Some money management tips I learned by reading and watching Suze (pronounced Suzie) Orman. Please note, right up front, that I consider myself to be financially-challenged. I’m not a stupid person, but money management professionals and banks and investment companies all seem to delight in using terminology and obfuscation and Scary Big Numbers and Percentages and I get intimidated. I’d say I’m at the level where I know enough not to make mistakes I’ve already made, or those that are glaringly obvious (or cons), but not savvy enough to guarantee that I won’t blunder in the future if I chose not to take advantage of the free advice and education available to me.
In short, I am a Money Moron. Right now I am making a mistake that Orman warns against: going back to school (in this case, for an AS Paralegal) when you are not 100% sure what you want to do once you have that degree in hand. Point being, I’m racking up big expenses and loan debts, am not currently employed full-time, have no job offer lined up for me on graduation day, and so on. On the other hand, not knowing what I want to do and NOT having a degree that might get me a decent job while I figure that bit out…that isn’t much smarter. Career counselling didn’t clarify things. So here I am.
I’ll share what I’ve learned, but I am telling you (in the equivalent of nine-foot-high flashing neon letters) that it behooves you to check into these things yourself. Dude! I’m a stranger on Teh Intarwebz. Keep that in mind. All I can do is promise that my intentions are good and that I hope to help, or to spur you to get someone professional to help you. Consumer Credit Counselling services are, I believe, absolutely free. Or, if your parents are money-wise, ask to talk to their assets manager about planning for your own future. (Imagine how proud the ‘rents will be of you!)
First thing you need to do is utilize what’s called the FACT act. You can get your credit score FREE once a year. There are three main credit score reporting entities (e.g., Equifax). Your score may vary slightly between the three, and there may be errors in your report. To be frank, I’m not entirely sure if you can ask all three bureaus for a report free per year or if you must choose one and pay for the other two, or if you should poll one the first year, the second the second year, et cetera. That’s up to you. Your credit score should range between 450 and 850. Some banner adverts wanting you to give them click-through commission money set the lowest rung at 300, which I assume only makes those with 450 (the worst possible score) feel better about themselves…surely some poor schmo has an even lower score, right? As an example, 740-780 is a very decent credit score to have. A score in the 600s or lower? Not so good.
Why a credit score is important:
* The higher your score (better), the lower the interest rates you have to pay on loans and lines of credit. Interest rates basically require that you pay money that you will never get back and cannot profit from. Often they are unavoidable if you cannot buy a house, car, piece of property outright. You may find the convenience of having a credit card, even one you do not use, is worth paying an interest rate. Car loans and student loans have interest rates.
* Your future employer can see your credit score. A good one implies good things: you are frugal, careful with your money, responsible, prudent. These are qualities a boss appreciates. A bad credit score implies the opposite. This is particularly vital if your job requires you to deal with company funds, a corporate account, billing, taxes, et cetera. Even creative types may get a job that requires responsible use of funds to purchase office equipment, or a corporate credit card for travel. If you can’t handle YOUR money….
* Your relationships. In most cases, debt accrued prior to marriage remains your problem. The sticking point is, it indicates that you are not a responsible person. No matter how much in love with you someone is, hearing that you have severe debt or credit score issues is not a turn-on. If you want to buy a car or house together, your low credit score is averaged with your partner’s high credit score (or, in worst case scenarios, the higher score is actually thrown out altogether when determining what interest rates you’ll pay). Banks are less eager to issue loans to you and, by extension, your family. And who is going to pay the bills if you have learned nothing from your money misadventures and continue to use credit irresponsibly? You may think you’re too young to be bothered about worrying about getting married or buying expensive things. Okay…imagine the crimp in your spontaneity if your credit score is so horrendous that when you try to open an account at Hollywood Video (when you and your schmoopie decide on the spur of a moment to have a movie date night at home) and you are turned down.
* You contest a bank error or identity theft purchase. Your poor credit score will be considered relevant, and it will take longer for your complaint to be checked out, because, naturally, you could be desperate enough to be trying to pull a scam.
The most basic problem with having a crap credit score is that you’ll end up paying thousands or tens of thousands of dollars more (than someone with a decent score) for life’s necessities. If you can find a way to get them financed at all. In essence, you’re going to be fined repeatedly for carelessness, ignorance, poor money management, financial disaster you couldn’t do anything about, whatever it was that precipitated your credit score problem. In short: FIX IT.
