Simple Yet Effective Ways to Improve Your Credit

Credit

Top 6 ways to improve your credit score

 It can seem like it takes forever to build good credit but it can be destroyed seemingly overnight. In the first part of this series on credit we discussed what makes up your credit score. If you missed it you can review it here. In this installment we will be discussing six simple yet effective ways that you can improve your credit. While these steps may be simple some require more discipline then others. Following these steps will help you build or rebuild your credit and help you create healthy long term credit habits.

Make your payments on time

This may seem like a simple process but with the busy schedules that most people have it can be a challenge to pay your bills on time. The average person has a minimum of 10 bills to pay each month which means that it is very easy to miss a due date.

Payment history, which reflects your tendency to pay your bills on time, is the biggest chunk of your credit score. At 35% of your total score one late payment can drop your score by ten or more points per missed payment. For this reason you want to make paying your bills on time a top priority. If you find that you have a hard time remembering when bills are due I recommend using a paper tacker that lists your bills and the due dates. You can add to that process a digital calendar on your phone or computer to remind you of upcoming payments. I suggest setting those reminders on 1 week and 24 hour reminder cycles until you get used to it.

Keep your utilization low

Credit cards are extremely convenient. If used responsibly you can even take advantage of free money with benefits like cash back and travel rewards. However if you are like the 58% of Americans who keep a balance on your credit card then many times those rewards are overshadowed by interest payments. Out of the fifty eight percent of people who keep a balance on their cards about 40% pay more than the minimum. That means that a lot of people have a balance that is more than likely above the recommended 30% utilization rate. The utilization rate is the amount of money you have spent in relation to your limit.

Credit Score Breakdown

The utilization rate is the second largest component of your credit score at 30% and is used to determine how well you manage your spending. Ideally you should pay your bill in full every month but if you are going to keep a balance you should keep it below 30%. While thirty percent is the recommended limit to be considered good, 10% is considered excellent. If you have fallen behind in this area work towards paying your balance down to below 30% on each card and watch your score increase.

Age of Credit

How long you have had credit typically takes time. The only way that you can sort of hack this part of your credit score is by becoming an authorized user on another person’s account. The way that this would work is if a spouse or parent who has established a positive payment history of 5 years or longer adds you to their account as an authorized user. Once they do that their record becomes yours and you now have the benefit of their longer payment history. You will also receive the benefit of their credit limits being reflected as yours so this would help your overall utilization score go down.

While this method can be a great way to improve your credit score, there are some risks for both of you. The fist risk for you is if that person fails to pay this account on time then their negative payment history would become yours as well. If they keep their balance above the 30% utilization then that would bring that section of your score down as well. Also if they give you access to this account and you spend without making payments you will hurt their credit. Which would, in turn, damage your relationship. This credit hack should be done with extreme caution.

Too many inquiries

It is normal to have 1 or 2 inquires per year and you won’t be penalized for them. But if you have more than two in a given year this will bring your score down 10%. Lenders view multiple inquires for credit as a warning sign that you are unable to manage your finances properly. The thinking is that you will acquire more credit then you will be able to safely pay back. This will make you a liability and can hinder their desire to extend credit to you. The exception to this rule is when you apply for multiple things within the same industry within 30 days of each other. In this case all inquiries would count as one. Examples of this would be shopping around for the best mortgage or car loan rates.

Unfortunately there are no hacks for this category. The only thing that will fix this is time. Once those inquires hit your report they remain there for 2 years. Once you have reached the two year mark they fall off and your score will improve. The best course of action is to limit the amount of credit that you apply for. This will keep your inquires low and will keep you from potentially over extending yourself.

Types of credit

Your credit mix makes up 10% of your score and is another category that takes time to build. An example of a healthy mix would be a mortgage, installment loan, student loan and credit card(s). Having none of these will hurt your score as will only having one type. If all you have are credit cards but no other types of credit it may be more difficult to get a personal loan. If you add to this lack of mixture a credit history of less than 2 years then your odds of denial are higher.

I wouldn’t recommend rushing out and getting several types of credit just to boost your score. There are a few things that you can do to boost this area. You can get loan yourself money with Self Lender. This is a program where you would create an account and “loan” yourself money. You can deposit as low as $25 per month into your account. Your positive monthly payments are reported to all three credit agencies and at the end of the term you get all of the money back, minus a nine dollar administrative fee. This is a great program for someone with no credit or who needs to improve their credit.

Painlessly improve your credit

Repairing and/or rebuilding your credit takes time and patience. Consistent monthly payments and spending responsibly may not sound very exciting but they work. The only way to make sure that you will stick to your plan is by creating a system for your success. Many of the things we have discussed can be automated. Set up bill pay from your checking account. This will give you an overview of which payments are going out of your account and limit surprise withdrawals and overdrafts. Creating digital reminders for upcoming due dates will reduce missed payments and fees.

If you need help keeping track of bills, subscriptions, paychecks and more here is a free 9 page budget tracking set to help organize your finances. These sheets will help you keep all of this information in one place and help you improve your credit. Click here for your free digital download.

 

 

 

Credit: Do You Really Need It?

What is credit?

Everywhere you look there are articles extolling the virtues of good credit. Everyone wants it but do you really know what it takes to achieve and maintain good credit? Do you even really need Credit? Many financial gurus who will tell you that if you pay with cash then you don’t need credit. Unfortunately, for the majority of people this is not always a feasible option. Perhaps a couple of decades ago this would have been sound advice. However these days credit profiles are being used for more than just credit cards and car loans.

Credit scores are used to determine if someone would be a good employee. For car insurance rates as well as determining if one can rent an apartment or activate utilities. With so many facets of our lives being based on credit scores it is important that to understand what it is and how it works. With this information you will be equipped to manage it wisely.

 

How are credit scores calculated?

