Why Financial Literacy is Important

January 22, 2020

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Dani Sumner

Dani Sumner

Financial Professional

791 Price Street
Suite 320
Pismo Beach, CA 93449

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December 30, 2019

The Pros and Cons of Budget Cars

The Pros and Cons of Budget Cars

Buying a car can be pricey.

The average used car costs about $20,000, while the average for a new one is around $37,000. When it comes to transportation (or anything else for that matter), it only makes sense that you’d want to save as much money as possible. But are there times when buying a used or budget car is a better investment than buying a new one? Here are some questions to ask yourself before you make that purchase.

How much mileage can you get out of this car?
One of the big things to consider when researching a budget car is how many miles of prior travel you’re paying for. Buying a cheap (although unreliable) car that breaks down on the regular due to wear and tear may give you fewer miles for your money than paying more for a car that might last 10 years. If you’re committed to buying used, you’ll probably want a mechanic to inspect the car for issues that might affect your car’s lifespan.

How much will maintenance and repairs cost you?
You might be one of the few who know someone with the auto know-how to keep an ancient car running for years. However, the average person will need to have car problems repaired at a professional shop, which can become expensive if it constantly needs work. This can be especially costly if you sink thousands into maintenance only for your vehicle to die for good earlier than expected. It’s worth considering that buying new might save you a huge hassle and potentially give you more miles for your money.

How does the interest rate compare for a new car vs. used?
The uncertainty involved with buying a used or budget car can increase the cost of financing. Lenders will often charge you higher interest for purchasing a used car than they would a new one. Having a high credit score will improve your rates, but that extra cost can still add up over time.

What you’re trying to avoid is buying a used piece of junk that requires constant maintenance at a shop, has a higher interest rate, and gives out too soon. There are definitely used and budget cars out there that have great value. Just be sure to do your research before you make such a significant investment!

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December 4, 2019

Why It's a Good Idea to Track Your Budget

Why It's a Good Idea to Track Your Budget

So you’re finally on board with this whole budget thing.

You’ve set up your plan. Now you’ve got a budget complete with average historical spending by category. You’ve discussed it with family members, roommates, and anyone else to whom the budget applies. You’ve checked off all the boxes. Yet somehow – at the end of the month, the math isn’t working out. The budget is busted.

What went wrong? Life is full of mysteries, like who left an empty box of cereal in the cupboard? Where are my glasses? Why won’t the baby go to sleep? And, where did all my money disappear to?

For a budget to work well, you’ll need to track it regularly and often. Many times, the reason you made a budget in the first place is that there’s very little room for error with saving and spending your money. A budget’s got to be loved and nurtured, kind of like a garden. Sometimes you have to get out there and pull some weeds or dig up a few rocks to keep it thriving.

Making Your Budget
To make your budget (if you haven’t already), there are several methods you can use. Good old pencil and paper never goes out of style. And it might help you see where you stand a little faster than potentially losing your initial momentum by learning a new “app”. Specialized software or online budgeting tools can be great – but they can also be fiddly if you’re not used to them. Rather than trying to figure out complicated menus and search for hidden buttons from the get-go, you might want to try it on paper first to work through your budget and establish a limit for each category of spending. Writing out your expenditures by hand has the added benefit of helping you face reality. It hurts a little more than automated solutions if you have to write the numbers down in black and white. If you’re good with spreadsheets, Microsoft Excel or Google Sheets can also be used to quickly build a budget without a frustrating learning curve.

Tracking Your Budget
Technology can be friend or foe in the home budget process. Even though you may have started out on paper, when it comes to tracking your spending for the long haul and in real time, technology is definitely a friend.

Mobile apps come in two forms: free and not free. We’ll focus on free apps for now because it’s consistent with the goal of keeping your spending under control.

Mint.com is owned by Intuit, famous for Quicken and Quickbooks software, and makes budget tracking very simple. Mint links to your bank account and other accounts you’d like to track, so you can see a complete view of your finances at a glance either on your mobile device or on your computer. Budgets are set automatically for each category but can be changed easily. Spending and income are also automatically tracked and categorized so you can view your progress – including budget amounts remaining for the month. Cash purchases can be added from the home screen.

