Understanding Your Credit Score

Your credit score can affect many aspects of your financial life.

The three main credit reporting agencies, Equifax®, TransUnion®, and Experian™, create and generate your credit reports. You credit score is a number, typically ranging between 300 and 850, that indicates how likely you are to repay your debts. The three major credit reporting agencies calculate your scores based on their own models, but these are not the scores that most lenders are looking for. There are several independent scoring companies, each with its own model for how they convert your credit report information into a score that indicates the level of risk that you may default to a creditor. Today, a vast majority of major lenders use the FICO® Score, a credit score created by the Fair Isaac Corporation, when making decisions on whether to lend to you. The score holds so much weight that it can affect the interest rates that you may pay on loans, your insurance rates, and even your ability to rent a home.

Photo by Gemma Evans on Unsplash

Understanding your credit report and how your credit score is compiled is a good place to start. Let’s break down your FICO® Score, as it is currently the most widely used credit score format that the top lenders are using.

The Fair Isaac Company considers five categories when calculating your FICO® Score: your payment history, how much you owe, your length of credit history, the credit mix that you keep, and your new accounts.

Your payment history (35%) — Thirty five percent of your FICO® Score comes from how you have managed your past payments to your creditors. This section of the reporting will take into consideration the payments you have made to creditors. Creditors, including credit cards, retail accounts, installment loans, auto and mortgage loans and many others, report to the major credit reporting agencies and that information is used to tabulate your score. To maintain, improve and build your credit score, it is important to make your payments on time every time. This keeps your accounts in good standing and helps create more depth in your payment history.

Missing payments or making payments late will have a negative effect on your score. The more frequent the missed or late payments are, the greater the impact they will have to your overall score. Public records and collection accounts, such as bankruptcies, tax liens and civic judgements, can lower your rating in this category dramatically and can have serious long-term repercussions on your overall score.

Your payment history is the section given the most consideration in determining your score, and it is the most important factor a lender assesses when determining the level of risk it will undertake when issuing you credit.  

Amounts Owed (30%) — Thirty percent of your score is based on how much you owe your creditors. There are several factors that come into play in the amounts-owed part of the scoring. Simply owing money does not always negatively affect you score, though when your credit utilization ratio (the total dollar amount of revolving credit, usually credit cards and personal lines of credit, you currently owe divided by the total available credit limits of the accounts) is high, it can indicate that you are overextended and are more likely to default if you come into a financial hardship. 

For example if you have on credit card with a limit of $10,000 and owe $6,500 on that card you would have a credit utilization ration of sixty five percent. The higher your credit utilization ratio the great the impact it will have on your overall score. A good rule of thumb is to have a credit utilization ratio of thirty percent or lower.

Length of credit history (15%) — You can still have a high credit score if you haven’t had a long history of credit, but you’re doing well on all the other categories. Your length of credit history makes up fifteen percent of your total score. Typically, the longer you have had credit accounts the more positively this will impact your overall score. The average time that each of your accounts has been open will help to determine  your overall length of credit history.  Having a longer credit history provides more information to base lending decisions on for potential lenders.

Credit Mix (10%) — When it comes to credit mix, think about diversity. Having a variety of types of credit accounts can have a positive effect on your credit score. It is not necessary to have every type of credit account available, but a few different types of credit will show that you can manage a mix of account types. It will be okay if you are just starting out or do not have a variety of forms of credit. Your credit mix is ten percent of your combined FICO® Score.

New Credit (10%) – Last but not least, the final ten percent of your FICO® Score is made up by evaluating your new accounts and account inquiries. It has been shown that opening numerous new accounts in a short period of time can indicate a financial problem and may indicate a greater likelihood of future default. It is not just a new credit account that will impact you but also the credit inquiries. When you are shopping for new credit, the lender will report an inquiry regardless of whether they issue credit. These inquires will remain on your credit report for the next two years and can negatively affect your credit score for the next year. Consider this whenever seeking to obtain new credit.

 Knowing more about how your credit score is calculated can help you maintain or build a better score. Think of your credit score as a way of explaining your combined history of credit to a lender who knows nothing about you. Your credit score is simply a risk score, a risk of how likely you are to repay a lender. The higher the score the more likely you are to repay them. A lower score may indicate the opposite, and this can make it more costly for you to borrow money (riskier loans charge higher interest rates). Having a higher credit score can help you save thousands of dollars over the course of your lifetime.