A credit score is a three digit score that is used to predict your ability to pay future debts based upon past performance.  These scores can range, on average, from 300 to 850. The higher the score the more attractive you are to lenders. These numerical scores are weighted based on these 5 categories: Payment History, Amounts Owed, Age of Credit, Credit Inquiries and Types of Credit.

Payment History

As you can see in the above chart payment history and the total balance you carry on your credit cards and loans make up well over half of your total score. One late payment can send your score into a 10+ point tailspin. Multiply that late payment by more than one account or over a series of months and this can cost you thousands of dollars in interest fees.

Credit Utilization

Not paying your credit cards in full every month is not a huge problem for your credit score unless you keep a balance above 30% of your available limit. If you keep a balance of between 50%-90% you will also see a significant drop in points. You may also be denied new credit based on this usage. Creditors view continuous balances over 30% as an indicator that you may not be using credit responsibly. While they may still extend credit to you it would be with lower credit limits and higher interest rates.

If you are paying your bills on time and pay your balances in full or stay below thirty percent on your balances, you may still have a hard time getting into the 650-750 range based on the remaining 3 factors. These three factors combined make up a large part of your score and are harder to change quickly. These categories are time specific and can’t easily be changes.

 Other Credit Factors

Age of Credit

The amount of time that you have had credit in your name is dependent on how old you were when you opened your first card. For most people the earliest they can legally have their own credit is 18. That means that if you are a 21 college graduate and looking to purchase a car your score may suffer because you haven’t established a long enough positive payment history.

The only exception to this rule is if you are added as an authorized user on the account of someone with a long positive payment history, like a parent. When this happens you will inherit their payment history which will boost your score. You will want to be very careful about doing this because it works both ways. If their payment history takes a turn for the worst then you will inherit that as well.

Credit Inquiries

The credit inquiry category of the credit score reflects how many times you have applied for new credit in 12 month period. Applying for 1-2 items per year is considered excellent. Anything more than that and it will begin to adversely affect ten percent of your total score. In order to not penalize people who are shopping around for mortgage rates or car loans all inquiries made within a 30 day span from the same type of industry will only count as one inquiry. When you are house hunting or purchase a new car make sure that you apply in the same time frame to avoid taking a larger hit to your credit.

Types of Credit

The final credit category is Credit Mix or the different types of credit that you have. Having a lopsided credit profile can negatively affect your credit as well. If you have one credit card and no history of installment loans then this is counted against you and can ding your credit 10 percent. Credit agencies want to see that you have the ability to properly manage different types of credit like car loans, mortgages and credit cards, effectively.

This does not mean that you have to go out and get all of these different types of loans in order to be considered credit worthy. Demonstrating an ability to manage a variety of credit is viewed as a benefit and makes you a less risky consumer.

Put this knowledge to work for you

There are three major credit bureaus, Transunion, Equifax and Experian. When you apply for credit the company you submit your application to gets a report from one of these agencies. To make things even more interesting they each calculate and weigh your information the differently. Not all companies report to all three agencies so your score can vary greatly from one agency to another. There is no guarantee of accuracy so it is very important that you monitor your reports at a minimum every 12 months.

With so many facets of your life being influenced by your credit rating, it has never been more important for you to know your score. You are entitled to a free copy of your report from all three agencies once per year. The best way to stay on top of the information that is reported is to monitor it. Click here for your free credit reports.

How can you improve your score?

Join us for next week’s post. We will provide strategies for improving your credit. Whether you have no credit, good or bad credit, join us for strategies for improving and maintaining it.

 

Skipping Coffee Won’t Fix Your Budget

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Skipping Coffee Won’t Fix Your Budget 5 practical budget tips that work

5 Practical Budgeting Tips That Work

We have all seen the headlines about how your daily latte is destroying your budget. I am here to tell you that skipping coffee won’t fix your budget. Starbucks or McDonald’s alone are not what is keeping your budget from balancing each week. Your habits and systems are the true culprits. These 5 practical budget tips will show you that it is possible to enjoy a tasty morning pick me up and have a balanced budget.

Track your spending

In order to understand where your money is going you first have to know how you are spending it. This is where tracking comes in. Get a small notebook and keep it in your purse or pocket.  Write down every purchase you make for 7 days. Every pack of gum, tank of gas and coffee purchase needs to be written down. Don’t forget to write down the bills that you pay daily as well. At the end of the week total your spending then repeat this for 3 more weeks. This will give you a full view of your daily and weekly spending habits. While tracking your spending may feel tedious, it helps you become more aware of your spending habits. You may find yourself skipping a few purchases to avoid having to write them down.

Tracking your spending has the added benefit of bringing full awareness to your daily habits. Seeing how many times you grab a bag of chips when you get gas or drop extra items into your cart at Target really puts things into perspective. For many people overspending is an unconscious habit. It is something that you do when you are bored, angry, sad or even hungry. Having every purchase listed for you in black and white will make it easier to move on to step number two.

Make Realistic Cuts

Now that you have tracked your spending, for a minimum of 3 weeks, it is time to make realistic cuts. Where can you reduce your spending? We all have areas that we can cut back on. The first places to look are your cable bill, cell phone plan and subscriptions that you aren’t using. When you were tracking your spending you may have come across several subscriptions that you signed up for during a free trial but failed to cancel. Cutting those are pretty painless. It can be a bit more challenging when you start cutting areas like cable and cell phone plans.

When it comes to your cable and cell plans take a good look at your actual usage. If you use a lot of data on your phone shop around and see which company has the best coverage in your area as well as the best price. When it comes to phone coverage cheaper is not always better. You may have to stay with a more expensive plan if the area you live in doesn’t have many options or good coverage. Most households no longer have landline phones so make sure that you have a way to communicate in the event of an emergency.