Another good option is Clarity Money, which tracks spending by category but also provides an easy way to cancel subscriptions and access your free VantageScore Credit Score (by Experian). Clarity Money was featured by Google Play as a “Best of 2017” and is also available for iOS.

Paper or spreadsheet methods help to make the budgeting process more tangible. Automated tracking makes it easy to monitor your progress against your budget – and to maybe think twice about spending on impulse.

The important thing is to think of your budget like a garden – once you have it planned and laid out, it’s going to take regular maintenance to ensure it stays beautiful.

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November 25, 2019

What to Do First If You Receive an Inheritance

What to Do First If You Receive an Inheritance

In many households, nearly every penny is already accounted for even before it’s earned.

The typical household budget that covers the cost of raising a family, making loan payments, and saving for retirement usually doesn’t leave much room for extra spending on daydream items. However, occasionally families may come into an inheritance, you might receive a big bonus at work, or benefit from some other sort of windfall.

If you ever inherit a chunk of money (or large asset) or receive a large payout, it may be tempting to splurge on that red convertible you’ve been drooling over or book that dream trip to Hawaii you’ve always wanted to take. Unfortunately for many, though, newly-found money has the potential to disappear quickly with nothing to show for it, if you don’t have a strategy in place to handle it.

If you do receive some sort of large bonus – congratulations! But take a deep breath and consider these situations first – before you call your travel agent.

Taxes or Other Expenses
If you get a large sum of money unexpectedly, the first thing you might want to do is pull out your bucket list and see what you can check off first. But before you start spending, the reality is you’ll need to put aside some money for taxes. You may want to check with an expert – an accountant or financial advisor may have some ideas on how to reduce your liability as well.

If you suddenly own a new house or car as part of an inheritance, one thing that you may not have considered is how much it will cost to hang on to them. If you want to keep them, you’ll need to cover maintenance, insurance, and you may even need to fulfill loan payments if they aren’t paid off yet.

Pay Down Debt
If you have any debt, you’d have a hard time finding a better place to put your money once you’ve set aside some for taxes or other expenses that might be involved. It may be helpful to target debt in this order:

  1. Credit card debt: These are often the highest interest rate debt and usually don’t have any tax benefit. Pay these off first.
  2. Personal loans: Pay these off next. You and your friend/family member will be glad you knocked these out!
  3. Auto loans: Interest rates on auto loans are lower than credit cards, but cars depreciate rapidly – very rapidly. If you can avoid it, you don’t want to pay interest on a rapidly depreciating asset. Pay off the car as quickly as possible.
  4. College loans: College loans often have tax-deductible interest but there is no physical asset you can convert to cash – there’s just the loan.
  5. Home loans: Most home loans are also tax-deductible. Since your home value is likely appreciating over time, you may be better off putting your money elsewhere rather than paying off the home loan early.

Fund Your Emergency Account
Before you buy that red convertible, put aside some money for a rainy day. This could be liquid funds – like a separate savings account.

Save for Retirement
Once the taxes are covered, you’ve paid down your debt, and funded your emergency account, now is the time to put some money away towards retirement. Work with your financial professional to help create the best strategy for you and your family.

Fund That College Fund
If you have kids and haven’t had a chance to save all you’d like towards their education, setting aside some money for this comes next. Again, your financial professional can recommend the best strategy for this scenario.

Treat Yourself
NOW you’re ready to go bury your toes in the sand and enjoy some new experiences! Maybe you and the family have always wanted to visit a themed resort park or vacation on a tropical island. If you’ve taken care of business responsibly with the items above and still have some cash left over – go ahead! Treat yourself!

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November 20, 2019

Which Debt Should You Pay Off First?

Which Debt Should You Pay Off First?

American combined consumer debt now exceeds $13 trillion high.

Here’s the breakdown:

  • Credit cards: $931 billion
  • Auto loans: $1.22 trillion
  • Student loans: $1.38 trillion
  • Mortgages: $8.88 trillion
  • Any type of debt: $13.15 trillion

Nearly every type of debt can interfere with your financial goals, making you feel like a hamster on a wheel – constantly running but never actually getting anywhere. If you’ve been trying to dig yourself out of a debt hole, it’s time to take a break and look at the bigger picture.