In the case of credit scores, knowledge can be power. Tell me your stories and your thoughts by leaving a comment below. Let’s have a better money conversation.

Understanding Your Credit Reports

You credit can have a major impact on so many aspects of your life, and it is important that you know what is on your credit report and how to manage it. Understanding your credit can appear complicated and challenging; however, it can also be a powerful tool. In this three piece series we will go over understanding your credit report, understanding your credit score, and establishing your credit.

Our credit plays a big part of our daily lives. Sometimes we do not realize this until someone starts asking us about it. Our credit determines our cost of lending. Essentially, credit effects interest rates, the price and ability to obtain insurance, housing opportunities, and our ability to obtain certain jobs. While credit can and should be used to improve our financial well being, many people struggle with excessive debt obligations because of the mismanagement of their credit. Using credit wisely is the key to assisting you to a world of possibilities.

You should be checking your credit at least once a year from each of the three major credit reporting agencies: Equifax®, TransUnion® and Experian™. You should also check your credit report anytime you think that your information may have been compromised.  Each of your three different credit reports most likely will have slight deviations, but on the whole each should be relatively similar as most major lenders report to all three agencies while some of the smaller agencies and collection companies may only report to one of the three.

Photo by John Schnobrich on Unsplash

To get started, you will need to pull your credit report from each of the three credit bureau reporting agencies listed above. You can access all three agencies at one time through sites such as www.annualcreditreport.com, which provide a free credit report from each of the three major credit reporting agencies. You can also get your credit report through many credit card providers, which provide monthly credit report tracking tools for free as long as you have an account with them. These programs vary by company and usually only provide access to one of the major credit reporting agencies, but they are useful tools for tracking and learning about your credit.

Once you have access to your credit reports it’s important to understand the information on them. Your credit report is typically divided into categories consisting of your Identifying information, credit inquiries, public records, and account information.

Identifying Information

                The identifying information on your credit reports is essentially all your personal information, including:

  • Name, known aliases, and previous names (these may include maiden names, other married names or nicknames; for example, if your legal name is Stephen but you go by Steve, then Steve will also be listed)
  • Social security number
  • Date of birth
  • Current and former addresses
  • Current and former phone numbers

The purpose of the identifying information section of your credit reports is to verify the information you have provided and to look for any warning signs or red flags regarding incorrect information. The information should be reviewed carefully to ensure that your identity has not been confused with someone with a similar name or a relative with the same name. You may be able to tell whether you have been a victim of identity theft.  Should you find a discrepancy in any of the information on your credit report you can file a dispute or an update to change it.

Inquiries

                In the inquiries section of your credit report you will find a listing of creditors and other companies that have requested your credit report over the past two years. There are two types of credit inquiries, soft and hard inquiries.

  • Soft inquiries are a result of companies purchasing or obtaining your information for promotional purposes or a current creditor checking your account on a regular basis.
  • Hard Inquiries are made when you have applied for credit through a financial institution. Close attention should be paid to any unauthorized hard inquiry as it could be a sign of identity theft. These inquiries can also negatively affect your credit score.

Public Records

Photo by Alexander Mils on Unsplash

                The public record section of your credit reports will display financial activity such as foreclosures, bankruptcy, tax liens, and civil judgments against you. Ideally, you want this section to be blank as anything displayed in this section can penalize your overall credit score.

Account Information

                Your account information is where you will find the specific details of your account history. This will likely be the most significant portion of your credit profile. It is here that you will find the specific details of your credit history from current and past creditors. Each creditor will have their own section containing information regarding:

  • Payment history
  • Credit limit
  • Dates accounts were opened and closed
  • Most recent payment amount
  • Current balance

If the account has not been managed properly the account will reflect this in the history, including current or previous late payments, and cases where accounts have been closed by the grantor or even transferred to collection.