Cable is another popular place to cut but make sure that the alternative that you choose really saves you money. Getting rid of cable is liberating but if you watch a lot of sports and premium channels adding all of these services individually can end up costing you more than you are already paying. Take some time to see what channels you actually watch most often and match them with the best services for your budget.  

Create systems to support your new budget

Create a budget based on your actual spending. I recommend using a zero based budget. Zero based budgeting is a simple system that assigns a job to every dollar that comes into your household. This means that you must allot a category for all of your money. If budgeting it new to you or you would like a detailed system for keeping track of your money you can get my budget planner here.  While there are digital budgeting systems like Mint and Every Dollar I recommend also tracking with pen and paper. Studies have shown that the physical act of writing things down forms new grooves in the brain and boosts retention. Being able to glance at your budget from your phone while out is helpful, but having it all mapped out on paper makes it feel more real.

Set aside time weekly to review your spending and to change direction when you get off track. Your weekly budget review doesn’t have to take much time, usually 30 minutes or less. The act of reviewing your spending weekly will keep you accountable to yourself and will build your budging confidence. Most people fail at maintaining their budget because they stop tracking their spending. If you don’t know where your money is going then you will never be able to stay on track.

 Automate your budget

 Automating your budget is a great way to stay on top of your bills. Between utilities, rent/mortgage, insurance, and other household services, paying your bills can feel overwhelming. Many experts recommend setting up automatic payments to avoid late fees and forgotten bills. While I agree with this method I am adding an additional detail. Instead of setting up bill pay with 10-15 different companies setup bill pay directly from your bank account. Most banks offer bill payment services for free. This gives you the ability to control who has access to your account.

There is nothing more stressful then checking your account and seeing a withdrawal for the bill you forgot about. Now you have to scramble to replace that money in order to avoid overdraft fees. Take all of your recurring bills from the budget you created in the previous step and set them up in bill pay from your checking account. This will always give you an accurate view of what is due and what has been paid. You will also avoid pesky overdraft fees because if you don’t have the money the bank won’t release the funds.

Another way to stay on top of your spending is by separating your money. With free checking accounts it has never been easier to have multiple checking accounts. I recommend having an account that is only for bills and one for food. You can also have as many savings accounts as you’d like so create sinking funds for things like car repairs, childcare costs, holiday shopping, etc. in order to keep that money separate and growing.

Review your plan often

You can get your finances in order and enjoy a latte or night on the town if you have clear systems in place. If you find that you are eating lunch and dinner out 5-6 times per week instead of quitting cold turkey try reducing the frequency. Add a coffee category to your budget and once you have reached that limit for the week you have to wait until the next week for another one. If you find that unplanned purchases at Target are the things that are knocking you off course, try ordering what you need online and picking it up in store.

When you are starting a new money management system you will need to review it often. Sometimes daily until it becomes a habit. While it only takes 21 days to create a new habit it can take 3-12 months to make it permanent. So if you try a new financial system and you fail don’t quit. Tweak it then keep going. Consistency is what will get your finances on track and keep them there.

 

 

Should You Rent to Own?

rent to own

Why you should avoid rent to own

While going through the ads from local grocery stores and fast food restaurants I came across a rent to own advertisement. In bold letters across the top it read “Flexible Lease Ownership that Works for You!” As I started browsing the ad for furniture, appliances, mattresses and electronics I was perplexed. Next to each item there was a monthly price that was marked down.  This gave the impression that you were saving money by paying lower monthly prices. In much smaller print showed there was the full cash price for these same items. With a bit of quick mental math it was clear that if you leased these items you would be paying over double the listed cash retail price.

I then started looking at each individual item and noticed that the payment terms ranged from 12 months to 24 months. The longer the term the more you would end up paying. These types of businesses tout the ease of flexible payment options, no credit needed and free delivery and set-up. It all can seem pretty appealing for people who have poor or no credit. However this is just another tool that businesses use to keep people indebted. This post is in no way intended to shame anyone who has used or is currently leasing from a rent to own establishment. I understand that there are times when this quick fix can feel like the only option a person has.

The real cost of renting to own

According to the Federal Trade Commission (FTC) “Most rent-to-own transactions are not regulated by federal lending and leasing laws that set disclosures and certain consumer protections” This means that they are able to charge pretty much whatever they want for their products as long as it has been disclosed.

Many of the items that were listed in were name brand items so the high cash price might make sense. However when I compared the listed cash price for a Philips 75” Class 4K UHD Smart TV ($1,829.99 plus tax) with the same model found in stores, I found that it was much cheaper elsewhere. In fact if purchased from newegg.com you could expect to pay $730 less ($1,099.99 plus tax).

This blatant overpricing is shocking but I was flabbergasted when I calculated the installment plan. If you chose to do the payment plan of $129.99/month for 24 months you would pay a total of $3,119.76. That is a whopping $1,290 additional dollars paid for the privilege of being able to make installment payments. With a bit of shopping around one could find pricing that is much better.

Mindset shift

If someone is able to pay $129/month for 24 months to rent an overpriced item why not save the money and pay cash? The reason is pretty simple. It is much more gratifying to walk into a store and walk out with the item you want immediately. Human beings are hardwired to desire fast results. This is also why more people are in debt today than in any other time in modern history. This innate desire for instant gratification coupled with a culture based on consumerism feeds this industry.

In order for a person to overcome these powerful forces they have to create clear financial goals for themselves. If they save $129 per month in a bank account for 8.5 months they will be able to pay cash for the TV. With the retail cycles changing about every 90 days they may even end up getting that same TV for less.

Is it ever good to rent to own

There are times when leasing is a good option. The following are, in my opinion, the only times when rent to own should be used.

