favorable loan. One in four consumers had errors in one of three credit reports.

If you find an error, contact each of the credit bureaus (Experian, Equifax, and TransUnion). You will need to give them specific information as to what you believe is incorrect. They must investigate the item(s) you have raised, usually within 30 days. You can do all of this online, but it is a good idea to follow up if you don’t hear back from them.

Fix Errors As Quickly As Possible

Initiate your inquiry as soon as you spot the error by following these steps. The credit bureaus may back burner your issue if they deem it frivolous, so be specific and provide the needed information as part of your inquiry.

Sometimes what appear to be errors are fraudulent charges and scams.

Read our related post: 9 Ways To Better Protect Your Privacy Against Fraud And Scams

2. Pay Bills On Time

The credit bureaus require you to pay the minimum amount required on time. They are looking at your payment history, which counts a lot towards your overall credit score. Missed or late payments are harder to repair and can lead to delinquent payments that take seven years to get rid of on your report.

Automate Payments

Consider automating payments online through your bank portals for credit card companies. Set up online payments with your other loan providers. Stick to a monthly schedule or pay these bills every two weeks to lessen the burden.

If you have missed payments, get current as quickly as possible. Be consistent after that as the creditors look for a clear pattern of timely payments before you see score improvements.

You do not want a collection account to appear on your credit report. Even if you pay that account, it has long-lasting adverse effects. It puts a 7-year stain on your report. Don’t let that be a disincentive from paying off the collection debt as it will stay on longer. You might want to check with the creditor to see if it was “charged off” as lousy debt before making a payment.

Pay Credit Card Balances In Full

Although the strategy of making the minimum payment on your credit balance is good for your score, it will keep you in debt longer. It is far better to pay off your monthly debt balances in full. Otherwise, you are paying those card balances at mid-high teen interest rates.

That makes the credit card companies happy, but, of course, that is not your goal.

3. Reduce Your Debt

The credit utilization ratio is an essential contributor to your overall credit score. Being disciplined about your debt levels is vital for the financial future. This ratio reflects how much of your available credit has been used. Lenders look at debt usage on a per-card basis and total debt relative to total credit available.

Creditors look at a 30% threshold. Ratios above that level may provide negative consequences to your score. Consider targeting a lower percentage in the mid 20’s if you must carry month-to-month balances at all. You may not realize that making sizable purchases such as moving to a new home caused you violated the 30% ratio.

Raising Credit Limits Too Tempting For Some

I have read others recommend that you seek higher limits on your credit cards to lower the ratio. That may work mathematically, but it is too tempting to have more credit available to spend more for some of us. It sort of reminds me of how our elected officials thrash out at each other, then raise our nation’s debt ceiling rather than reducing our borrowings.

Rather than raise limits on your credit cards, make a plan to zero out your debt balances to gain financial flexibility or stop using your cards and spend less.

If you are having trouble making ends meet because of exigent circumstances (e.g., job loss, death in the family), contact your creditors to see if there is something they can do, such as modify your credit terms temporarily. Another recommendation is to go to a financial counselor for some strategies to reduce your debt significantly.

Related Post: How To Pay Down Your Debt For Better Financial Health

4. Little To No Credit History

When you have a relatively “thin credit file,” it means you don’t have much in the way of showing that you are responsible with credit yet. Minimal credit history accounts for about 15% of your credit score. There are a couple of things for you to do.

You can become an authorized user on someone else’s account like a parent. Make sure that they use their credit responsibly, or it won’t be beneficial to you.

Related Post: A Guide To Your Child’s Credit Report: Pros And Cons

Strengthen Your Credit File

You can apply for a secured credit card where approvals are easier to get than unsecured credit cards. Your credit limits will be far lower, usually capped at around $500. You will need to post a refundable deposit as security. Secured credit cards are suitable for those with lousy history and those with little or no track record.

You may want to consider Experian’s recently launched free product, Experian Boost. It allows consumers to include utility and cellphone payments into their credit score calculations using this tool. It may provide an incremental boost for those with thin or poor credit history files. You are connecting your online bank account to your Experian credit report.

5. Don’t Close Any Unused Credit Accounts

If you have credit cards, you no longer use or need it, it is better to cut them up and put those cards in a drawer and forget about them. The exceptions to de-classing them to your sock drawer are you will be too tempted to spend or pay annual fees.

Otherwise, if you call the company to close the account, you will likely lose a few points off your score. Closed accounts, even if they have zero balances, stay on your credit report for ten years.

Keeping the account open and unused benefit your scores at least two ways:

  • your credit utilization ratio will rise because you have removed available credit.
  • Eliminating an account might hurt your credit history if it is an older account.

The impact of closing an unused account may be tougher on young people or someone trying to build up their credit file. I made this rookie mistake by closing a retail store’s account when I was younger. It was an expensive store and not one I found myself shopping at anymore.

I thought I was making a smart move when I closed the account and had my score dinged. I recommend the “scissors approach” and cutting the cards and put it away.

6. Apply For New Credit Sparingly And Only If Needed

Credit mix is a factor in your score, though not as influential as credit utilization. Think carefully before applying for more credit than necessary. It may result in counting as a hard inquiry on your credit report and, therefore, a harmful point reduction in your score.

 

How Long Does It Take To Rebuild Your Credit Card:

 

  • Credit errors or repairs  3-6 months
  • Closing accounts           three months
  • Hard inquiries                two years
  • Missed Payments         18-24 months
  • Car Repossess              seven years
  • Delinquencies                seven years
  • Bankruptcies                  7-10 years

 

Credit Score Ranges Per Experian:

  • 800-850 Exceptional
  • 740-799 Very Good
  • 670-739 Good
  • 580-669 Fair
  • 300-579 Very Poor

 

How Much Of A Difference Does A Credit Score Make On Your Loan?

Using myFICO Loan Savings Calculator,  here are national 30 year fixed mortgage rates with a 400,000 on April 16, 2021, according to the following scores:

Scores      APR                  Monthly Payment

  • 760-850    2.676%                 $1,617
  • 700-759    2.898%                 $1,664
  • 680-699    3.075%                 $1,703
  • 660-679    3.289%                 $1,749
  • 640-659    3.719%                 $1.845
  • 620-639    4.265%                 $1.971

 

If your score is currently at the low end, you can save up to $127,421 in total interest paid over the life of the loan by improving your credit to the 760-850 level. Becoming more creditworthy helps you save money.

 

Final Thoughts

Most of us are in the 620-719 score range. We have several ways we can raise our credit scores incrementally and produce meaningful savings. A better credit score improves our ability to borrow and satisfy those like our landlord who want us to be creditworthy.

We should be more financially responsible by reducing debt, paying our bills on time and zeroing out our costly credit card balances. We need to have greater financial flexibility and make better decisions for our  fulfilling our needs and wants in our lives.

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Related post: Are You Creditworthy? All About Your Scores And The Five C’s

Have you checked your credit report recently? It is important to review to do so for errors and ways to improve before core ahead of your needs to borrow. Do you have any experience you can share that you dealt with repairing credit errors  or increasing your score?

We would like to hear from you!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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