Understanding how to read your credit report is a start, but you need to know your rights and resources, as well.  The Federal Trade Commission, which protects consumers by preventing unfair, deceptive or fraudulent practices in the marketplace, enforces the Fair Credit Reporting Act and Accurate Credit Transactions Act, with which the credit reporting agencies must comply. Accordingly, you have the rights to:

  • Be told if information on your credit report has been used against you, such as being declined for credit or employment due to information obtained from your credit report.
  • Know what is on your report and having free access to your credit report annually. You also have the right to view your credit reports should you believe that you are a victim of identity theft or fraud, and if you are on public assistance or unemployment.
  • Request to see your credit score, though you will have to pay for it.
  • Dispute incomplete or inaccurate information, though the credit reporting agency must investigate should your dispute be frivolous.
  • Have inaccurate, incomplete or unverifiable information corrected or deleted by the credit reporting agency within 30 days of being notified, though they can and will continue to report should they confirm that it is accurate.
  • Remove most negative information from your report after seven years and remove bankruptcies that occurred more than 10 years ago.
  • Limit access to your report to those with a legitimate business interest .
  • Privacy regarding credit reports, wherein a credit reporting agency may not provide information to employers without written consent.
  • Opt out of “pre-screened” offers of credit and insurance by calling the nationwide credit bureaus at 1-888-5-OPTOUT (1-888-567-8688).
Photo by Romain V on Unsplash

Another great resource for understanding you rights is the Consumer Financial Protection Bureau. They regulate the offerings and provisions of consumer financial products and services under the federal consumer financial laws. This is a great site to visit for additional information that will help you to become a better informed consumer of financial products and services, such as lending and how it relates to your credit.

Your credit reports are a record of your borrowing history and how you have managed your financial obligations. Knowing how to read your credit reports is an important step in helping yourself understand how to better utilize your credit to help you succeed financially and ensure that you are protecting yourself from identity theft and fraud.

Tell me your stories and your thoughts by leaving a comment below. Let’s have a better money conversation.

Protect Yourself From Financial Fraud: Five Ways to Start Protecting Yourself Today

Protecting yourself from financial fraud is not the easiest thing to do, but it is an important part of saving yourself a lot of time and headaches down the road should your financial information ever be compromised. The fraudsters and scammers are getting better and bolder in their approach to taking your money, using phone calls, skimmers, and hacking.  Cybersecurity issues are becoming a daily struggle for businesses; thousands of customers’ information can be compromised in a matter of seconds, including yours. The more often we make our information available, such as through purchases with retailers and other companies for goods and services, the greater the risk having our information being stolen. It is important to take the necessary steps to protect yourself from financial fraud.

There are several ways to protect yourself and your information from financial fraud. Here are five ways you can start protecting yourself today:

Review and monitor all of your accounts regularly

Photo by You X Ventures on Unsplash

                Take the time to log in and review all of your cash and credit accounts on a regular basis. Monitor the transactions that are coming through your accounts. A general rule should be that the more you use an account, the more that you should be monitoring that account to help you catch fraudulent charges quickly. The longer that you wait to review your account transitions, the better the chances of a fraudulent charge going undiscovered.

Sign up for alerts on all your accounts

                Almost all financial institutions offer account security alerts that will allow you to receive text messages or emails in real time based on specific scenarios under which you would like to be notified. Some examples include logging in to your account from an unknown computer or device, charges outside your normal spending habits, and low balance alerts. Currently many financial institutions offer security alerts for account usage from outside your geographic area. For example, should your account have a transaction in New York while you are at the gas station in Los Angeles, security alerts can notify you via text and email of the discrepancy and ask whether you made the purchases and allow you to reject fraudulent purchases immediately.

Never use debit cards for online purchases

Photo by Markus Spiske on Unsplash

                No matter how safe you are using your credit card or debit card, there is no way to be absolutely certain that you can avoid credit card fraud all of the time. You can limit your exposure to fraudulent charges by paying with the right card. Most major credit card issuers offer 24-hour fraud protection and identity theft assistance to catch fraudulent transactions as quickly as possible and limit interruptions to your credit card use as possible. Most credit card providers also guarantee the cardholder will not be liabile should a fraudulent transaction occur. However, should you be using your debit card that is attached to your checking account and your information is compromised, the accounts that you use to pay your bills could be drained before you realize the fraud is happening. A Regulation E claim can be filed with your financial institution to dispute such charges, though this can take several days or weeks to be resolved, leaving you without money to pay your bills in the meantime.

