Category Archives: Budget

Your Credit

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“Your credit is a lot like your health. To keep it in good condition, you want to take care of it, minimize risk, watch for warning signs, and make responsible decisions.” Capital One

Credit consists of information about your borrowing and repayment history. It is a record of how you, as a consumer, has paid credit accounts in the past, and is used as a guide to determine whether you are likely to pay future accounts on time.

Good credit histories generate good credit scores and are rewarded by lenders with lower rates and favorable terms; bad credit can cost you.

Good Credit Habits to Practice Daily

To keep your credit healthy, here are four regular habits to practice every day, according to Experian:

1. Pay Your Bills on Time

The most important thing you can do to maintain a good credit score is to pay your bills on time. Payment history accounts for the largest share of your FICO® Score. To make sure you don’t accidentally miss a payment deadline, consider setting up automatic monthly payments for at least your minimum amount due. You should also consider reviewing your balance and making payments throughout the month instead of waiting until your bill comes due. This can help you avoid interest and make certain you don’t miss you don’t miss a payment. Remember: Any payment made more than 30 days past the due date can stay on your credit report for seven years.

2. Keep Your Credit Utilization Low

Credit utilization measures your credit card balances against your credit limits. Here’s how this works: Add up the credit limits on all your credit card accounts to find your available credit. Next, add up all of your credit card balances. Divide your total balances by your total available credit and convert to a percentage to get your credit utilization ratio.

When it comes to credit scores, the lower your utilization, the better. As a general rule, keeping your utilization below 30% will prevent credit score harm; those with the highest credit scores tend to have credit utilization ratios in the low single-digit percentages.

3. Check Your Credit Score Regularly

It’s always handy to know where your credit score stands and how it has changed: It helps you understand what effect your actions have in your scores. Beyond this, checking your credit score regularly can help you detect any problems that might be brewing and reverse course if you’re getting off track. If you’re in the process of improving your credit, a rising score is great positive feedback.

Checking your credit report periodically is also a good idea. Not only will you spot any negative or inaccurate information that might crop up, but you can also make sure there aren’t any new accounts you haven’t applied for—those may be a sign of identity theft.

4. Apply for New Credit Only When Needed

Having multiple accounts and a mix of credit types is good for your credit score. It’s a signal to lenders that you have the know-how to manage different types of credit.

But too many recent credit applications can be a drag on your creditworthiness. Each time you apply for a loan or credit, the lender runs a request for your credit report known as a hard inquiry. Although one hard inquiry on its own might result in a minor and momentary dip in your credit score, many recent applications can affect your credit more noticeably. A constant stream of hard inquiries—or a recent flurry of them—may cause lenders to view you as more of a credit risk.

When you do apply for new credit, make sure you understand your creditworthiness, and only apply for credit when you think you have a high likelihood of being approved.

Good Habits and a Healthy Outlook

Developing these four basic habits can help you keep your credit in good shape. In addition, monitoring your credit can help you track your progress and keep your goals top of mind.

  • Your spending habits—including purchases made with credit cards, as well as payments for insurance, car loans, utilities and cell phone bills—are the blueprint for your credit history and can make or break your reputation as a borrower.
  • Paying bills on time and in full is key to good credit and makes it easier for you to secure a mortgage, car loan or private student loan in the future. Regardless of how long you’ve had good credit, missed payments put a black mark on your report. On the other hand, a good balance of credit with consistent and timely payments can boost your score and keep it healthy.
  • Paying late or defaulting on payments is a red flag for lenders. If you have poor credit history, you’ll likely be seen as a risk and may not get a loan or credit card, or may be given one with a higher interest rate. Negative information and late payments remain on your credit report for seven years from the date of the initial late payment. The effects of these black marks on your credit score will, however, lessen over time.
  • And, you can’t hide debt or bankruptcy. Having too many credit cards and credit card debt affects your credit. And, bankruptcy does not erase bad credit history. Although declaring bankruptcy frees you from paying back all or part of your debt, the delinquent accounts aren’t deleted from your credit report. Instead, they’re added to show they were included in bankruptcy and can remain on your report between 7 and 10 years.

Terms like “credit history,” “credit report” and “credit score” are important to understand. They are three critical and separate entities that are directly related to one another.

  • Credit History: an unofficial record of your debts and repayments. You need a history of responsible credit use to establish a solid credit history and credit score. If you don’t establish and maintain various types of credit accounts, your scores won’t be as good as someone with a long history of responsible credit use.
  • Credit Report: an official record of your credit history collected from sources like lenders, utility companies, landlords and collection agencies, and compiled by the three credit bureaus, Equifax®, Experian® and TransUnion®
  • Credit Score: a statistically calculated numeric value indicating your creditworthiness based on the information contained in your credit report. While there are several credit-scoring formulas, FICO® (the acronym for Fair Isaac Corporation, the company that provides this model to financial institutions) is the most widely recognized. Scores range from 300 to 850, with under 400 typically indicating very poor credit and above 670 demonstrating you’re a responsible borrower. It’s important to understand that your income has nothing to do with your credit score and isn’t even reported to the credit bureaus

Credit scores are available for lenders, landlords and others to use in assessing if you’re a good financial risk to take on. Ranges of scores are often translated into quality ratings, such as good, fair and poor.