Suze Orman also urges young people to invest in the only truly undervalued resource available these days: the young people themselves. Stocks, property and land are no longer undervalued, generally speaking, and buying low and selling high and making a fortune is far more difficult, if possible at all. You, however, are your own best, and a unique, asset. Orman urges young people to focus on Career Building.
One way to improve your credit score is to manage credit offers wisely. Conventional wisdom says that you should close all cards but the one you use. Because of something called a credit-to-debt ratio, this can be deadly. Let’s say you have five credit cards, all with $2000 available credit. You’re only using one, and it is maxxed at $2000. You may think it would be wise to close the unused four cards now. It’s not. As it stands, you have $10K in available credit, and are only using $2K. That gives you a credit/debt ratio of 20%. If you close the other four cards, your credit/debit ratio is suddenly 100%. You now have only $2K in available lines of credit and you are maxxed out at $2K. Bad idea.
Another trap to watch out for is closing older lines of credit in favor of newer ones. Let’s say you got your first $2K card ten years ago, the next 8 years ago, the next 6 years ago and the last two four and two years ago respectively. If you close down all but the most recent credit card, you have erased ten years of your credit history on your report. This assumes that you established a credit line at all. Just having a card doesn’t show credit worthiness. You must use, pay off promptly, and then LOCK AWAY cards you plan to use to establish a good credit rating. Don’t carry them with you. If you want to go so far as to rent a safety deposit box (good for passports, heirloom jewelry, birth certificates, copies of car papers and house papers, et cetera), or a fireproof home safe, you can put the unused cards in there so you don’t have to fear impulse spending or theft. You should NOT carry them all around with you.
Another pitfall is applying for too many credit offers in a short amount of time. This raises red flags to people looking at your credit report.
Lastly, getting cards just because you can and collecting them is a bad idea. Not only do you risk financial ruin if the information is stolen somehow, a large, unused line of credit, after a certain point, is not in your favor. This is especially foolish if these cards require an annual fee.
Invest In Yourself as an Asset
If you have a job that you want to turn into a career, you must bite the bullet and put in your dues. That means coming in early, leaving late, not abusing lunch hours or breaks, not calling in sick all the time, coming in on weekends, dressing appropriately (as if you had the job you want), doing everything you are asked to do, looking around for other things you can do for the company, keeping office politics at bay by avoiding socializing while on the clock, avoiding chronic complainers, and by becoming indispensable. Know where the bodies are buried. Network laterally within your industry as well as upwards: seek mentors both within and outside of your company. Brainstorm new ways to make your boss or company look good. You must make your boss dependent upon you before you, as an undervalued asset, become valuable. Prove yourself and continue to prove yourself. Love what you do, and focus on that rather than solely money. Working in hope of a reward is never going to satisfy as much as working at a job you feel competent at and which you care about and enjoy more often than not. The goal is to see work as being separate from your play time. Net surf at home. Call spouses and partners at home or when outside of the building on your lunch break. When at work, work. That is how you become an invaluable asset and you will be rewarded for it by rising within the ranks in a career you love.
Know, too, the difference between a Job and a Career. Jobs will feed, clothe and put a roof over your head, but they are not necessarily soul-enriching like careers are. Treating Jobs like Careers can burn you out. You must not make a decision about whether a Job is or isn’t a Career for at least six months or so, though (unless the fit is grossly wrong for you): work as if it IS a Career.
If all of this sounds deadly to you, that’s a sign that you are working a Job, not a Career (or Calling). Time to re-evaluate what you want, and what you feel you are meant, to do.
How To Invest Your Paycheck Wisely
One thing you should try to do is maintain your current standard of living even when your pay grade improves. This requires discipline and sacrifice. Obviously, if you are living below subsistence level and you get a pay rise, adjust to that. Once you have a decent, if non-extravagant, lifestyle, however, treat future pay rises as more money to invest in your future.
If you have an opportunity to put money into a 401(k) or 403(b) plan (403(b) is for non-profits), DO NOT PASS UP FREE MONEY. If your employer is generous enough to provide matching funds, contribute up to the level they will match. Then stop. If your employer does not offer matching funds, there are better investment strategies.