Change your account passwords on a regular basis

Your passwords are an important link between accessing your finances and keeping you financial data safe. Changing your passwords frequently reduces your risk of exposure should there be a breach with one of the companies you use or should you unintentionally provide it to a fraudster.  Changing your password regularly means that even if an old password is discovered, it will no longer be useful.

Also, do not use the same password for different logins with different companies, should someone gain access to your information they would be able to use it on other sites including but not limited to your email.

Check your credit

You should be checking your credit at least once a year from each of the three major credit reporting agencies: Equifax®, TransUnion® and Experian™. You are entitled to one free credit report from each of the three major credit reporting agencies every year for your review.  This does not entitle you to a credit score, which will come with an extra cost. However, many credit card providers provide monthly credit report tracking tools free for as long as you have an account with them. These programs will vary with every company but are a useful tool to track and watch your credit profile.

Photo by Jon Moore on Unsplash

There are also credit monitoring services, which, for a monthly charge, alert you instantly of all activity relating to your credit, provide all updates from your creditors, and even lock your credit completely. Assisting in detecting suspicious activity early can help identify unauthorized queries and prevent financial fraud or identify theft.

Take the time to protect yourself and others, know how to recognize the top scams, and report suspicious activity that could be financial scams and fraud to your state consumer protection offices.

Tell me your stories and your thoughts by leaving a comment below. Let’s have a better money conversation.

Finding The Right Checking Account For You

Picking a checking account seems like an easy process. With so many financial institutions pleading for your attention there have never been so many options. From your local neighborhood credit union, big banks, small banks, and even completely online banks, the choice is yours, and there is almost no wrong decision. With all these choices, however, picking the right checking account for you and your family’s individual needs can be overwhelming and confusing.  With only slight differences between the institutions and so many types of accounts available to us now, there are a few things to consider in order to choose the right account for you. The key to choosing a checking account for you is to narrow your options by financial institution and then by the services you need or will need in the future.  

Photo by Kat Yukawa on Unsplash

Start your journey by narrowing down your options. Review your prospective banks and credit unions reputations. Consider how these institutions treat their customers through different review platforms like the Better Business Bureau, their geographic footprint, and the ease of access to your money such as through free world wide ATM’s. Once you have a few institutions in mind, review the services that they provide, keeping in mind your financial goals and priorities, as well as the institutions’ discounts, incentives, and fees.  

It will be useful to know a little more about discounts and incentives. Many financial institutions offer discounts to customers when their business also banks with them or when they set up direct deposit, maintain higher balances, or have a combination of products and services, which may include direct deposit, multiple accounts, investments, and/or loans. Sometimes incentives and discounts include fee waivers or favorable interest rates.

It is also important to understand the fees that could be accessed to your checking account and how much each of these fees may cost you. Some of the most common fees that are accessed to checking accounts include:

Overdraft fees: These fees are charged when a payment or withdrawal exceeds the available balance in your account and when the payment or withdrawal is covered by the bank despite the lack of funds.

Monthly service fees: These fees are charged when you do not meet one or more of the minimum requirements outlined in your contract. These can include, but are in no way limited to, a required direct deposit, a stated number of debit card transactions, or a select number of products or services required with the financial institution.  

Photo by rupixen.com on Unsplash

Minimum balance requirement fees: These fees may be assessed every time the account drops below a certain dollar amount or when the average monthly balance falls below a specified amount.

These are not the only fees out there but only a few of the most common fees associated with checking accounts. It is important to know what fees could be charged prior to entering into a contract with a financial institution and how to avoid them.

Your checking account should be used only to hold the money you are using for paying bills and making your daily transactions. Any excess money that you have sitting in your checking account is money that is not working for you. You may qualify for additional discounts on your checking account by also opening a savings account adding to your overall average balances. At the same time, putting the rest of the money that you’re not planning on spending into a savings or money market account will provide you with instant access to your funds while also allowing your money to grow. Even with interest rates at an all-time low, your money can grow more if you separate it from your everyday checking funds. Plus, as you see your savings grow you may be more inclined to rethink  and forego unnecessary purchases.