The amount you have in savings doesn’t impact your credit score or show up on your credit report, but chances are, if you have good savings habits and other good financial habits, you probably have a good credit score.

https://youtu.be/WL72pAZkiiI

The way you use credit can have a positive or negative impact on your credit (or FICO®) score. Each time you apply for credit, an inquiry is reported. Inquiries come in two forms: hard and soft. Both types of credit inquiries enable a third party, such as you or a lender, to view your credit report.

On the other hand, a good balance of credit with consistent and timely payments can boost your score and keep it healthy. Although credit is easy to use, you may hurt your score if you use a high percentage of the credit available to you. Here is how to keep your utilization rate low:

  • Use your credit cards wisely. Don’t use them to purchase more than you can pay off each month. Instead, set aside money each month to use for these purchases to pay your bill in full. For larger, more expensive purchases, save in advance so you can pay off the balance right away, thus avoiding high interest rates. “Used wisely, credit is an important tool in your financial toolbox,” explains Stefan Ross, vice president of credit card products at Fidelity. “Using credit cards in the right way can help you build wealth and get better loan terms.”
  • Control spending. It’s easy to spend $20 here and $40 there without thinking too much about it, which is how trouble starts. Keep track of your spending by reviewing your payment history online or saving receipts for one or two months to see where you can cut back.
  • Pay more than just the minimum. If you have credit card debt, paying just the minimum may cost you additional money. Paying the minimum may cover the interest only, which may be high for credit cards. You could spend years and thousands more than is necessary to pay it off, so increasing your payments may allow you to get rid of this debt faster.

Five factors determine your credit score: payment history, amount you owe, length of credit history, new credit and forms of credit.

  • Payment history. Although this is only one piece of your credit picture, it’s one of the most important. However, a good overall credit picture can outweigh one or two late payments.
  • Amounts owed. Owing money isn’t an automatic blot on your credit score. In fact, a healthy balance and timely payments can actually improve your credit score. However, if you’re using a high percentage of your available credit (which is called your credit utilization ratio or balance-to-limit ratio), it can indicate you’re overextended and a potential risk. Aim to keep your balances across all accounts below 30 percent of your available credit.
  • Length of credit history. A longer credit history generally will increase your scores, depending on how the rest of the credit report looks. Accounts paid as agreed remain on file for up to 10 years from the date of last activity.
  • New credit. Opening numerous accounts at one time can be detrimental to your score, especially if your credit history is short. That is because new accounts will lower your average account age.
  • Types of credit in use. Generally, your credit mix is more important if your credit report does

Source: myFICO.com.

The two most important factors on a credit report that make up the majority of your FICO score are your debt-to-available credit ratio, or credit utilization, and your payment history. So keeping your debt level low and making on-time payments help make you more attractive to lenders.the amounts you owe and your payment history.

A good general rule of thumb is your spending no more than one-third of your income on credit repayment—including mortgages, credit cards, and loans (e.g., car loans, student loans, and lines of credit) and track your spending to make sure that you’re staying within your budget. A budget outlines all of your income and your monthly expenses. This will help you map how much you have available to spend, and how much debt you can you can afford to take on and repay.

“If you don’t have the money to pay for an item now, you probably won’t have it after the credit-card bill arrives,” says Robin Holland, senior vice president for customer service operations at credit reporting agency Equifax. “We need to be wise about the use of credit. If you can’t pay for an item in a reasonable amount of time, you shouldn’t be charging it.”

Many people treat and think of a credit card as free money. Instead, you should think of a credit card as an unsecured personal loan from the bank that allows you to buy goods and services now and pay later. A wise consumer pays the balance in full each payment cycle and effectively uses the bank’s money interest free for about a month.

“Credit is a financial tool, debt is the financial problem.”

References:

  1. https://www.navyfederal.org/makingcents/knowledge-center/financial-literacy/understanding-credit/what-is-credit.html
  2. https://www.fidelity.com/viewpoints/personal-finance/credit-cards
  3. https://www.capitalone.com/learn-grow/money-management/use-credit-wisely/
  4. https://www.forbes.com/2005/12/19/creditcards-visa-mastercard-cx_sr_1226credit.html?sh=5fc49ee63879

Creating a Budget

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“A budget is telling your money where to go instead of wondering where it went.” John C. Maxwell

Spending within your means may sound like a simple rule to follow, but many Americans spend more than they save, which can result in debt. The good news is that it’s completely avoidable, and it’s reversible over time. With a little budgeting, planning, tracking and adjusting your spending, you can live happily within your means.

