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Our New Low(er) Interest Rate Environment

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With the talk of interest rates and recession in the headlines, I figured it was a good time to check-in, and give a little update on interest rates and how lowering them can impact the economy, issuers, and investors.

Why is the FED cutting?

Basically, the FED is cutting to extend the current economic expansion we are in.

The fundamental reason behind that is lower interest rates encourage corporations and consumers to spend more.

For two reasons.

One, they get paid very little, in interest, to put their money in the bank. And two, they are able to borrow money at lower rates.

Current income needs

People who need income, retirees, for example, invest their money in income-producing securities. Often times, those securities are fixed income instruments, like bonds.

Bonds pay interest on a semi-annual basis. The higher the credit quality of the issuer (company or government entity) the lower the payout. The inverse is true for a low credit quality issuer.

It’s the ever-present adage in investing, more risk equals more potential for reward.

When interest rates continue to creep lower, then those people start to make different choices.

What people are doing now

People are getting paid less, in interest, to invest in high-quality debt issuers, so they’re getting riskier. Meaning, they are investing that money with low credit quality companies and/or government entities.

Their risk of not receiving interest payments and getting their principal (the initial investment) back goes up.

The FEDs tool kit

I’ve touched on this point a few times in the past, but I’m going to hammer it home.

The Federal Reserve, essentially, has two tools. Lowering interest rates and buying Treasuries. Lowering interest rates promotes spending and buying Treasuries provides liquidity.

Because they are lowering interest rates during an expansion (whether we are still in one or not is debatable, but let’s say we are for the sake of argument), they are, effectively, removing the number of tools they have available.

When the next recession comes, my fear is they won’t be able to do enough to help us out of it.

Corporate debt

Currently, the amount of corporate debt in the market is the largest in history. Additionally, the amount of debt that’s rated BBB is also the highest in history.

BBB is the last rung on the investment-grade scale. Investment grade is anything BBB and above.

That’s a problem for basically one reason. When a BBB rated issuer gets downgraded (to BB) they are classified as junk (high-yield). When that happens, they need to tighten up their debt and improve their balance sheet. This means less borrowing and less spending.

It’s a dynamic that feeds itself. The issuer is downgraded, they spend less, GDP gets weaker, more corporations follow suit, and here comes the recession.

Investors

Once the corporate (high-yield) debt pops, issuers of debt will have trouble meeting their obligations. They’ll start to default, and their investors will be left high and dry.

Conclusion

This post is not intended to scare people, it’s to inform.

One last point. Because interest rates have been so low for so long, there are economists/academics that think the lowering of interest rates won’t actually help.

Related Reading:

Interest Rates And Trade

What Is A Bond?

Why Do Interest Rates Matter?

 

 

*The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

In Tough Times Put Your Head Down and Keep Going

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Since this site is primarily geared towards finances, I wanted to write a reflection about my own personal struggles with financial matters.

I might toss a few other non-finance related items in there as well, but we’ll see.

I’ve been duped

There are two instances that come to mind, where I learned the hard way about investing/handling money.

The first is from early childhood when Pokemon was all the rage. This one day, a kid from the neighborhood wanted to sell me some cards of his. I ran home, opened my piggy bank and took out $5.

I ran back to the kid and bought one card with that $5 bill. I later found out that you can get a big deck of cards for that much. I’d be swindled.

Fast forward several years. I’m in high school now. This infomercial came on with a guy raving about how much money he made using Google search. Specifically, Google Adwords.

All you had to do was pay for the program. Said program would walk you through the steps to setting up a website (I now know the site was to be an affiliated sales rep).

A $90 lesson. But mistakes are made so we can learn from them.

Young and dumb

Before I begin this section, you need to know that I did not know I was going to be a financial advisor, and financial education was limited in my household and was not taught in schools (unfortunately, very common).

That said, I made pretty typical mistakes. Got a credit card, and another, and another. I had spent too much money that I didn’t have and I’m still paying the price for it.

So when I talk about getting out of debt and using a credit card wisely, it’s because I learned first hand the negatives of using it irresponsibly.

More often than not, when individuals make financial mistakes, it’s on the personal finance side of things. Things like saving money, debt management, budgets, etc. Get those things down, the rest takes care of itself.

Budget item

One part of my finances where I continually struggle is my budget. Very specifically, it’s one particular item, and that’s eating out. I am a sucker, no doubt, for restaurants. Whether that’s drive-thru or a sit-down place. It just takes all the hassle out of preparing a meal.