It’s important to know all that you can about your account when you open it. It is also important to pay close attention to the emails and letters that you may receive about changes to your account. Just because you fully understood what you signed up for doesn’t mean that the financial institution won’t change the terms and conditions at some time in the future.

Photo by Green Chameleon on Unsplash

When it comes to our finances, each of us is unique. Take the time to educate yourself and find the best account for meeting your needs, and talk with your financial representative to help you find the best fit.

Tell me your stories and your thoughts by leaving a comment below. Let’s have a better money conversation.

Dollar Cost Averaging to Build Your Wealth.

The strategy behind dollar cost averaging consists in making regular contributions of a set dollar amount towards the same fund or stock over a long period of time regardless of the market conditions in contrast to investing a lump sum all at once. Many of us are already doing this in our retirement plans, as we are setting aside a percentage of our income towards our retirements. That money is then invested in the funds that you or your plan administrator has selected for you inside your retirement plan. This form of investing allows you to purchase more shares when prices are low and fewer shares when prices are high, averaging out the cost of your investment.

Photo by Michael Longmire on Unsplash
DatePrice Per ShareSharesCost
April 1st$20.0050$1,000.00
May 1st$15.0066.66$1,000.00
June 1st$10.00100$1,000.00
July 1st$1855.55$1,000.00
Total:272.22$4,000.00
Average Price Per Share:$14.69

Let’s see how it works. Consider investing $1,000.00 per month over the next four months into a fund with relative volatility. The first month you invest $1,000.00 at $20.00 per share purchasing 50 shares, the second month the price is down to $15.00 per share where your $1,000.00 purchases 66.66 shares, the third month the price is down to $10.00 per share and you obtain 100 shares, the fourth month the price is now $18.00 per share and your $1,000.00 equates to 55.55 shares. In total over the four months you have purchased 272.22 shares spending a total of $4,000.00, dividing the cost by the total number of shares your average price per share is $14.69. See further examples with dollar cost averaging the S&P 500.

Broad diversification of your investment portfolio being one of the most important things that you can do for your investments, think of dollar cost averaging as the diversification of time. By diversifying your investment over a select time period, it reduces the risk that you’re investing at an inopportune period of the market.

If you are thinking that it would just be better having purchased all the shares at the $10.00 value, you are right it would have been. However timing the market for the average investor is a sucker’s game, even with all of the information available these days there is no way to know when the market will go up or down and by how much. Dollar cost averaging may not be the most effective investment strategy when looking for total return verse that of investing a lump sum at one moment but most of the world does not have large cash reserves sitting around to invest in one lump sum. Dollar cost averaging is one investment strategy to adopt to ensure that some of your savings goes to work for you.

Photo by Carlos Muza on Unsplash

Most importantly, the practice of dollar cost averaging creates a good habit of investing for your future. Every dollar that can work for us in the longer time horizon the more secure we will be in the future when we need the money. Leave a comment below and let’s start a better money discussion.

Demystifying your 401(k), IRA, and Roth IRA

With so many options and so much noise when looking at different retirement programs let’s take a look at demystifying the three of the most common types of retirement accounts. Not so fun facts: According to Northwestern Mutual 1 in 3 Americans have less than $5,000 in retirement savings with one in five having no retirement savings what-so-ever.  Most advisors will recommend that during retirement you will need seventy to eighty percent of our preretirement earnings to maintain our current way of life before entering into retirement. The largest consideration of that number is if you have your home paid for or not. To avoid working, literally, for the rest of your life it is important to know where you can put your money to help you prepare for the golden years ahead.  

Traditional 401(k):

Photo by Anukrati Omar on Unsplash

The most popular form is a “defined contribution” retirement plan, more generally speaking this is a retirement plan where the employee, employer, and or both parties contribute a specific percentage or dollar amount of their income towards the employee’s retirement. Contributions are excluded from the employee’s gross income on a pre-tax basis, that is before taxes are accounted for on your check, and grow tax deferred until the funds are withdrawn during retirement, so you do not pay taxes on the money until you start collecting your retirement.