Keeping your personal finances in tip-top state does takes some planning, effort and time. Yet, many people live above their means and don’t even realize it. More than three-quarters of American workers (78 percent) are living paycheck-to-paycheck to make ends meet, according to survey conducted by Harris Poll on behalf of CareerBuilder in 2017. Thirty-eight percent said they sometimes live paycheck-to-paycheck, 17 percent said they usually do and 23 percent said they always do. 

To improve your financial health and money management awareness, the one piece of advice you hear most often from financial experts is to create a budget.

“Budgeting helps you better understand how you spend your money and shows you ways to manage your money, pay off debts and save for future financial goals.”

Budgeting is one of the single most effective tools for money management. Making a budget simply means examining your income and expenditures in order to determine exactly how much money you have coming in and where you’re spending it. Once you’ve got a clear understanding of your current budget – what income you’re receiving and what expenses you’re responsible for – take a closer look and find places where you can spend less.

A budget will help give you a clearer picture of how much money you have coming in (income) and how much is going out (expenses). It’ll set guidelines for your expenses that will help you understand how much you can set aside for those bigger ticket items like a house and long term goals, like saving for retirement or an emergency fund. A budget is a personal cash flow roadmap. It can span a week, month, quarter—three months—or any set length of time. They are created by individuals and businesses.

Begin planning your monthly budget by figuring out how much you have coming in versus how much is going out every month. Ultimately, you want to end up with a blueprint that specifically breaks down your cash flow (income minus expenses), so you know how much you can spend and how much you can save each month. Building a budget starts with a few simple steps.

Budgeting is Important

“When making a budget, the idea is to make sure your expenses don’t exceed your income.”

A budget is a foundational piece of a financial plan. If you’re serious about reaching your financial goals, making a budget and sticking to it can help you achieve them. Here are some of the benefits of making and following a budget:

  • Live within your means: If you haven’t been budgeting up to this point, you may often wonder at the end of the month where all your money went. It’s even possible that you’re running a deficit and taking on credit card debt to cover the difference. A budget can help you live within your means when you use it to set clear boundaries for your spending.
  • Pay off debt: Making a budget is about taking control of your finances. If you’re working to get out of debt, decide how to allocate your spending to prioritize paying more toward debt payments. For example, if you notice that you spend a lot on entertainment, you can set a budget to only allow yourself to spend up to a certain amount on that category. Then use the savings to pay down debt.
  • Save money: Long-term savings goals are also an important part of a personal budget. Think about setting aside money each month to save for retirement, a vacation or a home down payment. In the short term, make sure to save enough for an emergency fund. A budget can give you better control over how you spend your money, allowing you to cut back on spending and save more.
  • Reach financial goals: You likely have financial goals you’re working toward. But if you don’t have a budget, it can be tough to know where to focus your efforts and make meaningful progress. A budget can help you decide how much money to allocate for each goal to keep yourself accountable.

While these are general benefits of budgeting, take a moment to think about why you want to budget. Whether it’s due to a short-term need, long-term goals or simply to understand where your money goes, knowing your reasons for budgeting can motivate you to keep up with it.

Step 1: Look at your paycheck.

To create a budget, you first need to know your net monthly income, or after-tax income. This is your monthly take-home pay, not your total salary — an important distinction when figuring out how much you can spend on a monthly basis. Knowing this number is the first step to creating a spending strategy.

To start, make a list of all your sources of income coming in the door every month. Every paycheck you get. Maybe a regular side hustle. Do you get alimony or child support? What about income from investments? Everything.

Step 2: Distinguish your essential needs from your wants and discretionary spending.

Start listing your expenses. Start with the big stuff: rent, car payments or transportation, utilities, groceries, any debt payments you need to make — things like that. Now it’s time to make a list of your essential expenses. This involves separating your “wants” from the “needs.” Needs usually include things like:

  • Housing costs (monthly rent or mortgage payment)
  • Transportation costs (car payment, fuel, public transportation)
  • Utilities
  • Food
  • Insurance
  • Internet, cable, and phone bills

Once you’ve tallied those costs, add them up and deduct your needs total from your after-tax income. Make note of that number. What about everything you spend money on that you like, but maybe don’t need? Eating out, entertainment, that new pair of shoes. Add those as a list to your expenses. Treating yourself is great! But you want to do it within your budget.

Step 3: Calculate how much your wants cost you.

Next, outline all the things you spent money on that don’t fall into the “needs” bucket, and tally up the total. The easiest way to do this is to look at your credit card statements from the last month or two. If you use cash to pay for things, keep a log for several days (or better yet, a couple weeks) of all your expenses.

Once it’s all written down, use a critical eye and note where you’re being your own worst enemy by overspending or wasting money on things you don’t need (or even want). Strategize on how you can modify your behavior to reduce these unnecessary expenses.

While it’s a-okay to splurge on occasion, it’s important to do so in moderation.

Step 4: Add up all your costs.

Jot down the total amounts of your “needs” and “wants” and see how they stack up against a common rule of thumb: the 50/30/20 budget. This popular money management plan says you should spend 50 percent of your take-home pay on needs, 30 percent on wants, and put the remaining 20 percent toward savings, investments, and any debts you may have, like school loans or revolving credit card debt.