If you’ve contributed to your 401(k) or 403(b) up to the level of what your employer will match (remember, they are giving you FREE MONEY when they match what you contribute), consider paying down or paying off your credit cards. Start with those that charge you the highest interest rates per year. Do NOT close them if you want to establish a better credit/debt ratio.
After you have contributed up to the level of matching employer funds and paid down your highest interest rate credit cards, it’s time to consider a ROTH IRA. If you choose not to touch the IRA until you are 59 1/2 years old, then wait another five years, you can take out that money TAX FREE. If you have an emergency, you can withdraw WHAT YOU HAVE CONTRIBUTED penalty-free. You can’t touch the interest you have earned, but you can claim your contributed funds.
After you have funded your IRA to the maximum, consider saving for a down payment on your own home. Property is the best investment you will ever make. It appreciates in value, in general, far better than do stocks or interest-earning savings plans. It is perhaps foolish to do this without funding your 401(k), paying down your credit line debt and funding an IRA, as those are solid foundations for future investment healthiness and houses can be money pits if you aren’t careful. Establish your base first.
Buying A Home
The typical down payment on a home is 20% of its market value. Many people choose to pay 10% of that and finance the rest. “Normal” homes in “normal” real estate markets gain 4-5% / year in added value. That can be up to 40% / year return on your investment (if you are paying 10% down). Once you have owned the home for two years, up to $250,000 of appreciation is tax free gain. If you co-own the home, up to $500,000 is tax-free appreciation in value. A half million dollars. After your first $250-500K of tax-free appreciation, any further added value is taxed at a capital gains tax rate.
How do you know if you can afford to buy rather than rent? Many people make the mistake of thinking “if I pay $700 in rent, I can afford a $700 mortgage.” Often this is incorrect. (See: foreclosures.) Suze Orman recommends that you “Play House” for six months to see what you can afford. The first thing you should know is that hidden costs (PMI–more on this in a minute, insurance, property taxes and a fund for emergencies / basic maintenance / home repairs) typically add up to 45-50% to your monthly costs. So if you are paying $700 now in rent per month, assume you’ll be paying $1050 a month with a $700 mortgage. There are other hidden costs (your car insurance rates may go up, depending on circumstances) and not-so hidden (maybe you just can’t WAIT to get a new living room suite and TiVo now that you’re a Big Grown Up Person With A House). Some property owner headaches don’t reveal themselves until time has passed: a tree with roots that grow into your septic system, inadequate weather management requiring a HVAC system to replace window unit air conditioners and space heaters, dead birds in your chimney, pest control, lawn and garden maintenance, replacement of major appliances that die unexpectedly, chances in zoning or community regulations that require you to erect or tear down a fence or shed on your property, and so many more troubles you wouldn’t believe it. This is why a house fund is vital; ditto an inspector checking that your desired home is up to code and has no hidden problems (some you may opt to address when negotiating for the price of the house, choosing to accept a lower price in return for you taking on the burden of fixing the deficiency yourself or requiring the current owner to address problems before you sign on).
So. What can you afford free and clear? You’ve learned that $700 per month rent does not mean you can afford $700 per month for a house mortgage IF you’re struggling to survive on $700 rent now. Yes, you’re paying yourself, in essence, when you own rather than rent, but if you fall behind on your mortgage payments, the bank can seize your home and foreclose. Bad juju when that happens.
PMI, as mentioned earlier, is Private Mortgage Insurance. If, like most people, you don’t have $20 to put down on a house, you have to have PMI. Currently this runs at about $45/month PER each $100,000 you have financed. There is a little-known way to deal with your PMI in advance. More on this in a second. What you should NOT do when financing a house you can’t pay the full 20% down on is a piggyback loan. Many people finance 80% of thir mortgage through one lender and another 10% through another. (This doesn’t add up to 100% because it assumes you’ve paid the minimum 10% down typically allowed.) As interest rates are rising, a piggyback loan is a dangerous way to finance just to avoid the PMI. A smart way to deal with the PMI is to pay it up front. On a 30-year mortgage for $200,000, PMI up front is $2000. So, by offering to pay PMI up front, instead of a $200K mortgage, you have a $202K mortgage which adds only about $14/month to your mortgage as opposed to the traditional way, paying as you go, which would, in this example, be $90/month. As a bonus, it is tax deductible if you pay upfront, so pay it up front and be done with it.