This should be the first place that you place your money when this option is available to you as part of your employer’s benefits, plus you will have the money come directly out of your paycheck and that is making savings automatic and easy for you.  On top of that, most employers offer a match of a certain percentage of your income and you should always contribute enough to participate in the full match. Let’s repeat that, if you are not able to contribute the maximum amount to your 401(k), contribute at least the amount that your employer is matching. If you are not participating to the full match you are giving up free money. For example, if you are making $48,000 per year and your employer matches 3% per check, getting paid twice a month at $2000, your employer is giving you $1,440 per year as long as you are putting at least that much in your 401(k) as well. Over time those funds will compound and grow.

For the 2020 tax year the IRS limits of contributions to your 401(k) plan are capped at $19,500 and $26,000 for those 50. The difference over 50 is called catch-up contributions, and regardless of how much you have saved, that limit is available for all individuals over 50 participating in their employer’s 401(k) plan. It’s important to remember that even a little bit of savings helps and if your employer is offering a 401(k) plan, participate.

IRA:

IRAs were made to encourage individuals with earned income to save for retirement in addition to other retirement plans they have. Also known as traditional IRA accounts, all deposits made to your IRA are made on a pre-tax basis and grow tax deferred until the funds are withdrawn during retirement, age 59 ½ or older, similar to that of your traditional 401(k) plan. The funds placed into an IRA account are still available to you should you not wait to retire however, there is a ten percent additional tax penalty for early withdrawal prior to age 59 ½ with a few exceptions.

Photo by Austin Distel on Unsplash

For the 2020 tax year the IRS limits of contributions to your IRA are capped at $6,000 or the amount equal to your taxable compensation for the year if less than $6,000. However if you are age 50 or older you are eligible to add an additional $1,000 “catch-up” deposit to your annual contributions. The good news is this year as of the 2020 tax year, there is no longer an age limit on making contributions to your IRA as long as you are still having earned income, however you must begin taking minimum required distributions the calendar year in which you turn 70 1/2, you are born before July 1, 1949 and 72 ½, if you are born after June 30, 1949.

There are several different choices in investment vehicles within your IRA depending on what type of account you opened and your risk profile. Most banks and investment institutions have basic IRA savings accounts or CD’s where your retirement money can sit in FDIC insured accounts or brokerage accounts that will allow you to invest. Whichever way you choose is right for you, but please seek the advice of a professional and educate yourself in your choices.

Roth IRA:

A Roth IRA allows the same contributions amounts as the traditional IRA. The total maximum amount that you can deposit to your IRAs, traditional and Roth is capped at $6,000 and $7,000 for those 50 and older total combined.  

The difference between the two comes in the timing of the tax benefits. Opposed to the traditional IRA pre-tax dollars that lower your taxable income this year growing tax deferred, the Roth IRA is funded with post taxed dollars that are not taxed at the time of withdrawal during retirement.

Roth IRAs have no required minimum distribution at any age at this time, but there are limits to the income that you make to if you can contribute. The income eligibility as of the 2020 tax year if single, head of house has income limits of less than $124,000 and if married filing jointly less than $196,000. This is a great vehicle for your money as well when saving for retirement, especially if you believe that your taxes will increase in your retirement years.

Not one or all of these are created to be your only tool for retirement, remember saving now will allow you to enjoy retirement latter. Saving as much as you can now will give your funds more time to grow, taking advantage of compounding interest and market growth.

Regardless of your approach, tell me how it is going and let’s start a better money discussion. 

Your Interest Rate Doesn’t Matter. It’s All About That APR

Interest rates have seen a steady decline of the past year and with the recent cut by the Federal Reserve they are now hovering around the lowest rates in history. With rates being at an unprecedented low in the United States and around the world, borrowing is at an all-time high as individuals rush to purchase and refinance large items at today’s record low rates. If you are considering purchasing or refinancing a large item that you must finance it is important to know the difference between interest rate and annual percentage rate (APR) to get the best loan available to you.

Photo by Precondo CA on Unsplash

Interest Rate is the annual cost of borrowing the principal amount of the loan. Most often this will be the advertised rate that you will see lenders providing to the public in large bold numbers. However, when reviewing you loan documents you will often find a different rate, that of the APR.