Don’t panic if your current financial picture doesn’t align with this ideal ratio. It can be difficult to stick to this plan, especially if you’re new to the workforce and possibly paying down student loan debt.

But that’s exactly why a budget can be so useful. Matching up how much you spend to established guidelines can be a helpful way to identify where everything’s lining up — and where you can put in a little more effort and reduce your spending.

Step 5: Keep it up.

Now that you have your budget created, here comes the harder part: sticking to it.

The primary part of your budget should always cover your needs. What’s left over is split between the things you want and your savings. When it comes to minding your numbers, try out some of these tips:

  1. Be a stickler and set aside some savings for an emergency fund. It’s smart to have it an intrinsic part of your budget.
  2. While putting 20 percent of your take-home pay toward savings and debt isn’t technically considered a “need,” you should treat it as one. Avoid dipping into that bucket to pay for “wants,” so you can pay down debts and afford future unknowns, should something arise. In fact, you could remove temptation by setting up monthly automatic savings transfers.
  3. Break it down. If a budget isn’t as manageable, try chopping it up into monthly or weekly segments. A shorter time frame can make it easier to stay on track. That way, you won’t discover that you’re already pushing the limit of your budget.
  4. Review regularly. Along those same lines, keep track of your purchases as they happen instead of totaling them up at the end of the month. Checking your balance online or reviewing your recent credit card charges is a great reality check for daily expenditures.
  5. Get everyone on board. If other people, like your spouse, are supposed to follow your budget, make sure they’re on board with the financial goals you’re trying to meet. To help create a comprehensive budget, most financial advisers recommend following the 50/30/20 model for budgeting. This model suggests you use 50% of your take-home pay for essential needs, 30% for wants or discretionary spending, and 20% for savings.

Trim your expenses if your budget proves your expenses outweigh your income. One of the easiest ways to trim your expenses is to evaluate how much money you’re spending on the things you want but don’t necessarily need. For example, a night out with friends costs an average of $81, which really adds up if you go out multiple nights a week. This doesn’t mean you can’t go out and have fun, but you may need to limit your spending to make your budget work.

Another way to cut your expenses and get control of your finances is to see if you can lower the cost of certain services. Contact cellphone, internet and cable television providers to see if a competitor offers a better deal or if you can save money by bundling. Consider dropping premium cable television channels and opt for an economical basic package.

Setting goals

Successful budgeting starts with aligning your spending with your priorities. Creating goals and rewards is a fantastic way to increase your chance of budgeting successfully. For example, set a goal to save a specific amount to pay off debts by spending less on unnecessary expenses like dining out, buying lattes or shopping. Put this money into a savings account to earn interest. When you meet your savings goal, reward yourself with a reasonable splurge on something fun. Typical goals and priorities include:

  • Planning and paying for college and post graduate educational expenses
  • Saving a down payment to buy a home or paying off the mortgage early
  • Paying off high-interest student loans and credit card bills
  • Saving and investing for early retirement

Budgeting doesn’t have to be the complicated or intimidating task that it’s often made out to be. Follow this simple process, and your monthly budget will help keep your finances in check.

Now you have the beginnings of your monthly budget! It’s most efficient to build this your budget in a spreadsheet or budgeting software. Then add new expenses as you spend.

Keep it Simple: The 50/30/20 rule

Tracking your finances doesn’t have to be complicated. A budget starts with a list of your income and your expenses, and following a simple strategy as the 50/30/20 rule.

The 50/30/20 rule is a popular budgeting method that splits your monthly income between three main categories. It’s pretty straightforward: You split your money between your needs, wants and savings, according to those ratios.

Here’s how it breaks down, according to NerdWallet:

Monthly after-tax income. This figure is your income after taxes have been deducted and the cost of payroll deductions for health insurance, 401(k) contributions or other automatic savings have been added back in.

50% of your income: needs. Necessities are the expenses you can’t avoid. This portion of your budget should cover costs such as:

  • Housing.
  • Food.
  • Transportation.
  • Basic utilities.
  • Insurance.
  • Minimum loan payments. Anything beyond the minimum goes into the savings and debt repayment bucket.
  • Child care or other expenses that need to be covered so you can work.
  • 30% of your income: wants. Distinguishing between needs and wants isn’t always easy and can vary from one budget to another. Generally, though, wants are the extras that aren’t essential to living and working. They’re often for fun and may include:
    • Monthly subscriptions.
    • Travel.
    • Entertainment.
    • Meals out.

    20% of your income: savings and debt. Savings is the amount you sock away to prepare for the future. Devote this chunk of your income to paying down existing debt and creating a comfortable financial cushion to avoid taking on future debt.

    How, exactly, to use this part of your budget depends on your situation, but it will likely include:

    • Starting and growing an emergency fund.
    • Saving for retirement through a 401(k) and perhaps an individual retirement account.
    • Paying off debt, beginning with the toxic, high-interest type.