  • Leasing a TV for a sporting event
  • Leasing furniture and/or appliances for business rental apartment
  • Musical instruments for children
  • Special events or parties
  • Real estate house staging

In these instances you are able to get a lot of bang for your buck by being able to use the items for a short amount of time without the hassle of selling them later.

Rent to own vs. Layaway

When I was growing up most stores had layaway. I remember going with my mother to the store and putting clothes on layaway twice a year. This was how many families were able to purchase large ticket items like school clothes and appliances without credit. My mom would make weekly payment and in a couple of months we would leave the store with our purchases. Very few stores offer this service anymore because there is not much money to be made in it. It is much more lucrative for the store to offer credit and charge interest for these items instead. This change of mindset from delayed gratification to instant gratification is what has given rise to what many people deem a predatory industry.

The choice is yours

Ultimately the consumer has the right to choose rent to own or leasing. As long as the person is clear about the full cost of doing business with these companies there is not much that can be done. It is highly recommended that if you go this route that you ask a lot of questions. Read all of the fine print before signing up for any services. Ask about prepayment fees as well as the late payment policy.

An alternative to this service would be to look for discounted items. Many stores offer drastically reduced prices for floor models, items that have dents or scratches or were returned. You are often able to get the same warranty and return policy on these items but can pay thirty to sixty percent off of the retail price. With a bit of creativity and patience you can save money and get the products you want.

 

 

How to Beat Financial Stress

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6 No Nonsense Tips to Help You Cope

Life is what happens when you are busy making plans, according to John Lennon. I would like to add that life is what happens when you have fully funded your emergency fund. That same situation could be even more stressful if you don’t have funds set aside for emergencies. According to Bankrate’s most recent Financial Security Index, 28 percent of adults in the United States do not have an emergency fund at all. While 1 in 4 adults do have an emergency fund, they don’t have enough to cover three months of living expenses. Couple these statistics with the fact that many Americans are living paycheck to paycheck it should come as no surprise that people are dealing with a lot of financial stress. Having the tools to beat financial stress can make unexpected financial emergencies much easier to manage.

Stress is unavoidable. However prolonged stress can lead to high blood pressure, heart disease, obesity, diabetes, depression and anxiety. Financial stress comes with the added adverse effects of behavior changes, relationship strain and deeper depression. With this list of potential life altering stress affects I am providing you with six no nonsense tips to help you beat financial stress.

Don’t avoid your debts

When debts begin to pile up and you can’t see a way out many people simply avoid their debts. They don’t open the mail, answer the phone calls and generally try not to think about the mounting debt. While this may seem like a good idea your subconscious still knows that the debts are piling up and it will manifest in your behavior. You may find yourself feeling more tired then usual or snapping at your loved ones more often. This will lead to tension in your relationships which then piles to your stress.

The better way to handle these situations is to contact your creditors and be honest with them about your situation. Most credit card companies offer hardship assistance programs and will work with you to temporarily lower your payments or create payment plans to get you back on track. Often you can go through these programs without closing your accounts. If you are severely delinquent and your account has gone into collections, you will want to first verify the debt with that company and then setup a payment plan.  Utility and mortgage companies also have hardship programs as well and will work with you to bring your accounts current. Having an arrangement in place will stop the phone calls and letters giving you peace of mind that you are moving in the right direction.

Cut expenses

Take a long hard look at your expenses. Take out a sheet of paper or my Free Budget Planner to track your expenses. Having all your expenses in front of you in black and white will give you the chance to really see where your money is going. The biggest budget vampires are eating out for lunch and dinner. Another budget category that sneaks up on people are subscriptions. You may be surprised at the amount of money you are spending on small things like Hulu, cloud storage, apps that you don’t use and that free trial you forgot to cancel. Don’t forget about annual subscriptions as well like antivirus programs, gym memberships etc.

Once you have everything listed add them up and see what the total is. Once you pick yourself up off the floor,  go through this list with surgical precision. Cut items that you barely use or that are simply too expensive. If you can pare down your cell phone plan and if streaming will get you what you need then those are great places to cut. I shaved $100 off my cable/internet bill by cutting cable and paying for local TV w/HD and high-speed internet. With amazon prime video, Hulu, and Netflix we don’t miss our favorite shows and I am paying less overall.

A Cable Cutting Side Note

One of the first things people will tell you when it comes to cutting expenses is to cut cable and your cell coverage. These are great suggestions however this may not always be the best solution. Before you call your cable and cell phone company to cancel review your options in your local area. You may get a cheaper cell phone plan from a different company only to find that you now have crappy service. With most households no longer having landline phones, you want to make sure that you have reliable communication options. Double check your streaming options as well. If you watch OWN Network, ESPN or other specialized network make sure that the streaming services you are switching to offer those channels. If they are not included, you could end up paying more than you were paying with cable.

Add Additional Income

If you have stretched your dollars as far as they will go and sold all unused items, it is time to consider adding additional income. It’s not fun working multiple jobs and it can cut into your social life which can be a bummer. However, if your income does not match your expenses and/or debts you will need more money. Short of winning the lottery the only way to get more money into your bank account is to get a second job. There are many things that you can do to add additional income like drive for Lyft or work retail. If you have skills like doing hair, babysitting, cleaning homes or carpentry skills you could advertise on Facebook marketplace or local neighborhood apps like Nextdoor. If you are a single parent or are caring for family members and time is limited, you could do things like Lyft/Uber or work from home jobs in your spare time.

The amount of time you put into your second job is dependent upon how quickly you want to change your financial situation. Working multiple jobs will mean less free time for family and friends which can cause its own set of pressure. No longer being as available for spur of the moment outings weekends and evenings will cause people to complain. They may not understand your financial goals, and this can cause some friction. When the comments roll in about how busy you are all the time just let them know that you have big goals that require massive action. It won’t last forever but this season of no will have lasting effects and will reduce your stress.