Did you know there are often advantages to paying off certain types of debt before other types? What the simple list above doesn’t include is the average interest rates or any tax benefits to a given type of debt, which can change your priorities. Let’s check them out!

Credit Cards
Credit card interest rates now average over 15%, and interest rates are on the rise. For most households, credit card debt is the place to start – stop spending on credit and start making extra payments whenever possible. Think of it as an investment in your future, one that pays a 15% guaranteed return – the equivalent of a 20% return in the stock market or other taxable investment.

Auto Loans
Interest rates for auto loans are usually much lower than credit card debt, often under 5% on newer loans. Interest rates aren’t the only consideration for auto loans though. New cars depreciate nearly 20% in the first year. In years 2 and 3, you can expect the value to drop another 15% each year. The moral of the story is that cars are a terrible investment but offer great utility. There’s also no tax benefit for auto loan interest. Eliminating debt as fast as possible on a rapidly depreciating asset is a sound decision.

Student Loans
Like auto loans, student loans are usually in the range of 5% to 10% interest. While interest rates are similar to car loans, student loan interest is often tax deductible, which can lower your effective rate. Auto loans can usually be paid off faster than student loan debt, allowing more cash flow to apply to student debt, emergency funds, or other needs.

Mortgage Debt
In most cases, mortgage debt is the last type of debt to pay down. Mortgage rates are usually lower than the interest rates for credit card debt, auto loans, or student loans, and the interest is usually tax deductible. If mortgage debt keeps you awake at night, paying off other types of debt first will give you greater cash flow each month so you can begin paying down your mortgage.

When you’ve paid off your other debt and are ready to start tackling your mortgage, try paying bi-monthly (every two weeks). This simple strategy has the effect of adding one extra mortgage payment each year, reducing a 30-year loan term by several years. Because the payments are spread out instead of making one (large) 13th payment, it’s likely you won’t even notice the extra expense.

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November 4, 2019

How to Build Credit When You’re Young

How to Build Credit When You’re Young

Your credit score can affect a lot more than just your interest rates or credit limits.

Your credit history can have an impact on your eligibility for rental leases, raise (or lower) your auto insurance rates, or even affect your eligibility for certain jobs (although in many cases the authorized credit reports available to third parties don’t contain your credit score if you aren’t requesting credit). Because credit history affects so many aspects of financial life, it’s important to begin building a solid credit history as early as possible.

So, where do you start?

  1. Apply for a store credit card.
    Store credit cards are a common starting point for teens and young adults, as it often can be easier to get approved for a store card than for a major credit card. As a caveat though, store card interest rates are often higher than for a standard credit card. Credit limits are also typically low – but that might not be a bad thing when you’re just getting started building your credit. A lower limit helps ensure you’ll be able to keep up with payments. Because you’re trying to build a positive history and because interest rates are often higher with a store card, it’s important to pay on time – or ideally, to pay the entire balance when you receive the statement.

  2. Become an authorized user on a parent’s credit card.
    Another common way to begin building credit is to become an authorized user on a parent’s credit card. Ultimately, the credit card account isn’t yours, so your parents would be responsible for paying the balance. (Because of this, your credit score won’t benefit as much as if you are approved for a credit card in your own name.) Another thing to keep in mind is that some credit card providers don’t report authorized users’ activity to credit bureaus. Additionally, even if you’re only an authorized user, any missed or late payments on the card can affect your credit history negatively.

Are secured cards useful to build credit?
A secured credit card is another way to begin building credit. To secure the card, you make an initial deposit. The amount of that deposit is your credit line. If you miss a payment, the bank uses your collateral – the deposit – to pay the balance. Don’t let that make you too comfortable though. Your goal is to build a positive credit history, so if you miss payments – even though you have a prepaid deposit to fall back on – you’re still going to get a ding on your credit history. Instead, it’s best to use a small amount of your available credit each month and to pay in full when you get the statement. This will help you look like a credit superstar due to your consistently timely payments and low credit utilization.

As you build your credit history, you’ll be able to apply for credit in larger amounts, and you may even start receiving pre-approved offers. But beware. Having credit available is useful for certain emergencies and for demonstrating responsible use of credit – but you don’t need to apply for every offer you receive.