    Making a budget can be an important step in the right direction for you. But budgeting for the sake of budgeting isn’t fun. As you work with your budget each month, remind yourself of the reasons why and purpose you’re doing it. Also, evaluate your progress periodically to make sure you’re on track to meeting your financial goals.

    References:

    1. http://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey
    2. https://www.thebalance.com/benefits-to-budgeting-453688
    3. https://www.ally.com/do-it-right/money/how-to-build-a-budget/?CP=135969424;274374394
    4. https://www.marketwatch.com/story/the-beginners-guide-to-building-a-budget-2019-08-09?mod=article_inline
    5. https://www.nerdwallet.com/article/finance/nerdwallet-budget-calculator

    Financial Literacy and COVID-19 | Charles Schwab Foundation

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    “89 percent of respondents to a Charles Schwab’s survey believe a lack of financial literacy contributes to larger social issues—from poverty, to fewer job opportunities, to wealth and gender inequality.” Carrie Schwab-Pomerantz

    • Even in the wake of a global health crisis, Americans value financial education.
    • An overwhelming majority of Americans believe that a lack of financial literacy contributes to larger social issues.
    • Americans want our schools to take the lead in providing our youth with a financial education.

    The impact of financial illiteracy is not lost on the American public. 89% of Americans agree that lack of financial education contributes to some of the biggest social issues our country faces, including poverty (58%), lack of job opportunities (53%), unemployment (53%), and wealth inequality (52%).

    “Financial illiteracy is insidious. The antidote is financial education, which gives people the skills they need to make smart money decision and can help improve their lives.” Carrie Schwab-Pomerantz, president of Charles Schwab Foundation.

    Americans indicated they wish they had better money management skills, according to a Charles Schwab survey. When asked what they would teach their younger selves about personal finance based on what they know today, Americans said the value of saving money (59%), basic money management (52%), and how to set financial goals and work toward them (51%).

    From the survey, it is apparent that every person in America should be taught the fundamentals of money management including budgeting, saving, avoiding debt, setting financial goals and investing.

    “The pandemic has underscored just how critical basic personal finance skills are in preparing for the unexpected. Financial literacy is a survival skill that everyone needs.” Carrie Schwab-Pomerantz

    Carrie Schwab-Pomerantz recommends five key steps every American can take to help shore up their finances during this period of global health crisis and economic uncertainty.

    • Start an emergency fund (or add more to it) to help protect yourself against an unexpected drop in income or expense shock. Set aside whatever you can – every little bit counts. Try to aim for $1,000-$2,000 to get started, and then work your way up to 3-6 month worth of essential expenses over time.
    • Create a budget to help you prioritize and assess your financial resources. Self-isolation has led to different spending patterns for many people, including cutting back on what we may have previously thought of as “essential.”
    • Create a financial plan to help you navigate from where you are to where you want to be. You don’t need to have a lot of money to need a financial plan. Consider it a roadmap to reach your financial goals, whether that’s to pay off debt, build savings, or make a large purchase.
    • Ask for help if you’re struggling. Given the scale of this economic crisis, the government, lenders and creditors are trying to work with borrowers through this difficult time. Don’t hide from creditors – that can make things worse.
    • Focus on what you can control. You can’t predict or control the market, but you can control how you manage your investments, your savings rate, having a financial plan and how you react to events.

    “The need for financial literacy is especially urgent for women and minorities, who continue to face unique challenges at home and in the workplace,” said Schwab-Pomerantz.

    However, financial literacy isn’t a cure-all, but it is an essential key to unlocking doors to opportunity and financial security.

    References:

    1. https://www.schwab.com/resource-center/insights/content/americans-want-financial-literacy-now?SM=URO#sf237483690
    2. https://pressroom.aboutschwab.com/press-releases/press-release/2020/Charles-Schwab-Financial-Literacy-Survey-Exposes-Grave-Impact-of-Lack-of-Financial-Education-During-COVID-19/default.aspx

    Financial Literacy – A National Priority

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    Knowledge is your best financial asset

    Financial literacy and money management skills require greater attention and urgency in the United States. According to a 2019 study by the FINRA Investor Education Foundation, there’s been a decrease in recent years of how much Americans know about interest rates, taxes, loans, and debt…the major money decisions that affect so much of our lives.

    The study also showed that millennials have the biggest gap in money knowledge and skills as compared to other age groups. This is worrisome because they’re America’s largest generation, and millennialsare often shouldering outsized debts and limited economic mobility.

    Moreover, George Washington University research showed that 1 in 5 American high school students lacked even basic financial skills — such as the ability to interpret a pay stub to determine how much money will be deposited into their bank account or the savvy to avoid being tricked into sharing an online bank account logon.

    The average student debt in 2017 was about $29,000, according to the Institute for College Access and Success. About 1 million borrowers default for the first time on their federal student loans each year, a report from the Urban Institute found.