Create/Realign Your Goals

Financial stress can be exacerbated by a lack of direction. You can cut expenses and add additional income but if you don’t have a clear goal in mind you will find yourself right back where you started. If you already have your financial goals mapped out review them. Realign them for your current goals. If you don’t have any financial goals now is a great time to start. I recommend creating a 90-day, 6 month and 12-month plan. If you are behind on your bills your plan could look something like this: The yearlong goal save $1000.  Six-month goal: Stay current on bills. 90-day Plan could include creating a budget and making payment arrangements with creditors.

Your goals don’t have to be lofty or match anyone else’s plan, but they do need to feel attainable. There should be just enough room to stretch but not so big that you will end up giving up. Schedule quarterly check-ins with yourself to review your financial goals. Add them to your phone calendar so that you don’t forget. This way you will be able to stay on target and adjust as needed in real time.

Change your mindset

Change begins in the mind. If you spend a lot of time berating yourself for poor money decisions then it will be difficult for you to move past it. Take some time to acknowledge your missteps then move past them. Living in the past will not help your present situation. What’s done is done. Create new positive mantras to say when those negative thoughts start to creep in. You can put positive affirmations on your desk and the lock screen on your phone. Follow positive financial education sites on social media and read books about improving your finances. All of these things will help change the negative inner dialogue is playing in your mind. With a positive mindset you can achieve any goal you set for yourself.

Change what you can control

The final step to reducing financial stress is to change what you can control. The one thing that you have total control over is your mindset. Now that you have some ideas about changing your thinking you will be able to move forward with confidence. Once you have begun the journey of mastering your mindset create a budget.

I’m sure you thought I was going to go with more esoteric recommendations but the truth of the matter is that without a budget you will never have true control over your finances. Outside of your mindset this is the second most important thing that you have control over and is fully in your power to change. Not knowing how much is coming in or going out it can feel overwhelming. It also leads to overspending and uncontrolled debt. Creating a budget gives you control over where your money goes and reduces the stress of most financial surprises. When those surprises spring up you are better able to manage them because you will have budgeted for them. With these 6 tips you will be prepared to handle financial stress with more grace than you ever have before.

 

5 Reasons Kids Need an Allowance

,5 Reasons Kids Need an Allowance

Why every child should get an allowance.

To give or not to give an allowance is an age old parenting question. A quick google search of the subject will give you loads of conflicting information. Some people believe that kids should not be given an allowance unless they earn it through chores. While others believe that kids should be given money no strings attached. Below are the 5 reasons that kids need an allowance.

Why it’s important

  1. Delayed gratification: Most people can agree that giving a child everything that they ask for immediately is a recipe for disaster. It also removes the connection between want and need. Giving a child an allowance teaches them the importance of waiting for the things that they want. If they have to wait until they have saved enough money for the item or until they go home and retrieve their money they are more likely to think twice about the purchase.
  2. Budgeting: An allowance is the first form of paycheck that a child will have. Receiving there set stipend weekly or bi-weekly allows a child to create a budget for themselves. Giving a child a blueprint for spending and saving helps form the foundation for healthy spending habits later. Dividing their allowance into spending and saving categories when they first receive their payment also teaches the importance of goal setting.
  3. Saving: Teaching children the importance of saving for specific things will create a mindset of temperance. It teaching them goal setting skills. According to roostermoney.com the top 3 things that kids save their money for are cell phones, Lego and Nintendo Switch. The sense of accomplishment that a child will gain from setting and achieving the goal of saving simply can’t be taught. An added bonus is that the child will probably take better care of the item better than if it were just handed to them.
  4. Charity: Charity is something that, in my opinion, should not be overlooked as an important skill for children to learn. Giving to a worthy cause helps children feel as if they are contributing to society. Weather your child gives to their local church or to the humane society they will feel connected to a cause greater than themselves. Charitable giving also teaches children that they money can do more than just purchase toys and trinkets for themselves. It will give the child a sense of purpose and pride when they think about the good things are being done because they gave a portion of their stipend.
  5. Autonomy: Children will gain a sense of autonomy with an allowance. Knowing that they are free to do whatever they want with their money gives them strength. The look on a kids face when they realize that they can have anything that they want, within their budget, is priceless. They walk a little taller and may even take more time making thoughtful choices instead of grabbing the first thing that catches their eye. Being able to purchase what you want is empowering and can lead to higher self-esteem as well.

How much is enough?

Now that we know the top 5 reasons kids needs an allowance we can dive into the tricky question. How much allowance should you give? A common rule of thumb for determining how much of a stipend to give is $1 per year of age. For example a 4 year old would get $4 while a ten year old would get $10 per distribution period. This is a system and takes the guess work out of what the amount should be. Depending on your budget you can determine if you give this amount weekly, bi-weekly or monthly. I recommend that whichever schedule you choose keep it as consistent as possible. When kids are younger they won’t notice if you miss a “payday” but as they get older and start budgeting for their wants they will notice.

Should you tell them how to spend their money?

It is our job as parents to give our children direction so it is acceptable to tell them how they should divide their money. In our house I have my daughter use an 80-10-10. 80% of her allowance goes to spending. 10% goes to savings and 10% goes to Charity. You will need multiple piggy banks or savings jars that can be labeled for the different categories. This will help make the separation more defined and reduce spending from the wrong bank.

I started giving my eight year old daughter an allowed at age 4. After 4 years she automatically takes her money and divides it as soon as she gets it. She chose the Humane Society as the charity that she saves for and makes a yearly deposit in person. Being able to give her money to helping animals and being able to pet the animals that she is helping makes it real for her. It also keep her committed to saving for them. Sometimes she adds extra to her charity bank.

Should allowances be earned?