I mentioned Suze Orman advising folks who want to move from renting to owning to “Play House” for six months. Essentially this is a low-risk way of proving to yourself whether or not you are ready for home ownership and can afford your dream house.
1. For six months, pay your rent on the first of the month. No exceptions.
2. For six months, put half of what you pay in rent into your savings and do not touch it.
That’s it. If you do it for six months, are NEVER late, even by one day, with your rent payment and if you don’t feel overly pinched in your lifestyle (ou can afford your basic needs as well as a reasonable amount of wants every month and are still socking money into retirement plans, paying off bills, socializing as you normally do, buying the same amount of groceries you normally do, and so on) then you are ready to own your own home.
Lastly, after you have your home and have lived in it without financial distress for a year, it’s time to start an emergency savings fund. This is an account, perhaps separate from your normal savings account, where you sock away enough money to live on for at least eight months. This protects you in case you are seriously ill, in case you lose your job, in case your family has a crisis, and so on. This isn’t your normal savings fund, it isn’t your household maintenance fund, it’s a separate fund to be used only if you need to keep your head above water during an emergency. For most of us, this is a pipe dream at the moment, but it is what Orman recommends once you have dealt with your retirement savings, your credit cards and other debts and have purchased a home.
Education and Debt
Is it worth going into debt with student loans to get an education? In most cases, YES. It’s getting so that even the most basic and menial and lowest entry-level positions require you to have a bachelor’s degree even to be considered. Even some blue-collar positions require advanced degrees and special training.
Get your degree to invest in yourself as a valuable asset. Become more marketable. Caveat: don’t go to school IN LIEU OF building a career just because you don’t know what to do. Why accrue more debt? (I’m guilty of this!) Some student loans are tax-deductable up to the first $25,000 you pay.
In short, you shouldn’t count on it being there for you. If you retired tomorrow, it would still not be there for you. It does not cover even the most basic survival needs. How do you save if you aren’t earning any money? First, invest in yourself, get a good start on your chosen career track and become indispensable. If the problem with Social Security worries you, consider taking a stance politicaqlly on what affects your future. BE AWARE of things that AFFECT YOU. Be proactive. Be informed. No one will care for you when you are older, or it is at least something you should not count on, so if you don’t get involved, you revoke your right to complain about the state of things later on in life.
Bankruptcy Doesn’t Make You Bad
You managed your money poorly or circumstances beyond your control led to your financial ruin and you had to declare bankruptcy. This doesn’t mean you are a bad person. You must not punish yourself for your mistakes. On the other hand, most people who declare bankruptcy once, declare it twice. Don’t be that person. Learn the financial lessons you need to know, ask for help from qualified professionals, and change your way of thinking about money.
A mindset that often leads to bankruptcy is feeling deprived. You feel you are entitled to nice things. You shop to fill emotional voids within, because you are sad, or feel ugly, or feel lonely or feel “less than” peers who have expensive toys that you do not have. You have to fill emotional voids in more self-affirming ways and practice delayed gratification. Frills and thrills in the now should not cost you security and luxury when you are older. Buy quality when you buy things that are intended to be around for a while. Cheap furniture, cheap bedding, cheap towels, cheap electronics: the cost of repeatedly replacing cheap quality goods is far more than buying a good quality, sturdy item at the start. You don’t have to have it all at once. Buy good quality pieces in stages. Consider reducing your possessions and collections. Shelving to house collections takes up space and costs money you could spend on other things. Anything you collect that is not worth the aggravation it would cause to move it to another place should be reconsidered. (I’m guilty of this: I hold on to a sizable collection of vinyl albums, for one.) Scale your possessions to the available storage you have, rather than buying more storage to house your possessions. If your collections don’t mean as much to you as they once did, but you keep them out of sentiment, consider selling or giving away all but a few of your favorites or most valuable. A well-chosen arrangement of things is more pleasing and has more impact than mere quantity of items, and is easier to display and enjoy and dust around.
When should you give? How much should you give? Do you consider yourself a charity?