    Learning about how to budget, how to wisely invest, and how to control your spendings can seem daunting, but money experts like Stefanie O’Connell, author of The Broke and Beautiful Life, have made it their mission to make finances empowering for everyone.

    Think of it this way: The more you know about your own spending habits, the less likely you are to make a costly mistake.

    https://youtu.be/vl2sasYSY4E

    Financial literacy is the possession of skills that allows Americans to make smart decisions with their money, according to financial coach and guru Dave Ramsey. Financial literacy means people can regularly do the right things with money that lead to the right financial outcomes.

    Financial literacy helps people develop a stronger understanding of basic financial concepts—that way, they can handle their money better, especially when you consider how the typical American handles money:

    • Nearly four out of every five U.S. workers live paycheck to paycheck.
    • Over a quarter never save any money from month to month.
    • Almost 75% are in some form of debt, and most assume they always will be.(1)

    When you have financial literacy knowledge and skills, you’re able to understand the major financial issues most people face: emergencies, debts, investments and retirement. Financially literate people know their way around a budget, know how to use stocks and bonds for financial security, and know the difference between a 401(k) and a 529 plan.

    References:

    1. https://www.apartmenttherapy.com/money-advice-financial-experts-give-friends-36838772
    2. https://www.tdameritrade.com/education/personal-finance.page?a=aqu&cid=PSEDU&cid=PSEDU&ef_id=fc4aabeabe19150570d4f44c54b1871a:G:s&s_kwcid=AL!2521!10!81501364379637!81501451536164&referrer=https%3A%2F%2Fwww.bing.com%2Fsearch%3Fq%3DFinancial%2Bliteracysearch%3Dform%3DQBLHsp%3D-1pq%3Dfinancial%2Bliteracysc%3D8-18qs%3Dnsk%3Dcvid%3D4F9192028F2446EAB4DC1C65810CC605
    3. https://www.daveramsey.com/blog/what-is-financial-literacy

    Your Credit Score and How it Works

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    It is important for consumers to understand how your credit score works.  Since, not understanding how credit scores work can actually hurt your credit score.  Your credit score can affect your financial future and you need a good credit score to get the lowest interest rates on future loans.

    Stack of credit cards and dollars.

    Most consumers understand that bankruptcy or foreclosure is going to negatively impact their credit score for seven years, but there are plenty of other small mistakes a consumer can make that can turn a good score of 750 or higher into a mediocre 680.

    One mistake people make is thinking that carrying a monthly balance on your credit card statements helps improve your credit score.  The truth is that you can build a great credit score without carrying a balance and paying interest on your purchases, according to consumer advocate Clark Howard.

    The smart and responsible way to use credit cards is to have a budgeted amount that will go on your credit card each month and pay your bill in full each month.  Clark Howard also recommends that consumers do not charge more than 30% of your available credit card balance.  Preferably, keep it below 10% if you want to boost your credit score quickly.

    According to Clark Howard, your payment history makes up 35% of your FICO score and it is important to understand this fact when bills are due.  Consequently, you can attain a good credit score by paying your bills on time and keeping a low credit card balance.

    References:

    1. Howard, Clark, Big mistake can hurt credit score, The Atlanta Journal-Constitution, October, 1, 2020, pg. D1
    2. https://finance.yahoo.com/news/7-small-mistakes-that-will-hurt-your-credit-score.html

    Kevin O’Leary: Financial Freedom

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    Dividends have produced forty percent (40%) of market returns.

    The Ten Steps to Financial Freedom, according to Kevin O’Leary, Chairman of O’Shares ETF, and better know as “Mr. Wonderful”,  are::

    1. Get committed to a plan. Start by coming up with a clear “why”. Know your purpose and incentives for wanting to achieve financial freedom.
    2. Know your numbers. You must create a budget.
    3. Cost planning. Live within your means. Think twice before spending. Cut cost in order to save 10% to 15% of every paycheck.
    4. Go to war against debt and never surrender. Debt is the opposite of passive income; it erodes your asset base while you sleep. Don’t indulge your inner spending.
    5. Income plan. Focus on increasing income more than decreasing spending. Earning more is key. Before you spend, save. Invest surplus cash before you spend. Purchase assets that pay cash flow like dividend stocks, bonds or rental real estate.
    6. Emergency planning. Your the CEO of the business of your own life. Have cash reserve of three to six months of essential expenses. Remember, your psychology is always working against you and achieving financial freedom.
    7. If it matters, measure it. Know your expenses and income. Keep track of everything to ensure you can course correct if something goes wrong.
    8. Tax planning. Think about how much money you can save with simple tax planning. Use traditional IRA or Roth IRA. Also, consider donating to charities.
    9. Financial advisor. Hire a financial coach to help manage your money.
    10. Freedom formula. Freedom is when you have enough passive income generated from your assets to cover your essential expenses.

    https://youtu.be/HsUQoEOu_bE

    Without another round of financial assistance, Black business owners facing tough choices | Bizwomen

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    Without another round of financial assistance, Black business owners facing tough choices

    Caitlin Mullen, Bizwomen contributor, Sep 14, 2020, 9:01am EDT

    The pandemic has presented challenges for most business owners, but new research indicates recovery could take longer for Black-owned businesses. 