As good as it is sometimes, it’s also costly. My resolution was to actually include restaurant spending on my budget. I gave myself $50 for the month for take-out. This limits how much I actually spend and also scratches my itch for eating food outside of my home.

If there is an item you know you’ll spend money on, put it in your budget.

Related reading: Your Go-To Budget Guide

Personal Reflection

On the more personal side of things, it’s been a pretty challenging year for me. Had a mental health diagnosis that created some hurdles for me to jump through. As I write, I’m still jumping through these hurdles, but I’m starting to see the benefits of doing so.

By hurdles, I’m referring to medications and therapy. As well as things I can do on my own time, like exercise, journaling, and meditation.

Those last three items have been difficult for me to do consistently, but when I actually do them, I feel much better.

Another challenge of mine is that I am in the middle of a divorce. This has been incredibly difficult. It’s caused a lot of anger, sadness, doubt, among many other emotions.

What it did, however, was it forced me to turn the microscope inward and figure out the parts of me I don’t like, the parts of me I do like, and the past experiences that shaped me and the lessons to take away from those experiences to continue to grow.

Reflection Benefits

With all of the battles I’ve fought this year and as taxing as this year has been, it’s also been one of the more life-changing periods in my life.

For me, it was extremely difficult to look inside myself and analyze what makes me, me, but I’m glad I did it. It’s given me a better understanding of who I am, how I function, and what I can do to continue to grow and improve.

It’s given me the tools I never thought I would have. It’s helped me be a better parent. I’ve been able to focus more on the things that matter. And I’ve been able to be more present and limit the amount of forecasting I do for the future. (Don’t worry. On the finance side, I’m still looking ahead).

Takeaway

My advice to you is to just keep moving forward. At times, life is stuff. Navigating your finances can be challenging, but we, as humans, are resilient creatures.

Inexpensive Fall Activities

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With Fall quickly approaching I thought it’s fitting to write an article about the (inexpensive) activities you can partake in that won’t break the bank.

Below you’ll find a large number of fun things you can do when the leaves start to change.

  1. Go for a hike – Depending on where you go, this can be free! If the hike takes place in a state park, there might be a small fee. Regardless, a hike is a great way to spend time, get exercise, and experience nature.
  2. Pick pumpkins – This is an autumn staple! Go to your local pumpkin patch and pick out your favorite pumpkin. Then figure out what design, pattern, or face you’ll carve into it and go to town!
  3. Have a picnic – Ingredients for sandwiches, potato salad, chips, and a dessert item. What else could you need? Through in an item from below (scenic drive) and a nice spot to set up, and you’re good to go! Inexpensive and relaxing.
  4. Apple orchard – Go apple picking! Gives you a great excuse to go outside, walk, and hand-pick some healthy food for yourself. A typical orchard operation will charge you $1.25-$2.00 per pound.
  5. Local festivals – Most of these are free or cheap to attend, with most of the cost coming from the games and events you participate.
  6. Maze – Many of the fall festivals will have a maze. These are typically made from hay bales. Additionally, farms that have pumpkins to be picked sometimes have a corn maze and/or hayrides. I have one of those near me and it was a ton of fun, and cheap too.
  7. Football games – Local high school games are really exciting to watch. They’re inexpensive to go to, they usually have good food, and you get to show off some hometown pride. Added bonus, you could have a promising player on your team or one on a visiting team to watch. I don’t know about you, but watching a special talent is…well..special!
  8. Haunted house – I’m partial to the scary stuff because I’m into things that frighten me, but haunted houses are awesome. Yes, some are quite lame, but when they’re done right, it’s exhilarating!
  9. Sit around the campfire – This is an incredibly relaxing activity. Sitting around a fire with your family and/or friends, roasting marshmallows, and making smores – can’t get much better. Costs nothing more than marshmallows, graham crackers, and chocolate!
  10. Scenic drive – For me, there aren’t many things that can beat a scenic car ride (the previous item does). Especially in the fall. Trees change colors, there’s a slight nip in the air, and it just smells like autumn.
  11. Scary movie marathon – I understand that scary movies aren’t for everyone, but if you have a few and invite people over that bring additional movies, you can make a long and scary evening out of it. If you don’t have scary movies, go to your local library and check some out. It’s free!
  12. Make collages with leaves – This could be a nice, little craft you can do as a family. Especially if you have young kids. They love getting messy and creating with their hands. They can also have a ton of fun jumping in leaf piles before you pick the leaves out for your collage.
  13. Ghost hunting – Seriously. In doing research for this post, this actually came up, and it surprisingly checks out. There are a number of apps available. 