When you give, it is a reflection of your values and a way to give thanks for what you do have. As a bonus, giving feels GOOD. Givers get a feeling of pleasure from their own generosity, and acknowledging that you are in a position to help others contributes to a feeling of personal power. That feeling of power and the warm glow that comes from helping the less-fortunate will color your inner views about your own situation positively. Decide what you can give each month, open-heartedly, and make a commitment to sit down at the first of the month when bills come due and make your donation to a charity you care about the first thing you do. The feeling of abundance you will have, giving to others in need, will make paying bills feel like less of a drudgery. You may not yet be rich, but you can still help others, so you can’t be poor, right? Your monthly donation does not need to be extravagant. If you can spare a dollar, give a dollar. Resist the temptation to give only when major disasters strike. Do it consistently. Also, don’t do it via automatic bank transfers. Physically write out a check every month and send it yourself, from an open-hearted desire to be helpful to others. If you can’t give money, give of your time. Donate clothes to the Salvation Army, books to the public library, pet toys from a deceased pet who can’t get any use out of them anymore to a rescue group, old computers and printers to non-profit groups, feminine hygiene supplies and new diapers to a battered woman’s shelter, board games and yarn skeins and knitting needles to nursing homes…use your imagination. It feels good helping others, and that good feeling, associated with money matters, will help you associate fiscal responsibility with positive feelings.
Cynical misanthrope? There are plenty of animal preservation charities, charities that fund the arts, Public Broadcasting, charities that help the homeless regain their dignity and shelter, charities that support your college or high school, charities that help with historical preservation, charities that promote literacy…whatever ignites your passions, be it politics, or children, or abused animals or certain environmental causes, there is a charity you will feel good about supporting. You can even donate anonymously if you fear getting spammed by requests from other charities. Buy a money order each month and sent it off anonymously. Pick a different charity each month and drop money orders in collection baskets, or library donation boxes, or buy canned food for food drives, pet food to animal shelters, or toys for holiday gift drives. Pledge to yourself to spent a certain amount each month and be true to your promise and do it before your money goes towards less life-affirming places (such as the cable company or utilities). Increase the sum total of joy in the world by doing small, but vital, things to help.
Investing in Markets
I won’t go into this, because it’s all new to me, but essentially you make a commitment that you’re going to invest $500 a month (or whatever) into certain mutual funds or investment groups. It’s recommended you get an advisor to help you when you first start doing this. Say you have five investment options you pay into each month. Resist the urge, at least for a while, to try to guess the direction of the stock market.
Assume you have a 14-year mortgage and a sudden windfall of $25,000. Your mortgage has a fixed rate (one hopes). It is likely that the interest on your mortgage loan is far lower than other expenses you could make. Assume also you plan to stay in your house. Take your windfall, talk to an investment counselor, and then chose the groups you want to invest in. Don’t invest it all at once. Divide your windfall money into equal amounts and buy the same amount of investment fund shares each month. This will average out better for you than if you paid off your mortgage.
Mutual funds and stock groups you can buy for $100 minimum:
iShares Dow Jones US Basic Materials (IYM)
iShares Dow Jones US Real Estate (IYR)
iShares Lehman Aggregate Bond (AGG)
iShares MSCI-EAFE (EFA)
Vanguard Total Stock Market UPER (VTI)
(I had Vanguard shares before and currently have a lot of Columbia shares, which aren’t available for $100 minimum buy-ins. Vanguard performed well at the time, if that makes a difference to you, and tends to be conservative (e.g., low risk, moderate potential reward, probably the best potential for maintaining portfolio value over the long haul).)
Let’s say you invest $500 a month into these five share groups (asset classes). The goal is to invest about 20% of your total 100% investment per share group / asset class. This means that each month you should rotate which asset class you buy stock from, trying to maintain a 20% division of funds per asset class. Don’t try to guess what will be “hot,” discipline yourself to rotate through all the asset classes. (This information comes from MSNBC financial information articles, and you can read more about each asset class and what you’re buying there. For example, basic materials (IYM) includes buying precious metals like gold, and others include foreign stock offerings along with US-only stock offerings.)
Lastly, MSNBC Financial wizards recommend investing inPIMCO Community Real Return Strategy Fund(PCRDX) once you can afford to buy in $2,500 minimum amounts. As with all stock advice, consult an expert, preferably one at your bank. I have merely the barest clue what’s going on with all this, I have not yet had a sit-down with my advisor to get educated (beyond the basics).
When you feel financially free, your spirit is free. You remove a huge area of stress from your life. I’m not there yet, but I’m striving to learn. I figured I’d share what I’ve recently read. Typing it in here helps me retain the information and makes it feel more accessible and understandable.