Photo by Volkan Olmez on Unsplash

The APR is calculated separately of the interest rate and is the combined cost of interest on the principal plus the cost of other fees that you might be paying as well. For example: most mortgage companies have an array of fees that often are reflected in your APR but not your interest rate such as a loan origination fee, documentation fees, discount points, closing cost, and borrower paid mortgage insurance. These fees must be displayed in the APR according to The Truth in Lending Act. The APR is a more true reflection of the total loan cost and will allow you to shop loans in a more apples to apples comparison being a more precise means of determining the accurate cost of a loan.

You must be diligent when shopping for a loan, many times you will hear a lender quote the interest rate or even quote a discounted interest rate only to fine large fees or “points” hidden to get you that super low interest rate that they quoted you. When comparing loans pay close attention and compare the APR to decide the least expensive loan.

Please leave a comment below, I would love to hear your stories, answer your questions, and have better money conversations.

Put Your Returns To Use

It’s that time of year again and with returns coming in the millions every day so are those returns being sent back to you. With the average return at $3,200.00 so far this year as of February 28th, according to the IRS.gov, what can you do to get your best return on investment with your tax return?  However you approach your tax situation, if you are getting something back this year you should view the money as an unexpected windfall that you were not expecting and put the money to use for you.  Three great strategies include:

Photo by rupixen.com on Unsplash

Paying of your high interest debt:

The more debt that you carry, the more money you are taking away from your future self, if that is six months from now or forty years, if you are carrying balances month over month you are depriving yourself of future resources.  Using this year’s tax returns to pay off your high interest debt should be your number one priority. Not only will paying off your higher interest debit provide your future self more financial stability, it could help improve your overall credit score by reducing your revolving available or credit utilization. With a better credit rating you can help yourself to lower loan rates in the future as well. 

Funding your emergency savings fund:

In basic financial advising we learn that clients should establish an emergency savings fund equal to three to six months of their living expenses.  Savings for your emergency fund is one of the most important concepts in financial advising.  Too often, an individual’s finances are ruled by their emotions and biases, we often overlook the boring future of saving for a rainy day when we can get instant gratification (something now). Unfortunately, no one can predict when an emergency situation might pop up, from the car breaking down to a medical emergency of yourself or a loved one; and if you don’t have the money set aside you may have to charge the expense on high interest credit cards or shuffle other bills around so that you can get back to work to pay those expenses off. Putting your taxes towards your individual emergency saving fund is a great idea.

Contributing to your retirement:

Funding your retirement each year is probably the most important thing your can do for your future self financially. Since you are treating your tax return as an unexpected windfall, using that money to contribute to your retirement will have your future self reflecting on how smart you truly are. While rates of return may fluctuate on your retirement account, the sooner you start, the more your money will compound, leaving you a bigger pile of money when the time comes to retire. With so many different types of retirement plans available to you it is important to do your research and talk with a professional advisor or your accountant when starting out to help find the right plan for you. 

Photo by Aaron Burden on Unsplash

Keeping your long term goals in mind when making financial decisions is imperative, how you plan and prepare for your future is essential to creating a better outcome. Create and follow your budget and set your goals.

Regardless of your approach, tell me how you approach you taxes and your returns. Start a conversation and lets have a better money discussion.  

Starting Your Savings in 3 Easy Steps

Having a positive attitude towards savings is one of the greatest behaviors that you can have around your finances. In basic financial advising we learn that clients should establish an emergency savings fund equal to three to six months of their living expenses.  

Photo by Fabian Blank on Unsplash

Savings for your emergency fund is one of the most important concepts in financial advising.  Too often, an individual’s finances are ruled by their emotions and biases, we often overlook the boring future of saving for a rainy day when we can get instant gratification (something now). Unfortunately, no one can predict when an emergency situation might pop up, from the car breaking down to a medical emergency of yourself or a loved one; and if you don’t have the money set aside you may have to charge the expense on high interest credit cards or shuffle other bills around so that you can get back to work to pay those expenses off. The good news is that wherever you are financially, you can begin saving in three easy steps. 

1) Begin your budget / know what you can do and what you need

Knowing and executing your personalized budget is one of the keys to your financial success.  You want saving money to be fun and rewarding, as your balances increase they will become something that you can be proud of. Recognize and celebrate the milestones that you accomplish. 