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October 16, 2019

Tips on Managing Money for Couples

Tips on Managing Money for Couples

Couplehood can be a wonderful blessing, but – as you may know – it can have its challenges as well.

In fact, money matters are the leading cause of stress in modern relationships. The age-old adage that love trumps riches may be true, but if money is tight or if a couple isn’t meeting their financial goals, there could be some unpleasant conversations (er, arguments) on the bumpy road to bliss with your partner or spouse.

These tips may help make the road to happiness a little easier.

1. Set a goal for debt-free living. Certain types of debt can be difficult to avoid, such as mortgages or car payments, but other types of debt, like credit cards in particular, can grow like the proverbial snowball rolling down a hill. Credit card debt often comes about because of overspending or because insufficient savings forced the use of credit for an unexpected situation. Either way, you’ll have to get to the root of the cause or the snowball might get bigger. Starting an emergency fund or reigning in unnecessary spending – or both – can help get credit card balances under control so you can get them paid off.

2. Talk about money matters. Having a conversation with your partner about money is probably not at the top of your list of fun-things-I-look-forward-to. This might cause many couples to put it off until the “right time”. If something is less than ideal in the way your finances are structured, not talking about it won’t make the problem go away. Instead, frustrations over money can fester, possibly turning a small issue into a larger problem. Discussing your thoughts and concerns about money with your partner regularly (and respectfully) is key to reaching an understanding of each other’s goals and priorities, and then melding them together for your goals as a couple.

3. Consider separate accounts with one joint account. As a couple, most of your financial obligations will be faced together, including housing costs, monthly utilities and food expenses, and often auto expenses. In most households, these items ideally should be paid out of a joint account. But let’s face it, it’s no fun to have to ask permission or worry about what your partner thinks every time you buy a specialty coffee or want that new pair of shoes you’ve been eyeing. In addition to your main joint account, having separate accounts for each of you may help you maintain some independence and autonomy in regard to personal spending.

With these tips in mind, here’s to a little less stress so you can put your attention on other “couplehood” concerns… Like where you two are heading for dinner tonight – the usual hangout (which is always good), or that brand new place that just opened downtown? (Hint: This is a little bit of a trick question. The answer is – whichever place fits into the budget that you two have already decided on, together!)

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October 2, 2019

3 Easy Ways To Save For Retirement (Without Investing)

3 Easy Ways To Save For Retirement (Without Investing)

Our retirement years will be here sooner than we think.

Ideally, you’ve been putting away money in your IRA, 401k, or other savings accounts. But are you overlooking ways to save money now so you can free up more for your financial strategy or help build your cash stash for a rainy day?

1. Pay Yourself First.
If you’re making contributions to your 401k plan at work, you’re already paying yourself first. But you can also apply the same principle to saving. (If you open a separate account just for this, it’s easier to do.) If you prefer, you can accomplish the same thing on paper by keeping a ledger. Just be aware that paper makes it easier to cheat (yourself). With a separate account, you can schedule an automatic transfer to make the process painless and fuhgettaboutit.

Here’s how it works. Whenever you get paid, transfer a fixed dollar amount into your special account – before you do anything else. If you don’t pay yourself first, you might guess what will happen. (Be honest.) If you’re like most people, you’ll probably spend it, and if you’re like most people, you might not really know where it went. It’s just gone, like magic.

Paying yourself first helps to avoid the “disappearing money” trick. Hang in there! After a while, as the money starts adding up, you’ll impress yourself with your savings prowess.

2. Got A Bonus From Work? Great! Keep it.
What do you think most people are tempted to do if they get a bonus or a raise? What are YOU most tempted to do if you get a bonus or a raise? Probably spend it. Why? It’s easy to think of 100 things you could use that extra cash for right now. Home repairs or upgrades, a night out on the town, that new handbag you’ve been coveting for months… Maybe your bonus is enough for you to consider trading in your car for a nicer one, or getting that new addition to your house.

Receiving an unexpected windfall is fun. It’s exciting! But here is where some caution is wise. Pause for a moment. If you had everything you needed on Friday and then get a raise on Monday, you’ll still have everything you need, right? Nothing has changed but the calendar. If you hadn’t gotten that bonus, would your life and your current financial strategy still be the same as it was last week? Consider putting (most of) that extra money away for later, and using some of it for fun!