All-in-all, autumn is my favorite time of year. I love the weather, the leaves changing, and all of the fun things you can do. I recommend doing at least one of these activities in the next few months!

Different Ways To Think About Money

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Your money philosophy and how you think about your finances make a big difference in the decisions you make.

Whether you’re just starting your financial journey or you’re well into it, it’s a good idea to take a step back and define that philosophy.

Money is a tool

Sure, there are monetary goals you would like to achieve. For example, $1 million nest egg has long been touted as the number you need to hit for a comfortable retirement, but hitting, somewhat, arbitrary numbers aren’t everything.

Money is a tool. If used properly, you really can achieve financial success. Taking the money you’ve saved and putting it to work for you is a very simple, yet effective way to use it.

Another monetary tool is a credit card. Credit cards offer a variety of reward programs, like travel miles, cashback, among others. Additionally, it enables you to build and strengthen your credit report.

It is important, however, that if you are using a credit card, you must do so responsibly. Accumulating credit card debt can really set you back, financially.

Related reading: A Deep Dive Into Credit Cards

Focus on the solution, not the problem

Often times, we focus too much on the issues with our finances. I have too much debt, I have too little saved for retirement, or my expenses are killing my ability to save.

Instead of focusing on the problem, focus on what can be done to fix it.

If you have too much debt, develop a plan to pay it down. If your retirement savings are low, figure out how you can increase your savings rate. Expenses hurting your ability to save, cut your expenses.

“Whatever the problem, be part of the solution. Don’t just sit around raising questions and pointing out obstacles.” Tina Fey

Related reading: How To Cut Spending

Money using emotional bandwidth

It is true that money is relatively important. I say relatively to try and redirect to my first point when I mentioned that money is to be used as a tool.

It affords you food to eat, clothes to wear, and a place to live, among other things. If your basic needs are met and future goals are being worked towards, you have to try and stop worrying that you don’t have enough.

This is extremely challenging to do because we, as a society, are so fixated on money and material items that money can buy. It also doesn’t help that comparing ourselves to others is essentially baked into our DNA.

Believe me, I know that learning to stop worrying is incredibly difficult, but retraining your brain to view your finances differently can be extremely liberating.

Related reading: The Psychology Of Money

Think long-term

To be a successful investor or to be able to financially plan effectively, you have to think long term.

The market is going to have its ups and downs. As an investor, it’s important to ride out those down periods and continue to invest. If you have 15+ years until you need that money, you should be able to recoup your losses.

With regard to saving, I typically take the “bucket” approach. I have three buckets, short-term, medium-term, and long-term. Be advised: the following is how I define these time horizons.

  • The short-term bucket is for items under 5 years away. For example, when I want certain debts paid off or a down payment for a house.
  • Medium-term is anything 5-15 years away. The main one in this category is my son’s college savings.
  • Long-term is retirement savings, exclusively.

Related reading: How To Make Long-Term Investing Decisions

Buying experiences versus buying stuff

Money to a certain extent can buy happiness. As long as it’s being spent on experiences rather than stuff.

Memories with family and friends, visiting different destinations and attractions are the things we’ll cherish most.

Stuff breaks and toys are outgrown. What people won’t forget, however, is the time you spent with them.

Make that a priority. I know, as a fairly new parent (my son is almost 2), that I am constantly aware of how finite time is and that I need to make the most of those moments I spend with him.

The way you think about money pulls weight in how you use it. When creating a financial plan, I would prioritize figuring that out. How you think can lead to how you act.

The Questions You Need To Ask Yourself

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Questions are a fantastic way to understand things better. They are vitally important in our everyday lives.

One area where I think they are underutilized is personal finance.

You NEED to ask yourself questions on the regular so you can discern if you are doing the right things and taking the correct steps for YOU.

In the following article, we’re going to explore the various questions you need to ask yourself in order to be financially effective.

What is my goal with money?

This is a fairly general question, so we’ll break it down into three buckets: short term, medium-term, and long term.