    About 4 in 10 Black small business owners who received Paycheck Protection Program loans have had to lay off staff or cut worker pay as that money has run out, Goldman Sachs discovered. By comparison, 32% of all respondents said they had done so. 

    Although just 16% of all business owners surveyed reported less than one-quarter of their pre-Covid revenues have returned, more Black business owners said this — almost 33%, reports Business Insider. 

    The situation has prompted Grammy-winner Alicia Keys to create a $1 billion fund to support Black-owned businesses; the NFL is one of the organizations contributing to the fund, per Billboard. 

    “As an artist, I’m always thinking about how can I use my platform to further racial equity. This fund is one of the answers and our goal is to empower Black America through investing in Black businesses, Black investors, institutions, entrepreneurs, schools and banks in a way to create sustainable solutions,” Keys told Billboard. 

    Keys acknowledged the initial $1 billion goal won’t close the economic gap, but it’s a start.

    “The next steps are to reach out to different industries to invite them to invest in racial justice and create a multi-billion dollar endowment across business sectors,” Keys told Billboard. 

    A National Bureau of Economic Research working paper released earlier this year indicated the spring’s pandemic lockdown was particularly devastating for Black business owners: The number of working Black business owners went from 1.1 million in February to 640,000 in April. 

    Black business owners also have faced discrimination as they’ve sought coronavirus-related financial assistance. About 95% of Black-owned businesses had little chance of receiving funds in the first wave of PPP loans, the Center for Responsible Lending said. 

    The National Community Reinvestment Coalition found Black business owners had a tougher time securing loans at banks and faced bias their white counterparts did not, reports The New York Times.

    The Federal Reserve Bank of New York recently noted counties with the highest concentration of Covid-19 also have the highest concentration of Black businesses and networks, and there were clear PPP coverage gaps in those communities.   

    “Covid has basically been a very severe, devastating scenario for Black-owned businesses that were already struggling to survive,” Kenneth L. Harris, national president and CEO of the National Business League, a trade association representing Black businesses, told the Detroit Free Press.

    The NBER working paper noted the pandemic’s effect on these businesses could result in near-term impacts on economic advancement and job creation, and long-term effects on wealth inequality. 

    Congress has yet to agree on legislation that would provide another round of funds and unemployment benefits. If Congress doesn’t take action this month, 43% of Black small business owners say their cash reserves will run out by the end of the year, Goldman Sachs found; 30% of all respondents said this. 

    And 40% of Black small business owners said they’ll have to cut wages or lay off workers without another round of stimulus funds; 36% overall expect they’ll have to do this.

    Babson College and David Binder Research conducted the Goldman Sachs survey of 860 small business owners in the U.S. and U.S. territories in early September; 55% of respondents were women.

    Main Street America has said almost 7.5 million businesses could close permanently this year due to the pandemic, leaving 35.7 million workers without jobs.

    Source: https://www.bizjournals.com/bizwomen/news/latest-news/2020/09/without-more-assistance-black-business-owners-fac.html

    Setting Financial Goals | Mass Mutual

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    Every successful investing journey starts with a set of clear goals.

    When it comes to planning for your financial future, it’s essential to have clear, concise and measurable financial goals — and a good comprehensive financial plan and strategies for reaching them.  Sometimes the hardest part is just knowing where to start and what is the destination.

    Mass Mutual advises clients to set four basic financial goals; two short term goals (Income & Savings) and two long term goals (Retirement & Debt) — using their simple 5-10-15-20 guidelines:

    • 5: Increase your annual income from all sources by at least 5% each year.
    • 10: Save at least 10% (preferably 15%) of your net annual income each year.
    • 15: Target a retirement “nest egg” of about 15 times your annual income.
    • 20: Plan to have your debt (excluding your mortgage) paid down within 20 years at most.

    Goal: 5% Income Increase

    While many Americans see their salaries increase about 2% to 3% each year, setting the bar higher will help you maximize your biggest asset: your income. Setting a goal to increase in your total income 5% every year, whether it’s through your salary or other sources of income, can make a big difference over the long run. your personal financial situation.

    10% Yearly Savings

    A good rule of thumb is to save 10% to 20% of your net income each year. This could help you to take advantage of opportunities that may arise, like finding your dream home or investing in a new business venture. It also can provide a cushion in case of emergencies. You can increase the amount you save by setting aside a little more of your salary each month and cutting back on unnecessary expenses.

    15x Salary Retirement Nest Egg

    As you get older, you’ll have a better sense of your true retirement needs. For now, we suggest trying to accumulate a total of 15 times your current gross annual income for
    retirement. The goal is to end up with a nest egg that could generate about 75% of your current annual income each year in retirement.