3. Pay Down That Debt.
By now you’ve probably heard a financial guru or two talking about “good” debt and “bad” debt. Debt IS debt, but some types of debt really are worse than others.

Credit cards and any high-interest loans are the first priority when retiring debt – so that you can retire too, someday. Do you really know how much you’re paying in interest each month? Go ahead and look. I’ll wait… Once you know this number, you can’t “unknow” it. But take heart! Use this as a powerful incentive to pay those balances off as fast as you can.

The cost of credit isn’t just the interest. That part is spelled out in black and white on your credit card statement (which you just looked at, right)? The other costs of credit are less obvious. Did you know your credit score affects your insurance rates? Keeping those cards maxed out can cost more than just the interest charges.

Every month you chip away at the balances, you’ll owe less and pay less in interest. (You’ll feel better, too.) And you know what to do with the leftover money since you knocked out that debt. Hint: Save it.

But keep this in mind – life is about balance. It’s okay to treat yourself once in awhile. Just make sure to pay yourself first now, so you can treat yourself later in retirement.

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August 28, 2019

Why You Should Care About Insurable Interest

Why You Should Care About Insurable Interest

First of all, what is insurable interest?

It’s simply the stake you have in something that is being insured – and that the amount of insurance coverage for whatever is being insured is not more than your potential loss.

To say things could become a bit awkward might be an understatement if your insurable interest isn’t considered before you’re deep into the planning phase of a project or before you’ve signed some papers, like a title or a loan.

It’s better for your sanity to understand insurable interest beforehand. Where the issue of insurable interest often arises is in auto insurance. Let’s look at an example.

Let’s say you have a car that’s worth $5,000. $5,000 is the maximum amount of money you would lose if the car is stolen or damaged – and $5,000 would be the most you could insure the car for. $5,000 is your insurable interest.

In the above example, you own the car, so you have an insurable interest in it. By the same token, you can’t insure your neighbor’s car. If your neighbor’s car was stolen or damaged, you wouldn’t suffer any financial loss because it wasn’t your car.

Here’s where it might get a little tricky and why it’s important to understand insurable interest. Let’s say you have a young driver in the house, a teenager, and it’s time for him to get mobile. He’s been saving up his lawn-mowing money for two years and finally bought the (used) car of his dreams.

You might have considered adding your son’s car to your auto policy to save money – you’ve heard how much it can cost for a teen driver to buy their own policy. Sounds like a good plan, right? However, the problem with this strategy is that you don’t have an insurable interest in your son’s car. He bought it, and it’s registered to him.

You might find an insurance sales rep who will write the policy. But there’s a risk the policy won’t make it through underwriting and – more importantly – if there’s a claim with that car, the claim might not be covered because you didn’t have an insurable interest in it. If you want to put that car on your auto insurance policy, the car needs to be registered to the named insured on the policy – you.

Insurable Interest And Lenders
If you have a mortgage or an auto loan, your lender is probably listed on your policy. Both you and the lender have an insurable interest in the house or the car. Over time, as the loan is paid down, you’ll have a greater insurable interest and the lender’s insurable interest will become smaller. (Hint: When your loan is paid off, ask your agent to remove the lender from the policy to avoid any confusion or delays if you have a claim someday.)

Does Ownership Create Insurable Interest?
Good question. It might seem like ownership and insurable interest are equivalent – they often occur simultaneously. But there are times when you can have an insurable interest in something without being an owner.

Life insurance is a great example of having an insurable interest without ownership. You can’t own a person – but if a person dies, you may experience a financial loss. However, just as you can’t insure your neighbor’s car, you can’t purchase a life insurance policy on your neighbor, either. You’d have to be able to demonstrate your potential loss if your neighbor passed away. And no it doesn’t count if they never returned those hedge clippers they borrowed from you last spring.

So now you know all about insurable interest. While insurable interest requirements may seem inconvenient at times, the rules are there to protect you and to help keep rates lower for everyone. Without insurable interest requirements, the door is open to fraud, speculation, or even malicious behavior. A little inconvenience seems like a much better option.