  • Short-term (Under 2 years) – If you are saving for a short-term goal, what is it? A vacation? Down payment on a house? No matter the goal, that money will be used soon so the best place for it is in a savings account.
  • Medium-term (2-10 years) – This could be anything from a down payment for a house to saving for your kids’ college education. What you do in the interim depends on when you’ll need it and the goal you are saving for. If it’s less than 5 years, I’d still recommend a savings account or short-term bonds. Something that can earn you a little interest, but is still relatively safe. That 5-10 year period depends on the goal. If there’s a particular dollar amount you need to it (down payment, for instance) I’d go no more than moderately aggressive. You want to earn a little, but you don’t want that saved amount to go under what you need.
  • Long-term (10+ years) – Most often, a goal that’s over 10 years away can be invested in the stock market, though the percentage of your assets that’s actually in the market depends on the risks you are willing to take and when you need to access those funds.

Related reading: Financial planning for all ages

How much am I willing to lose before I sell?

I almost always propose this question to new clients because it gives me a good understanding of their risk tolerance.

If they are only comfortable with losing 10 percent of their portfolio, they’ll be invested pretty conservatively.

On the other hand, if they can tolerate a 50 percent drawdown and not bat an eye, then we can “put the pedal to the floor”, excuse the expression.

Determine how much of a loss you can stomach and that will give you a good idea of how to allocate your assets.

Related reading: Are you taking on too much investment risk?

How long will it take to adjust my allocations?

Questions regarding asset allocation, typically, pertain to risk and time horizon. For example, if you start saving for retirement when you’re 25, the majority of your portfolio will be in equities (stocks).

This allocation, generally speaking, is suitable for you for a couple of decades. At which point, you’ll probably (again, speaking generally) want to shift a little more of your portfolio to bonds.

Your allocation will, and should, shift over time, and once you get within a few years of your goal, the primary objective of your portfolio becomes capital preservation.

Related reading: Why asset allocation matters

Are my actions suitable for my current financial situation?

Financial situation takes everything into consideration (income, debt, spending, savings, etc.) Actions can be anything related to those items.

Specifically what I’m talking about is how much you are saving, how much you are spending, and how much $ you’ve dedicated to paying down debt.

If you have a sizeable amount of debt and not a whole lot of savings, it’s time to cut your spending. Conversely, if you’ve paid down your debt and are ahead of the game with your savings, it would be alright if you loosened up a little and enjoy yourself.

Like everything in life, your personal finances are a delicate balancing act, and when you ask questions, you can figure out how to shift your priorities.

How is my money being spent?

Kind of related to the last point. Tracking your spending to find out exactly where all of your dollars are going is an important step.

Another recommendation I usually make is to create a financial playbook. Here’s a brief outline of how I create a financial playbook:

  1. Big picture – List all assets and liabilities. How much you have saved and how much debt you have.
  2. List your necessary expenses – These are things that you have to pay (rent, utilities, transportation, food, minimum debt payments, etc.)
  3. List your monthly income
  4. Total up your monthly necessary expenses and your monthly income and see how much you have leftover. What’s leftover will help you discern what to do with it.
  5. I would list another line item for “fun,” though I would keep it to a minimum.
  6. What’s left after fun should be saved and used on debt.

Related reading: How to cut your spending

Conclusion

As I said in the beginning, questions help us understand the world, and ourselves, better.

Having a better grasp on why and when we make certain changes or do certain things is a must if we are to be more effective in managing our finances.

Your Wealth: What You Shouldn’t Do

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Establish an emergency fund, pay down debt, save for retirement, and grow your wealth! Much of your financial life is focused on the things you should do.

However, what I think to be more important are the things you shouldn’t do!

Educational Debt

There’s been a lot of literature/news over the last few years about how much of a problem student loan debt is. As of 2018, total student loan debt was $1.47 trillion. With a T! (Source)

That said, here are some things you should avoid.

  • Taking on too much – Some degrees/professions require a lot of schooling, which can lead to large amounts of student loan debt. And I don’t mean to speak ill of any degrees/professions, but if your desired career requires a “basic” 4-year degree, it’s probably best to find an in-state university to cut costs. Better yet, start at a local 2-year university or tech school until your Gen. Eds. are complete, then transfer.
  • Not having a plan for after – I think this is a common fear for Millennials and Gen Z, but you have so much time to figure things out. Don’t just go to college to get a degree. If you need time, take time. Once you figure out what you want, determine what you need to do to get there.
  • Not researching options – There are SO many student loan options. Depending on what type of loan you choose (private or public), you could have a wide range of payback methodologies. I wrote about student loan options and payback options in two previous posts. Check them out!