Giving children money with no work attached to it has its followers. There are people who believe that children should do chores without pay because they are members of the household and they should contribute for the greater good of the family. Other people believe in tying chores to an allowance to teach work ethic and the value of working for pay. Both of these approaches are valid and have merit. As a parent you will have to determine which of these approaches are best suited to your lifestyle.

Personally, I believe that children should be given age appropriate household chores and compensated for them. According to roostermoney.com children in the United States tend to start earning an allowance in exchange for chores between the ages of 4-11. The most common chores are cleaning, laundry, pet care and taking out the trash. The approach that works for us is a hybrid of these two approaches.

There are chores that are part of her allowance and chores that unpaid but are expected of her as a member of the household. Feeding the cats, putting her dishes in the sink and keeping common areas clean are good citizenship. Helping with yard work, cleaning her room, putting dishes away, etc. are some of the activities she is compensated for. As she gets older and gets a “raise” we add additional items to both the paid and unpaid chore chart. You can find a list of suggested chores based on age here.

They will thank you later

The basic financial skills that you are teaching your children by giving them an allowance can’t be learned in a book. Delayed financial gratification, autonomy, saving, charity and budgeting are the first steps to financial freedom. Equipping children with these skills should make them less likely to fall into debt. Many adults state that they never received any direct financial education from their parents. They attribute this lack of foundational knowledge to their poor money choices as adults. While personal responsibility is a factor, people who have had years of practice with budgeting, under controlled circumstances are better equipped to recover quickly.

 

 

Want To Stop Going Into Debt For Christmas?

paper bags near wall

The simple way to fund your holiday shopping

 

Does the holiday season catch you by surprise every year?

Black Friday through Cyber Monday has become a major shopping event. Marketing starts in October for not to be missed savings opportunities. We are used to the marketing and even spend lots of time complaining about how early stores begin playing holiday music. Even with the fixed calendar dates for the Christmas shopping season embedded in our minds, many people still manage to get caught by surprise.

You will often see people splurging on “deals” during black Friday. Followed by even better deals on cyber Monday and even more spectacular deals on Christmas Eve. All of this shopping leads to the average American going over their spending limits. Often by hundreds of dollars. When this happens they are usually adding to their debt by charging these purchases on credit cards. All is well until January rolls around and the bills start stacking up. However, with a little advance planning it is possible to break this cycle.

Why should you plan for holiday shopping?

You should have a plan for how to spend your money for gifts to avoid overspending. This may seem like a simple thing to do but for many people this requires a mindset shift. We have been programmed by marketing companies that the best way to show we care is by how much we send during the holidays. People begin counting the number of gifts under the tree instead of the thought behind the gifts. We are even seeing people going into enormous amounts of debt for Christmas. It is not uncommon for people to still be paying for the previous holiday gifts well into June.

Creating a spending plan creates boundaries in your mind which forces you to be more intentional with your spending. If you know that you only have $25 to spend per niece and nephew, for example,  you will become more creative with your purchases. Shopping actually becomes an adventure instead of a chore. If you need help identifying and improving your financial mindset my previous blog post on this subject has simple actionable steps that can help.

 How to create a savings goal

Below are a few easy steps that you can take to prepare your budget for Christmas:

  • Decide on a shopping limit: In order to get an accurate total look at bank and credit card statements from the previous year to see how much you spent.
  • Create a list of the people that you will be buying presents for: Prioritize this list with your significant other and children first then add in extended family and friends.
  • Breakdown your shopping limit: Breaking your limit into bite-size pieces will help you avoid being overwhelmed. If you are having a hard time saving $100 normally  it will seem impossible to save $500 for holiday shopping without a plan. 

Want a simple way to stick to your goal?

According to the National Retail Federation 33% of Americans expected to spend $1000 for Christmas gifts in $2018. This figure was up from an expected spend of $900 in 2017.  With so many households reportedly living paycheck to paycheck this means that most people are putting these expenses on credit cards.

Wouldn’t you like to be able to stick to your overall budget and pay cash for your holiday gifts? I have created a free 90 day Christmas Savings Challenge that you can use to save $500 by black Friday. Saving for items in the future is difficult for most people without some sort of accountability and a visual reminder of their goals. This is why vision boards are so popular and effective. With this tracking sheet you will be able to track your progress each week as you save.

Where to stash your cash

Now that you have your tracking sheet where should you keep the money you are saving? You can save the cash is an envelope or jar at home but you run the risk of dipping into it for non-holiday cash. I recommend opening a separate savings account. It could be either online or at a different bank than your main bank. The reason behind this is that you make your money a less accessible. Online savings accounts, like Capital One 360, are a great choice because they are free to open and maintain. Set automatic transfers from your primary account to this savings account each week. Automating this process will significantly increase your odds of meeting your goal. Don’t forget to add this weekly amount to your budget as well.

I have set the amount for this 90 day Christmas Savings Challenge at $500 but you can save for any amount that fits your shopping goals. If your goal is $700 then you would divide that up into 12 equal parts which would mean you would save $59 per week. This will give you $708 at the end of the challenge. The amount is personalized but the act of tracking will keep you motivated and more likely to achieve your goals. If you start planning now you can have a cash Christmas this year. Join the adventure of having a cash Christmas and get your tracking sheet today!

 

 

 

Key Reasons Why You Must Pay Yourself First

How to make yourself a priority

Conventional financial wisdom says that we should always pay ourselves first. This concept can be hard for most people to follow. Our first inclination is to pay our bills first then save if we have anything left. When we follow this way of thinking we will usually find that there is nothing left. After our monthly bills there are usually additional items that we forgot about or we find that we have “extra” money so we splurge on something fun. If you find that you are living paycheck to paycheck, like many people, then there is never any extra once all of the necessities are paid.