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August 12, 2019

The Black Hole of Checking (Part 2)

The Black Hole of Checking (Part 2)

Previously on “The Black Hole of Checking”…

In Part 1, we learned that any object pulled into a black hole will be stretched into the shape of spaghetti through a process called – wait for it – spaghettification. If you threw your shoe into it, the black hole’s gravity would stretch and compress your footwear into an unimaginably thin leather noodle as it was pulled deeper and deeper into the hole. Your shoe would be unrecognizable by the time gravity had its way.

The same thing can happen to the money in your checking account. Having a child, replacing an old automobile with something newer and more reliable, or taking a last-minute trip to see the grandparents in Florida over the holidays, can put a strain on your finances and stretch your reserves farther than you might have anticipated. As new bills create a bigger and bigger hole in your budget, your financial strategy may become something you don’t recognize.

Here in Part 2, let’s talk about how assigning an identity to your money can keep your financial goals on track, and help reduce the stretching of finite resources.

For example, say you keep all of your money in your checking account. Simple is better, right? If you want to go on a family vacation, you’ll just withdraw the funds from your account. Paying in cash to secure a “great” package deal up front? You’re all over that. But what happens if you pick up some souvenirs for Uncle Bob and Aunt Alice? Hmmm…if you get something for them you’ll have to get something for Greg and Susan too. (You’ll never make that mistake again.) And you just have to try that chic little cafe that you read about – you may never pass this way again. (But how can they get away with charging that much for a mimosa?!) Buy One, Get One all day pass at “The Biggest Miniature Museum in the World”? Let’s do it!

When you’re on vacation – having fun and enjoying yourself – it might be hard to resist taking advantage of unique experiences or grabbing those unusual gifts you didn’t account for. On the other hand, you may have no problem being thrifty when travelling, but what if someone gets sick or injured and needs hospital care on the road, or the car breaks down, or there is unexpected bad weather and you have to stay an extra day or two at the hotel?

After it’s all said and done, when you return home from your fun-filled trip, you may find a gaping hole where you had a pile of cash at the beginning of the month. If you had given your money a specific role before you planned your vacation, you may not have had such a shock when you got home – and you can enjoy your memories knowing you stayed on track with your financial goals.

Give your money identity, purpose, and the potential to grow by separating it into designated accounts. Try these 3 for starters:

1. Emergency Fund. Leaky roof? Flat tire? Trip to the emergency room? Maybe you’re great at resisting impulse buys (like those fabulous shoes you spied the other day), but sometimes things happen that are out of your control. Your emergency fund is for situations like these. Unexpected, unplanned-for expenses can derail a financial strategy very quickly if you’re not prepared.

The most important thing to keep in mind about this account? Do. Not. Touch. It. Unless there’s an emergency, of course. Then replace the money in the account as quickly as possible until it’s fully funded again.

How much should you keep in your emergency fund? A good rule of thumb is to shoot for at least $1,000, then build it to 3-6 months of your annual income. However much you decide suits your financial goals, just make sure you aren’t dipping into it when you don’t have an emergency. (Note: Grabbing a great pair of heels on sale is not an emergency.)

2. Retirement Fund. If you want to retire at some point (and most of us do), this one is a no-brainer. Odds are you’ve already begun to set aside a little something for the day you can trade in your suit and tie for a Hawaiian shirt and a pair of flip-flops, but is your retirement fund in the right place now? Unlike a day-to-day checking account with a very low or non-existent interest rate, your retirement fund should be in a separate account that has some power behind it. You’re taking the initiative to put away money for your future – get it working for you! Your goal should be to grow your retirement fund in an account with as high of an interest rate as you can find.

3. Fun Fund. This category may seem frivolous if you’re trying to stick to a well-structured financial plan, but it’s actually an important piece that can help make your budget “work”! Depending on your priorities, you might contribute a little or a lot to this account, but making some room for fun might make it more palatable to save long-term.

You might try setting aside 10% of your paycheck for fun and entertainment and see how that works – is that too much or not enough? Bonus: this is easy to calculate each month. If you’re bringing in $2,000 per month, put no more than $200 in your Fun Fund.

What you do with your Fun Fund is your choice. Will it be more of a vacation fund or a concert fund? A wardrobe fund or a theme park fund? It’s all up to you. And when the rest of your money has a purpose and is growing for your future, you might feel less guilty about snagging those hot shoes you’ve had your eye on when they finally do get marked down.