Credit cards

There are two BIG problems with credit cards. People who use them irresponsibly and people who don’t use them at all.

  • Using irresponsibly – This one pretty much speaks for itself. This pertains to people who spend way more than they ought to. A good rule of thumb is to only buy something using a credit card if you have the funds readily available to pay the balance off. Don’t have the money, don’t put it on the card. Doing so will cost you in interest and can really set you back.
  • Not using at all – Better than the first point, but still not great. Using a credit card can help your financial situation if you use it correctly. Most of them have rewards of some sort. It’s another credit account on your report. Charging and paying off right away establishes a good payment history. All good things for your credit score.

No emergency fund

Establishing an emergency fund is Step 1. If you don’t have money set aside for unexpected expenses, you’ll have to charge it. This leads to the point above about irresponsible use.

Save $1,000 for emergencies, turn your attention to high-interest debt (credit cards), and then shift your focus back to your emergency fund once that debt is paid off.

Spending

  • Paying bills late – Not paying your bills on time, especially ones shown on your credit report is a big mistake. The #1 factor in calculating your credit score is payment history. Paying ONE bill late will knock your score down. Just one. Don’t do it.
  • Spending too much – (See irresponsible credit card use) This is especially harmful if you frivolously spend BEFORE taking care of important “budget items”. Things like saving, debt payments, and bills.
  • Being too frugal – Though frugality is helpful in building wealth, it can also hurt you. There comes a point when you are too frugal. A vital life skill is doing things in moderation. If you pinch pennies and forego rewarding yourself, you run the risk of breaking the bank on a “bender”.

Investing

  • Waiting – I cannot stress enough the importance of investing early. What helps you make the most of your retirement savings is compound interest. The more time you have to invest, the more compound interest works in your favor.
  • Panic selling – This is a timely point since the market dropped almost 5 percent in the last week. Selling out of fear is always bad. More often than not, when you “panic sell,” you’ve already experienced the majority of the drawdown. Now, this depends on your particular situation, but it behooves you to stay invested during that period.
  • Using generalities when setting up an investment plan – Your investment plan needs to reflect your goals, risk tolerance, time horizon, and behavior. Using generalities is good for someone who writes about this stuff, but it’s not good for YOU. Your plan has to be tailored to YOU.

Life and Wealth

  • Sticking with a job you hate – Sometimes money and comfort makes us do things we don’t want to do. Being unhappy at your job is not worth it. It’s important, however, to thoroughly think through this decision. Quitting is tough, but if your family counts on you for income, you need to have a plan in place before you jump ship.
  • Comparing yourself to others – I’m going to encourage you to develop a new mindset because society taught us that wealth looks like fancy cars and big houses. I want you to think about stealth wealth. It’s probably my most favorite phrase/term. Someone with stealth wealth lives within their means. They live in a modest home, drive a car for transportation only, but saves more than the average person. They don’t “look” wealthy, but their retirement account says otherwise.

Further reading:

What it takes to be a successful investor

How to pay off credit card debt

Creating a financial plan you can stick to

What It Take To Be A Successful Investor

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What makes a successful investor? Is it your ability to beat the market or to beat your competition?

In my opinion, being a successful investor doesn’t have to do with out-earning your peers or leaving the S&P in the dust. No, my definition is very simple.

Develop an investment plan using a variety of factors, and be able to execute and follow that plan indefinitely.

Suitability

This is step 1. You need to figure out what your “suitability” is. Your suitability will lay a very good foundation upon which you build your investment plan. Suitability involves three things:

  • Risk tolerance – This is your ability to handle drawdowns in your portfolio. If you crumble with fear every time you lose 5 percent, then you’ll probably want a fairly conservative portfolio*. On the other hand, if you have no problem seeing your portfolio drop 50 percent, then you’re ready for a more aggressive allocation.
  • Time horizon – Probably the most important factor of the three. Your time horizon is basically when you’ll need the money. A long time horizon allows an investor to take on more risk because there’s more time for them to recover from drawdowns. The inverse is true for short time horizons. You’ll want to be conservative because you have little time to earn back what’d you lost.
    • Long time horizon – 10+ years
    • Medium time horizon – 2-5 years
    • Short time horizon – Less than 2 years
  • Goals – What’s your plan? Is this savings going to be used as a down payment for a house? If so, there’s probably a minimum dollar amount you have in mind and you’ll want to tip the odds in your favor that you don’t go below that. Similarly, if this is for retirement and you have 30 years to invest, you have the green light for risk assets.