Paying yourself first is sound financial advice, on every budget, and serves several functions. It makes you the priority in your financial life. Saving for an emergency and/or for your future provides peace of mind because it gives you a safety net. When you have money set aside you are less likely to put emergency expenses on a credit card, borrow from someone else, or get a payday loan. It also reduces stress because knowing that you are able to handle life’s surprises puts your mind at ease.

Change your mindset

Paying yourself first is really less about the amount you save and more about the mindset shift that takes place when you make yourself a priority. It is very easy, especially for women, to put everyone else’s needs above your own. This selflessness can also extend to our monthly bills. Your bills will be waiting for you weather you have a savings account or not. In the event of a flat tire or if the washing machine needs repair you will find a way to get the money you need to pay for it and it usually involves lots of stress and creative financing. Why not preemptively plan for that emergency and save yourself the sleepless nights and frantic calls to family and friends and start saving for your future peace of mind.  (See my previous post about money mindsets https://libertyfinancialllc.com/2019/06/08/what-is-your-money-mindset/)

Save for emergencies

Create an emergency fund. Ideally you will want to have a minimum of $1000 in an emergency fund to start. Once you have reached a thousand dollars keep going until you have 1 month of expenses saved. Then continue saving until you have 3-6 months of expenses saved. If you have a hard time keeping $100 in your savings account I’m sure you are totally dismissing my suggestion of saving $1000. Instead of thinking about the total amount, which can be unfathomable, create smaller savings benchmarks.

Most people can find $25 or $50 dollars per paycheck to spare but may have a hard time culling $100 from out of their budget. Break your larger savings goal down into increments that are less intimidating. This will make it more likely to follow through with it. Open a free online bank account, like Capital One 360 , and setup automatic payroll deposits or automatic transfers from your bank account every pay period. The money will come off the top before you begin paying bills. Saving in an online account, separate from your regular account,  keeps you from dipping into that money in the event that your “emergency” is a sale at Target. I recommend getting a debit card for the account so that you have access to the funds in a true emergency but don’t carry it with you.

Challenges keep you motivated

Staying motivated to save can be a challenging. Thinking about all of the things that $25 per paycheck could do for you in the present will keep you from beginning. To stay motivated I suggest following a savings challenge.  A savings challenge is a sort of game you play with yourself to track your savings. You can do this on your own with charts or you can do this with a friend for added motivation. Savings challenges are effective because you are able to see your progress immediately and checking off your progress keeps you engage.

A challenge that I have been doing for the past several years is the $5 challenge. The way this challenge works is that you save every five dollar that bill you receive.  Even if you don’t carry much cash you will be amazed at how quickly it adds up. I keep my savings in a special jar out of sight to avoid temptation.  I only take the jar out to add more money.  Only counting the money when I am ready to deposit keeps me from spending it as well.  It is a fun way to save and can be used to start or add to your emergency fund in addition to your regularly scheduled recurring deposits.

Accountability is another way to keep you motivated. If you have a friend who will keep you encouraged then share your savings journey with them. There are also online communities that you can join to share your journey and get motivation.  You will benefit from putting yourself first financially because you deserve the peace of mind saving for yourself will bring. Seeing that first hundred dollars in your account is motivating but watching it grow can be addictive.

Life happens when you are busy making plans

It seems like right when you get close to a savings goal life happens and you need to dip into your emergency fund. This happened to me recently when I had an unexpected car repair. Having the money in my emergency fund was awesome but was also annoyed that I had to use them. It seems that I have become quite addicted to watching my savings grow on my tracking sheets. I have a pretty aggressive savings goal and this expense pushed that goal back by about 90 days.  Being able to avoid adding to my debt by using money from my emergency fund is well worth the delay. Instead of paying the credit card company interest for this expense I can pay myself back.  Financial peace of mind is  priceless. No matter where you are in your financial journey you will benefit from paying yourself first.

 

 

Top 4 Reasons to Avoid Co-signing

IMG_0500Know the risks before signing on the dotted line

You may think that you are helping your loved by agreeing to cosign a loan for them but you there are several reasons that this is a bad idea. Cosigning can be helpful because it allows the person you are helping obtain that student loan, car or apartment that they may not have been able to qualify for on their own. You will feel better for being able to help them and they will be able to build their credit for their future. These are typically the reasons that most people use when they rationalize cosigning for a friend or family member. However the reality is that this person either has no credit or has proven that they are not trustworthy which is why they are calling you in the first place. These are warning signs and should be considered carefully before signing on the dotted line. Below are the top 5 reasons that you should avoid cosigning at all costs.

1. They won’t care about your credit score

If this person is unable to qualify for the loan on their own because of past payment history this is a red flag that should not be ignored. Banks have decades of experience with borrowers and they calculate the likelihood that people will pay back their loans using metrics that are usually pretty accurate. While you may not have the benefit of thousands of data points you do have access to your memories of your loved one’s past relationship with money. Have they had judgments against them from other lenders? Do they always seem to have an excuse about why they can’t pay their bills? Do they often borrow money from you or other people? These are signs that this person is not responsible and you will most likely end up paying the loan yourself. If they didn’t pay their loans previously the odds are very high that they don’t have a problem with their own bad credit and will not think twice about damaging yours.

2. You will be sued first if they don’t pay.

If they stop making payments on the loan the banks, in most states, will sue you first. Once the person stops paying the loan the bank will begin collections with you directly. This usually happens within the first 3-6 months of late payments. If they are unable to setup a payment plan with you directly they will begin collections. You will now have both late payments and collection activity on your credit score. With payment history making up 30% of your credit score this can cause a loss of 50+ points on your score. The only way to improve this section of your score is through timely payments or if the company agrees to remove the late payments. Getting those late payments removed is difficult to do so you will be stuck with this ding on your record. If you refuse to pay then the companies will also be able to sue you and garnish your wages. The only way to avoid this is to setup a payment plan and begin making payments yourself.