Photo by Fabian Blank on Unsplash

2) Have a specialized account

Have an account at a second financial institution that is just for your savings. If you are loyal to your bank or credit union, or if you get special pricing or discounts where you are you can even go as far as removing your specialized savings account from your online banking so that you are not tempted to move the money when the budget gets tight. 

3) Move the money / make it automatic

Pay yourself first, save time and your money by making savings automatic. Set up an automatic transfer, have a separate direct deposit from your paycheck, make it a game each time you spend on something that may bring you guilt (that $8 gourmet coffee) transfer the equal amount to savings.  

Photo by Tyler Lastovich on Unsplash

At first, it doesn’t matter how much you are saving as long as you start. As time goes on and you have a good handle on your savings it’s time to crank down, reanalyze your budget.  A good motto I learned years ago is “save until it hurts”. Continue to contribute to your savings, in some manner, until your financial life is feeling tight. Focus on the process and the outcomes will take care of themselves. 

Start your savings and let me know how it’s going.

Basics for a Budget

We are in a world where we have immediate access to our balances with our smart phones and online banking many of us have stopped budgeting taking the mentality of if there we can spend it and hope that we can make it to the next paycheck.  We are in a place where a report on the economic well-being of U.S. households by the Federal Reserve states that 4 in 10 adults would have difficulty covering a $400 emergency expense. Create your budget and begin to take control of your financial life.

Photo by StellrWeb on Unsplash

Creating and sticking to a budget is what my most successful clients attribute to their financial success. Having and sticking to a budget puts safeguards in your financial life to help ensure you will have the money you need for the emergencies that arise and for your desired financial life.

What is a financial budget?

As defined by Merriam-Webster dictionary, a financial budget is “a plan for the coordination of resources and expenditures; or the amount of money that is available for, required for, or assigned to a particular purpose.”  In simpler terms, this means having a plan for all of the money you make. Everyone has their own beliefs on how to budget, but it really comes down to figuring out the method that works best for you.   The simplest way to begins is with this equation: Income – Expenses = +/- savings. The income you make less the money you spend equals the money you save from savings or borrower from savings or other debit instruments.

What is your budget’s purpose?

The first thing in knowing what you are doing is why you are doing it. What are your goals? What do you want your money to do for you? What does your money represent? Are you working for your rainy day fund, paying off debt, a car, a home, retirement? Place these financial goals in writing, write down the why behind each the more detail you can create behind these goals and actually see in writing the more likely you are to stick to them. When starting out on your goal being realistic in what you are saving for in relation to your income within a specific time frame is going to help start the process.  Once you have a clear vision on what you are budgeting for you can set up your budget.

Photo by Tierra Mallorca on Unsplash

 What information is needed to create a budget?

Setting up your budget will be the easiest part of the process you will need to know your income, expenses and what you will need to add to savings to reach your goals.

Income. Truly knowing your income, this is your inflow in the income equation, for some this is an easy equation and doesn’t change much from month to month. For others, there may be variation and volatility in their incomes if it’s based on tips or commissions, here I recommend that you track your last two years history to look for seasonal trends. For your income section of the equation, use your net income, what you actually receive into your account after taxes and other items are removed from your pay.

Expenses. Today, it’s relatively easy to see where your money is going thanks to digital banking. Track every dollar with the use of online banking to make things easier many banks have budgeting tools or allow you to download your budget directly to an excel platform where you can get a clear picture on your most common expenses.  Once you have a clear picture where your money is going you can see any irregularities and where you can cut expenses to move towards a saving mindset for your financial goals that you have set.

Savings. Now that you know the answer to the question of how much you have left, it’s time for the hard part, following your budget. This is why you wrote down clear concrete financial goals that you are striving for.  Start with paying yourself first with the money that you budgeted to your goals. Every dollar counts.

Photo by AbsolutVision on Unsplash

Track and review the process. You will need to continuously track your progress as you move through the process so that you can continually reevaluate your budget and make adjustments as you move along. It is best to review and plan out your next month’s budget before the next month begins. Also as time moves forward, hopefully, your income does as well, often your expenses change with time as well. While you continue to track your expenses and income, make adjustments, and begin to reach your financial goals take the time to reflect and realize your successes.

Let’s have a conversation, how can help each other find better ways to budget. Post a comment, provide a recommendation, or ask a question. Let’s learn together.