Keep in mind that all three of these things, plus one other, need to be used together when determining your asset allocation. If you are tolerant of risk, but need the money in 5 years, somewhere in the middle between aggressive and conservative is probably better. That one other thing is your behavior as an investor.

Investor behavior

The finance/investment world is coming around to this, but your psychology is a HUGE factor as an investor.

Obtaining a high return on assets is one of your goals, but it should not be the primary goal. When you create an investment plan you have to make sure it’s something you can actually stick with.

I wrote about it previously, here.

You could be tolerant to risk and you could have a long time horizon, but if you lay awake at night every time the market drops, then you need to rethink your approach.

That kind of fear and anxiety hinders your ability to follow your plan. What normally happens, is someone sets an unrealistic investment plan, one where they take on too much risk.

Thereafter, volatility picks up. They check their portfolio and it’s declined 15 percent. They wait a day and check the next.

Another 2 percent drop. Then the thought of 2008 creeps into their heads and the panic sell.

You can set up a great investment plan, but your behavior will ultimately make the decisions. Keep that in mind.

Asset allocation

Using your suitability and behavior, you can then determine your asset allocation. The types of assets you use in your allocation can vary. If you wanted to invest a small percentage of your portfolio in gold, for instance.

The three most common assets are stocks, bonds, and cash. With risks ranging from high risk to virtually (there’s always some risk) no risk.

Speaking very generally, people with long time horizons and are more tolerant of risk, have a more aggressive portfolio. The inverse is true for people with short time horizons and a low-risk tolerance.

That said, the ultimate goal is to develop a plan that meets your goals in the smoothest fashion possible.

Ignore the noise

Throughout your investment “career” you’ll run into people, friends, family, or even random people on the street that will tell you the sky is falling or that the newest IPO will go gang-busters and you need to get in now!

Put your blinders on. There are two things that hurt investors. Their own behavior and their ability, or lack thereof, to tune out what’s happening around them.

This is extremely difficult because we, as humans, have evolved to use our peers to compare or judge, our standing in society.

Stay in your lane and focus on your goals.

Never stop learning

Every single experience in your life is a learning opportunity, especially the bad one. I recommend journaling daily, recount your day, and dig little nuggets of knowledge from your experiences.

Additionally, take in some form of content every day that improves your understanding in your line of work, or in an industry that you’re interested in.

With regard to your finances, give our Toolkit page a look. There you’ll find a number of books and resources to enhance your financial know-how.

Please be advised: Everything written in this article is for informational purposes only and should not be taken as investment advice. Opinions are my own and do not reflect the opinions of this publisher or my employer.

Further reading:

The Psychology Of Money

 

Strategies For Improving Your Credit Score

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Your credit score is extremely important, nowadays. It determines whether or not you qualify for other credit accounts, and if so, what terms. It plays a factor in where you live, and it can even impact job opportunities.

That said, it’s crucial you do everything you can to improve and keep your score high.

What impacts your score?

There are five factors that play a role in calculating your credit score. They are listed below with percentages to discern how big of a role each one plays.

  1. Payment history (35%) – How frequently do you make on-time payments. This number should be 100%
  2. Credit utilization (30%) – How much credit have you used compared to how much you have available. For example, if you have $20,000 of credit available and used $5,000, you have a utilization rate of 25%. Credit rating agencies want to see it below 30%, but the lower, the better.
  3. Credit age (15%) – How old are your current credit accounts? The older, the better. This means that every time you open a new credit account, your credit age drops.
  4. Types of credit (10%) – Credit cards, loans, student loans, etc. Variety helps here.
  5. Number of credit inquiries (10%) – Hard credit inquiries negatively affect your score. Like the utilization, low numbers are better.

(Source)

What hurts your score

There are a few things that negatively impact your score. I’ll list the bad things from the list above, then I’ll list a few others.