3. It can be harder for you to get a loan when you need it

When you cosign for someone the full amount of that loan shows up on your credit report. This raises your debt-to-income ratio and can make it difficult for you to get a loan for yourself. If you cosign for a car for your friend and two years down the line you attempt to get a loan for yourself you may be denied or have smaller loan options available to you. The bank will see that you already have a similar loan and adding to that amount may exceed what your income says you could afford to pay. This is true even if your loved one is making on-time payments and has never been late. The total amount of what has been borrowed can keep you from getting a house or car when you need it most.

4. Your relationship may be ruined if they fail to pay

If you’re loved one fails to pay back their loan it could strain or ruin your relationship. Nothing destroys a relationship faster than money. Think about how you would react if you had to delay your dreams because you were paying the balance on your friend’s car. How would you feel knowing that you are struggling to make their loan payments but you see them on social media taking vacations and buying expensive things? This can make you angry and resentful. These are two emotions that make relationships irreparable. It may be uncomfortable to turn them down now but it would be even more upsetting if you lose that family bond or years of friendship.

Is it ever a good idea to cosign?

Even with the above mentioned reasons to avoid cosigning there may be times that you are compelled to do it anyway. Typically cosigning for a spouse for joint purchases like a house or car is a pretty good risk as this is an item that will be used by both of you. In these situations it is also less likely that one of you are able to qualify for a large purchase like a house on your own so this is fairly common. Also parents will cosign for student loans for their children that are going to college as well. They do this in order to help their child establish credit as well as pay for college. There is a chance that the marriage ends in divorce or the child drops out of college and doesn’t pay back the loan but most people consider these acceptable risks. While they are acceptable they are still risks and should be considered with great care. If you make an informed decision you will be less likely to be caught unaware later.

 

Change Your Habits, Change Your Life

How to Guarantee That You Will Stick To Your Budget

How to Guarantee That You Will Stick To Your Budget

Take Responsibility For Your Actions

It has been said that we are 1 or 2 habits away from a major transformation. Our habits define our lives and we can trace our success and failures to the way that we live our lives. If you are unhappy with your personal relationships, your career trajectory or your bank account look at your daily habits. It can be very tempting to blame other people for our station in life and there are many things that are out of our control. However, the one person we have 100% control over in this world is ourselves. We get to decide how we react to every situation that occurs in our lives and we can change and grow ourselves.

In the world of personal finance, I have heard many people say “my boss didn’t give me that raise because they don’t like me.”, “My ex took all of my money in the divorce so now I’m ruined.”, “I don’t have time to work another job”, “my parents never taught me how to handle my money”, or “I grew up poor so I can’t do better.” While these statements may make us feel better in the moment or will garner sympathy from our girlfriends over drinks, it creates an environment of helplessness. When people feel helpless, they are giving their power to change their situation to other people.

Small Changes Lead To Big Results

In “The Compound Effect: Jumpstart Your Income, Your Life, Your Success” by Darrin Hardy he outlines a system that I have found useful in all areas of my life. I have recently finished my third reading of this book since 2014 and every time I have read it, I have found new ways to apply these principals to both my personal and financial life. This book introduced me to the concept of 100% responsibility. At first glance this idea seems a bit crazy because we all know that we can’t control how other people treat us or if we walk out and have an accident due to someone else’s negligence. In fact, that was my initial response the first time that I read about it but once I delved deeper into the concept, I found that taking control of my self and accepting responsibility for my actions or reactions gave me the strength to bounce back faster than most people. Was I upset when I felt like I had been taken advantage of or frustrated with myself for repeating the same money mistake? Absolutely. Changing my focus from “This is their fault” or “The sale made me overspend” to “How can I learn from this situation” and “I knew better than to buy this item” helped me change my future behavior.

Our successes and our failures are hidden in our daily habits. In The Compound Effect, Darren Hardy gives the example of an airplane taking off and plotting a course for one destination but by allowing their direction to be changed by as little as 1% will put that plane hundreds of miles off course. This is what happens to most of us with our finances. Its usually not the $400 purse that breaks our budget. It is several unplanned purchases under $50 through out the month that add up to our budget being hundreds of dollars off course. Instead of beating ourselves up and declaring that budgets don’t work or that we are just not good with money I recommend making small daily changes to your spending.

Track Your Habits

Studies have shown that it takes 21 days to formalize a habit and about a year for it to become a permanent unconscious habit. Twenty-one days really isn’t that much time in the scheme of things but when you are trying reverse years of poor spending habits it can feel like an eternity. One of my favorite methods of calibrating my spending is to track every unplanned dollar that I spend in a small notebook for one week.

The act of physically writing down every stick of gum, tank of gas, e-book and pair of pants for my daughter brings my awareness to my spending. Once I get to the end of that first week, I find that I have started skipping random purchases just to avoid having to write them down. Once I have my total for the first week, I then start the second week and try to reduce the amount of unplanned spending in order to beat my first week total. I repeat this pattern for the third week.

At the end of the three weeks I can tweak my budget based on real world spending instead of wishful thinking. Having concrete information also empowers me to build a budget that I am more likely to stick to because I know where my temptations lie. Now instead of feeling guilty about going to the movies I can build it into my budget which increases the likelihood that I will not overspend in that area.

Reap The Benefits Consistency

The tricky part of this process is that because you are making small, consistent changes you won’t usually see instant results. Most of us quit before we have reaped the rewards of constant forward momentum. Changing your mani-pedi schedule to every three weeks instead of of bi-weekly and putting that money towards debt repayment doesn’t feel all that exciting in the third month. You may not even see very much movement in your immediate debt reduction totals. However the compound interest that you are able to avoid by putting that extra money towards debt will shave months off of your repayment plan for that bill. Keep the long term goal in front of you, review it often and stay the course. Maintaining your new trajectory guarantees your success every time.

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