    20-Year Debt Pay-Down

    Many of us are burdened with debt, including student, credit card, auto and other loans. By understanding how long it will take to pay down your debt and working towards a debt elimination plan with set timelines, you’ll be better able to manage not only your debt, but your savings and retirement, too.

    https://www.massmutual.com/financial-wellness/calculators/establishing-financial-goals

    50/15/5: a saving and spending rule of thumb | Fidelity Investments

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    It isn’t about managing every penny. Track your money using 3 categories.

    FIDELITY VIEWPOINTS – 03/03/2020

    Key takeaways

    • Consider allocating no more than 50% of take-home pay to essential expenses.
    • Try to save 15% of pretax income (including employer contributions) for retirement.
    • Save for the unexpected by keeping 5% of take-home pay in short-term savings for unplanned expenses.

    Budget…the 50/15/5 rule is Fidelity’s simple rule of thumb for saving and spending: Aim to allocate no more than 50% of take-home pay to essential expenses, save 15% of pretax income for retirement savings, and keep 5% of take-home pay for short-term savings. (Your situation may be different, but you can use our rule of thumb as a starting point.)

    Why 50/15/5? Fidelity analyzed hundreds of scenarios in order to create a saving and spending guideline that can help people save enough to retire. Their research found that by sticking to this guideline, there is a good chance of maintaining financial stability now and keeping your current lifestyle in retirement. To see where you stand on our 50/15/5 rule, use our Savings and spending check-up.

    Essential expenses: 50%

    Some expenses simply aren’t optional—you need to eat and you need a place to live. Consider allocating no more than 50% of take-home pay to “must-have” expenses, such as:

    • Housing—mortgage, rent, property tax, utilities (electricity, etc.), homeowners/renters insurance, and condo/home association fees
    • Food—groceries only; do not include takeout or restaurant meals, unless you really consider them essential, i.e., you never cook and always eat out
    • Health care—health insurance premiums (unless they are made via payroll deduction) and out-of-pocket expenses (e.g., prescriptions, co-payments)
    • Transportation—car loan/lease, gas, car insurance, parking, tolls, maintenance, and commuter fares
    • Child care—day care, tuition, and fees
    • Debt payments and other obligations—credit card payments, student loan payments, child support, alimony, and life insurance

    Keep it below 50%: Just because some expenses are essential doesn’t mean they’re not flexible. Small changes can add up, such as turning the heat down a few degrees in the winter (and turning your AC up a few degrees in the summer), buying—and stocking up on—groceries when they are on sale, and bringing lunch to work. Also consider driving a more affordable car, carpooling, or taking public transportation. Consider a high-deductible health plan (HDHP), with a health savings account (HSA) to reduce health care costs and get a tax break. If you need to significantly reduce your living expenses, consider a less expensive home or apartment. There are many other ways you can save. Take a look at which essential expenses are most important, and which ones you may be able to cut back on.

    Retirement savings: 15%

    It’s important to save for your future—no matter how young or old you are. Why? Pension plans are rare. Social Security probably won’t provide all the money a person needs to live the life they want in retirement. In fact, we estimate that about 45% of retirement income will need to come from savings. That’s why we suggest people consider saving 15% of pretax household income for retirement. That includes their contributions and any matching or profit sharing contributions from an employer. Starting early, saving consistently, and investing wisely is important, as is saving in tax-advantaged retirement savings accounts such as a 401(k)s, 403(b)s, or IRAs.

    How to get to 15%: If contributing that amount right now is not possible, check to see if your employer has a program that automatically increases contributions annually until a goal is met. Another strategy is to start by contributing at least enough to meet an employer match, and then if you get a raise or annual bonus, add all or part of these funds to your workplace savings plan or individual retirement account until you have reached the annual contribution limit.

    Short-term savings: 5%

    Everyone can benefit from having an emergency fund. An emergency, like an illness or job loss, is bad enough, but not being prepared financially can only make things worse. A good rule of thumb is to have enough put aside in savings to cover 3 to 6 months of essential expenses. Think of emergency fund contributions as a regular bill every month, until there is enough built up.

    While emergency funds are meant for more significant events, like job loss, we also suggest saving a percentage of your pay to cover smaller unplanned expenses. Who hasn’t been invited to a wedding—or several? Cracked the screen on a smartphone? Gotten a flat tire? In addition to those there are certain category of expenses which are often overlooked, for example; maintenance and repairs of cars, field trips for kids, copay for doctor’s visit, Christmas gifts, Halloween costumes to name a few. Setting aside 5% of monthly take-home pay can help with these “one-off” expenses. It’s good practice to have some money set aside for the random expenses, this way you won’t be tempted to tap into your emergency fund or tempted to pay for one of these things by adding to an existing credit card balance. Over time, these balances can be hard to pay off. However, if you pay the entire credit card balance every month, and get points or cash back for purchases, using a credit card for one-off expenses may make sense.

    How to get to 5%: Having this money automatically taken out of a paycheck and deposited in a separate account just for short-term savings can help a person reach this goal.

    Read more: https://www.fidelity.com/viewpoints/personal-finance/spending-and-saving