  • Poor payment history – If your payment history is below 100%, you’re already starting from behind. Anything under 100% gets notched down.
  • High utilization rate – As I said, rating agencies want to see utilization rates under 30%, so anything over that will bring your score down.
  • Low credit age – Older accounts are better for your score
  • Only one type of credit account
  • A large number of credit inquiries
  • Bankruptcy – Negatively affects your credit score and stays on your credit report for 10 years.
  • Liens and judgments taken out against you – Negatively affects your score and stays on your report for 7 years

Starting from a low score

If you are starting from a lower score, it could be from past experiences (bankruptcy or liens), and if that’s the case, you can only improve. Unfortunately, time is your enemy right now until those drop off.

The first place I would start is to pay off your current debt. If you don’t have any open credit accounts, the next step is to open one.

Individuals with low scores will have trouble opening credit accounts, so I would start with a secured credit card.

A secured credit card is like a regular one, except you establish the credit limit with a deposit. The amount of your deposit is the amount of your limit.

This is a slow and steady way to improve your payment history and show the credit rating agency that you’re responsible.

Current credit accounts

Speaking generally, I advise people to keep their credit accounts open. The one exception is you do plan on closing a credit account, make it one you recently set up.

Getting rid of a new account will increase your credit age, which should increase your score.

New credit accounts

If you’re looking to increase your score, I’d recommend abstaining from opening any new accounts, unless you’re someone that needs to open that secured credit card to rebuild your score.

The other two exceptions would be opening an account for a credit card balance transfer or a personal loan for debt consolidation.

Opening new accounts hurt twice. One, you effectively lower your credit age. And two, when you apply for a credit account, it counts as a hard credit inquiry.

Don’t do it unless you have to, and if the long-term benefits outweigh the short-term penalties.

Pay down debts

Paying down debt is a slow way to improve your credit score, but it’s a tremendous way to improve your finances overall.

Less debt means less money needed to service that debt. Less debt means a lower utilization rate (number 2 factor).

Also, when you make debt payments [on time], you’re strengthening your payment history (number 1 factor).

I recently wrote an article, linked here, about paying down debts. Give it a read. In that article, you’ll also find helpful resources on similar topics.

Utilities

The last thing I would do is check to make sure your utility provider (for me, my local municipality has its own utility company) is listed on your credit report.

My previous utility company (WE Energies) did come up on my credit report. It’s another “credit type” and another way to strengthen your payment history.

Further reading:

Save Money on Legal Fees

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Don’t get me wrong – when you need legal advice, cheaper is not always better. Shopping for an attorney by price alone may not be the best strategy when you are facing important, life-changing events such as a criminal charge, a serious personal injury, or a difficult divorce. Nevertheless,  you can save yourself some money by following a few of these tips.

  1. Don’t assume that the largest law firm in town is the best. Large law firms tend to charge more than small firms and sole practitioners. If your legal needs don’t involve large corporate mergers, international business deals, or complex class action litigation, you may not need to hire a law firm whose billing rate starts at $500 per hour. Look for a smaller local firm that may be able to offer more personalized service while billing at a much more affordable rate.
  2. Sign up for a free consultation. Not all lawyers offer free consultations, but many do, especially those in the personal injury field. If you need a Niagara Falls personal injury lawyer, you may want to talk to more than one firm before you choose the one that is right for you. Be sure to ask about their fee schedule and the possible costs that could be involved with your case.
  3. Be wary of slick TV ads. If you are injured by a medical device or product, you have probably seen ads on television for lawyers who handle cases like yours. You may even receive advertisements in the mail from law firms who want your business. Look at the fine print – Usually, the law firms that advertise on TV have to hire local attorneys to handle cases in your state, so why not eliminate the middleman? If you are in Massachusetts, for example, only a Massachusetts attorney may represent you in a Massachusetts court. Find an attorney in your state who has experience in the type of litigation you may need.
  4. Make sure you really need an attorney. Some states allow non-attorneys to handle certain tasks, like title searches and real estate closings. These services may be less expensive through a title company or other authorized provider.
  5. Remember: When you are being billed by the hour, the clock starts ticking as soon as your attorney picks up the phone, or as soon as you walk into his/her office. There is nothing wrong with that, but you have some control over how long your meetings and phone calls will take. Don’t waste your attorney’s time. In a divorce matter, for example, you do not want to pay $250 per hour to make your attorney listen to petty complaints about your spouse. Save that for your friends. Your attorney needs to know facts that are relevant to your case. Try to separate those from petty annoyances that will have no significance to your final outcome.

Write down a list of questions before you talk to your attorney. The less time you spend talking aimlessly while trying to remember what you wanted to ask, the less expensive your visit or phone call will be.