Don’t let your goals and your money get lost in a black hole of coulda, woulda, shoulda. What kind of purpose do you want to give your money? I can help!

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April 29, 2019

What Happens If a Life Insurance Policy Lapses?

What Happens If a Life Insurance Policy Lapses?

The dollar amount of death benefit payouts that seniors 65 and older forfeit annually through lapsed or surrendered life insurance policies is more than the net worth

That’s $112 billion worth of death benefits, inheritance, donations to charities, and cash value down the drain. Or, more specifically, that’s $112 billion that goes right back to insurance companies – all because policyholders surrendered their policies or allowed them to lapse.

A lapse in a life insurance policy occurs when a premium isn’t paid. There is a brief grace period in which a premium payment for a life insurance policy can still be made. But if the payment is not made during the grace period, the life insurance policy will lapse. At this point, all benefits are lost.

There are circumstances in which the life insurance policy can be recovered. It could be as simple as resuming premium payments… or it could involve a lengthy process that includes a new medical exam, repaying all premium payments from the lapsed period, and possibly the services of an attorney.

The best practice to avoid a policy lapse is to make premium payments on time. To help out their customers, many insurance companies can automatically withdraw the monthly payment from a checking account, and some companies may take missed premium payments out of the policy’s cash value – but please note: term life insurance has no cash value. In this case, missed premium payments won’t have the cash value failsafe.

If you’re in danger of a lapse, contact me today. Together we can review your financial strategy to help you and your loved ones stay covered.

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April 22, 2019

A Pocket Guide to Homeowners Insurance

A Pocket Guide to Homeowners Insurance

Homeowners insurance should bring peace of mind.

The right policy is there to help protect you if something happens to your home. Since a home may be the most significant investment many of us make in our lives, the proper homeowners insurance should be a major consideration.

Getting the right homeowners insurance is essential, but doesn’t have to be difficult. Still, how do you know if you’re selecting the right type of insurance policy for your house? Read on for answers to some common questions you might have.

What is the purpose of a homeowners insurance policy?
A homeowners insurance policy is a contract by which an insurance company agrees to pay for repairs or to replace your home or property if it is involved in a covered loss, such as a fire. A home insurance policy may also offer you liability protection in case someone is injured on your property and files a lawsuit.

Do I have to have homeowners insurance?
Your mortgage company will probably require a homeowners insurance policy. A lender wants to make sure their investment is protected should a catastrophe strike. The mortgage company would need you to insure your home for the cost to replace it if it were to be destroyed in a covered accident.

How do I know how much insurance to buy for my home?
The limit – or amount of insurance you place on your home – is determined by several factors. The construction of your home is typically going to be the largest determinant of the cost to replace it. So consider what your home is made of. Construction types include concrete block, masonry, and wood frame. Also, consider the size of your home.

Personal property is another consideration when determining how much insurance to purchase for your home. A typical homeowners insurance policy usually offers a personal property limit equal to half the replacement cost of your home. So if your home is insured for $100,000, your policy may automatically assign a personal property limit of $50,000.

What is the best deductible for a homeowners insurance policy?
When it comes to deductibles, consider selecting one that you can easily and quickly come up with out of pocket, just in case. Homeowners insurance policy deductibles may range from $500 to $10,000. Some policies offer percentage deductibles for certain damages, such as windstorm damage. For example, a coastal resident may have a windstorm deductible of two percent of the dwelling limit and a $1,000 deductible for all other perils.

There may be some cost savings features when you select a higher deductible on your homeowners insurance. Talk with a licensed insurance professional about your deductible options and premium savings.

Know the policy exclusions
All homeowners insurance policies typically contain exclusions for accidents and damages they don’t cover. For example, your policy likely does not cover damage to your home caused by an ongoing maintenance problem. Also, most homeowners insurance policies don’t automatically cover losses resulting from a flood.

Exclusions are important because they drive coverage. Talk to your insurance professional about your policy’s exclusions.

Know the basics and talk to a professional
As far as homeowners insurance policies are concerned, it’s crucial for homeowners to know the basics – limits, coverages, deductibles, and special exclusions. If you have specific concerns about your homeowners insurance, seek guidance from a licensed insurance professional.

