"Wealth is the ability to truly experience life." -- Henry David Thoreau
I grew up in Arkansas, and all of the smart kids dreamed of either being doctors or lawyers. In my typical overachiever way, I wanted to be both. Not because I had a passion for medicine, or the law, but just because I wanted to be successful. In my teens, success was defined by having a high powered respected job, making a lot of money, helping people, and having a nice house. But, over the years my definition of success is changing. I want to travel and experience the world, I want to meet and inspire people, I want to eat good food from the best chefs, I want to have a strong and healthy body all while being surrounded by the people I love. Simply put, I want to be Happy. And although money doesn't buy happiness, I know I am going to need access to capital, coins, cheddar, moolah, stacks, money to achieve my vision of success.
According to mom, I have always been "good with money." Being good with money is one of those terms I don't quite understand. It's like having "good hair." Like, what does that really mean? Does it mean you save? You don't have credit cards? You own your home? You don't buy luxury items? Like really... What does being good with money mean when you are trying to create your ideal life. Here are my six tips on being "good with money."
I. Build Your Credit
One of the biggest misconceptions about building credit and having a good credit score, is that you do not want to have credit cards. This is just false. In all actuality, the more accounts you have on your credit report (in good standing) the higher your score will be. Now, this isfairly low factor on determining your score, but a factor none the less. In order to show that you are responsible with credit, you have to have access to it and not use it. If your goal is excellent credit, you want to use less than 10% of your available credit. So if you have a $1,000 credit line, you shouldn't put more than $100 on your credit card. Now, if you have already messed this up, trust me, most people have, you need to pay your credit cards off ASAP. Credit card debt is the worst debt. It generally has the highest interest rates and it can quickly make your credit score plummet. So, any extra money you have should go towards paying your credit card bill. Please, please, please do not just pay the minimum. That will not help your score and you will likely pay a ridiculous amount in interest. As soon as you are using 50% or les of your available credit, request an increase on your current credit card and open another one. But, don't open a store card. Just don't do it, the coupons at Victoria's Secret are not worth the 18%+ of APR. Ideally, you want a credit card that has great rewards and ideally no interest and no annual fee for the first year. (Now, I pay an annual fee for my AMEX, but I calculated that my rewards were worth more than my annual fee).
II. Check Your Credit Report
In order for you to build your credit, you need to know whats on your credit report. Just knowing your score isn't enough. I use Credit Karma to get my score, because it is actually free, as in you do not have to put in your credit card. (They make money by constantly, and I mean constantly, advertising credit cards to you). And I usually log in and check it once per month. This is a great habit, because I have found errors that need to be corrected. And that brings me to my next point. Your credit report can change. If there are errors, you can write letters and get things removed. You can negotiate with creditors, if necessary, so they do not report negative remarks to the credit bureaus. It takes time, but it is worth it.
III. Save With a Credit Union
Credit Unions typically have the most inconvenient hours. They close at 4pm and 12 noon on Fridays, and they close early on even days of the month. (Okay, I'm being dramatic, but you get my point.) But this inconvenience is perfect for your savings account. For starters, you do not want an ATM card for your savings account. There is no reason for you need to get money out of the ATM or charge every day purchases from your savings. Decline the ATM card. If you really have a hard time staying focused, decline checks too. If you must get money out of your savings account, I want you to have to go into the branch and withdraw it. Hopefully, these extra barriers will help you set a goal. Now, what percentage you should save is not cut and dry. I don't subscribe to the "save 10% of everything" mantra. For starters, depending on your financial situiaton you may be able to (and need to) save more or less, so I don't like arbitary numbers. Instead, look at your monthly income after taxes and your monthly expenses (bills, personal care, etc.). Subtract your expenses from your revenue, and save half of the difference. So let's use some numbers. Your monthly income is $5,000 and your monthly expenses are around $3,500. That means you have $1,500 left over. I think you should be saving at least $750. That would be 15% of your total take home. If your bills are $4,000, then I would encourage you to save $500 and work on lowering your bills. Now, if you owe credit card debt, you need to focus on paying off your credit instead of saving. Thats just my 2 cents. Knock that debt out.
IV. Separate Your Money
So I have 4 accounts at 3 different banks, 1) a savings account at a credit union, 2) a checking and savings account at the bank that is the closest to my house and job, and 3) a bill account with an online bank that has interest checking and an easy bill pay system. I have my direct deposit automatically deposit all of my money in the right place. So using the above example, if I earn $5,000/month and owe $3,500/month in bills, I will send $1,750 of my bi-weekly paycheck to my bill account and $375 to my savings account. I have all of my bills set-up on automatic bill pay, so I don't ever have to worry about any of my bills being late. (I put at $500 buffer in my bill account, just in case the amount changes. I don't have time for overdraft fees). Then, I will have the remaining $375 come to my checking account. This is my "fun money", or more properly, my discretionary income. This is the money I know I can buy whatever I want with. Using this system, there is no way I just won't save every month. That isn't an option. If I want more discretionary income, I either cut my expenses or I make more money. The beauty of this system, is that any extra money automatically turns into "fun money." Even a part time job that pays $400/week could really have a profound impact on your "fun money." :-)
V. Check Your Interest Rates
Put down all of your debt and look at your interest rates. Of course, you want to pay off your highest interest rates first. But you also want to see if there are things you can refinance - specifically auto loans and student loans. Depending on how new your student loans are, there may be options to refinance where you can drop your interest rates. I refinanced my student loans, and my interest rate dropped from 6.8% to 4.75%. Check out Sofi to see if refinancing works for you. If you have high interest rate credit cards, pay those down, and call the company and see if they will drop your rate and increase your limit. If they wont, cut that card up. Don't close the account, unless they charge you a monthly maintenance fee. Avoid monthly maintenance fee cards if you can.
VII. Don't Buy a New Car
Now, this depends on how old you are. Well it really doesn't. Buying a new car at any age never makes sense, simply because the second you drive your car off the lot it drops in value. It's an awful investment. If you're still in your 20s or younger, you simply don't need a luxury car. I don't care if you are making 6-figures or not. Get yourself a solid, reliable, safe car that is good on gas. And all that money you will be spending on a car payment or a lease payment, save it. Now don't get me wrong, at some point we all want our dream car. And you should get it once your finances are in a solid state. My definition of "solid" is no credit card debt, enough savings to cover 6 months of bills, and no (or minimal student loans). And if you want a house, you should buy your house before you buy your car. Once this is done, go ahead, ball out. I know I will as soon as all of my student loans are paid off.
So if being "good with money" is one of your goals for 2016, then hopefully these tips are helpful. Let's build some wealth on 2016!