Don’t ask your lawyer to do tasks that you might be able to do. If you need to produce bank statements, for example, you can get them yourself rather than paying your attorney to do it. Ask your attorney if there is anything you can do; if the answer is “no,” then stand back and let him do his job!

How To Cut Your Spending

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Do you know what could really help you reach your financial goals? Answer: If you had more money to work with! Cutting your spending is an integral part of your finances.

I’m not saying you need to cut out the things you love (insert Starbucks coffee, avocado toast, etc.). I’m saying you need to splurge on those things wisely, either by reducing their frequency or cutting out something else.

Let’s figure out ways we can cut our spending.

Track spending

How are you supposed to know what to cut spending on if you don’t know where your money is going?

Go back a few months and look for a “pattern.” Where is all of your money going? Bills, housing, transportation, debt payments, etc. are in their own category. Everything else that’s not considered necessary spending (minus groceries) goes in the discretionary spending category. Everything else that’s not considered necessary spending (minus groceries) goes in the discretionary spending category. Keep in mind, things will change if you’re living in an affordable city like Columbus, Ohio, rather than an expensive place like New York City.

This discretionary spending is what you need to pay attention to.

Grocery spending is necessary, but the amount can vary. Figure out what you typically spend, each month, on groceries and determine if that amount can be lowered. More often than not, it can. Just don’t go hungry.

Budget (and budget alternative)

The classic budget lists the necessary expenses (housing, groceries, debt, utilities, savings, and other bills). You then assign dollar amounts for other “unnecessary” expenses (take-out, clothes, etc.).

The dollar amount is what you’d like to spend on that item/category, and not go over. The purpose of a budget is to come to a total expenditure that’s less than your monthly income.

My approach is similar. I list the necessary expenses (excluding debt payments and savings). Just the things I need to pay (housing, streaming, utilities, insurance, and transportation).

Next is my grocery budget. This is a necessary expense, but I try to keep it relatively low. Between my son and I, the limit is $300 per month. Then I list debt payments and savings.

I calculated how much I needed to pay per month to pay off my debt by a certain date. My savings is automated and partitioned.

I have one savings account for emergencies, one for car repairs, one for holiday spending, and one for vacations. Once a week, money is automatically transferred from my checking to each savings account.

The amount of each transfer is less mathematical and is more about comfort. My retirement savings is done right away at the beginning of the month so I don’t have the chance to spend it away.

Whatever remains is mine to do with as I please.

No spend days

Have one day per week or a few days per month where you don’t spend any money.

I’ve seen some people go as far as having a no spend week! Implement these days at your discretion because obviously, you’ll still want to pay your bills and such.

Another cool idea is to restrict paying for certain items during particular times of the year. For example, you don’t buy any clothes during the month of September, or you don’t have any take-out/restaurant food in April.

Coupons/rewards/etc.

With smartphones, applying coupons to your purchases has never been easier. I use coupons.com. You can save which coupons apply to you and they can be scanned at checkout. From your smartphone!

Also, wherever you do your shopping, make sure you are a member/rewards member. There’s usually a sale for members. Excluding paid memberships (like Costco), being a rewards member is free and can save you money.

By the way, it costs money to shop at Costco, but their goods are very reasonably priced. They make their money on the memberships, and they sell all of their goods at cost. That means they sell a product at whatever price they paid to get it in the store.

Use price per unit/item

When you are making a decision about how much of something you need to buy, always use price per unit as your factor. The overall price of something may look less expensive than the bulk item, and it is at the time of purchase, but more often than not, the price per unit is lower for the bulk item.

It’ll cost you more when you check out, but through time, you’ll spend less money.

Quick hacks to cut expenses

  • Negotiate a lower interest rate on your credit cards
  • Balance transfer to 0% introductory APR
  • Personal loan to lower average credit card APR
  • Unplug unused electrical devices
  • Cancel unused subscriptions
  • Reduce entertainment expenses
  • Carpool to work
  • Keep tires properly inflated (better gas mileage)
  • Use LED light bulbs
  • Use a programmable thermostat
  • Lower the temperature on your hot water heater
  • Eat at home more/eat out less
  • Buy generic

Conclusion

Achieving financial success doesn’t have to be difficult and boring, though it does take some discipline. Small rewards are important. Without them, you’ll go crazy!

Cut the fat off of your budget, and you’ll see how much better it feels to make significant progress in your financial life.