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This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies that may be available to you. Before taking out any loan or enacting a funding strategy, seek the advice of a licensed financial professional, realtor, accountant, and/or tax expert to discuss your options.

April 17, 2019

Handling your car loan like a boss

Handling your car loan like a boss

Cars may be necessary to get around, but they can be expensive.

At some point, many of us will need to finance a car. Coming up with enough cash to buy a car outright – even a used car – can be difficult. Enter the auto loan.

Financing a car isn’t all bad, especially if you follow a few best practices that can help keep your car loan in good shape. Avoiding the dreaded upside down car loan – owing more on your car than it’s worth – is the name of the game when it comes to a good automobile loan.

Why do car loans go upside down?
Being upside down on your car loan is surprisingly common. It happens to many of us, and the root cause is depreciation. Depreciation is the decline in value of a good or product over time. Many physical goods depreciate – furniture, electronics, clothing, and cars.

There is a saying that a car begins depreciating as soon as you drive it off the lot. Unlike a good such as fine art or precious stones that you would expect to appreciate over time, a car usually will lose its value over time.

For example, say you buy a new car for $25,000. After three months your car depreciates by $3,000, so it’s now worth $22,000. If your down payment was less than $3,000 or you didn’t use a down payment at all, you are now upside down – owing more money on your car than it’s actually worth.

Some cars, however, hold their value better than others. Luxury cars have a slower depreciation rate than an inexpensive compact car. The popularity of a vehicle can also affect depreciation rates.

What happens when you’re upside down on a car loan?
Being upside down on your car loan may actually not mean much unless you’re involved in a loss and your car gets totaled. Assuming you have proper auto insurance, your policy should pay out the actual cash value of your totaled vehicle, which may not be enough to pay off the remaining balance of your auto loan. Then you’re stuck paying the balance on a loan for a car that you don’t have anymore. That is why it’s essential to avoid being upside down in your car loan.

Strategies to keep your car loan healthy
Keeping your car loan right side up starts with putting a healthy down payment on your car. Typically, a 20 percent down payment may give you enough equity right off the bat to keep your car loan from going upside down when the vehicle begins depreciating. So, if you’re purchasing a $25,000 car, aim to put at least $6,000 down.

Another way to avoid being upside down on your car loan is to select the shortest repayment term possible. If you can afford it, consider a 36-month repayment plan. Your monthly payments may be a bit higher, but the chances of your loan going upside down may be less.

Choose carefully
Keeping your car loan from going upside down is important. Make sure you have a healthy down payment, shop for vehicles within your budget, and stick to the shortest repayment term you can afford. Simple strategies can help make sure your car loan stays in the black.

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This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies that may be available to you. Before taking out any loan or enacting a funding strategy, seek the advice of a licensed financial professional, accountant, and/or tax expert to discuss your options.

April 8, 2019

Quick ways to cut your monthly expenses

Quick ways to cut your monthly expenses

Looking to save a little money?

Maybe you’re coming up just a tad short every month and need to cut back a little bit. If you’re scratching your head wondering where those cuts are going to come from, no worries! Reducing monthly expenses may not be as hard as you think.

Complete an insurance review
Often, there could be an opportunity to save some money on your insurance without even switching companies. It might be worth taking the time to review your insurance policies carefully to make sure you’re getting all the discounts you’re eligible for. There may be auto insurance discounts available for safety features on your car such as airbags and antilock brake systems. You may also get a multi-policy discount if you have more than one policy with the same company.

If you aren’t sure what to look for, contact your insurance professional and ask for an insurance review with an eye toward savings. They may be able to offer some advice on changes that can lower your monthly premium.

Shop around on your utilities
Some consumers may have a choice when it comes to utility providers. If this is you, make sure you shop around to get the best rate on your household utilities. Research prices for electricity, water, gas, or oil. If your area has only one provider, don’t worry, you may still save money on utilities by lowering your consumption. Turn off the lights and be conservative with your water usage and you might see some savings on your monthly utility bills.

Cell phone service
Your cell phone bill may be a great place to save on your monthly expenses. It seems like every cell phone provider is itching to make you a better deal. Often, just calling your current provider and asking for a better rate may help. Also, study your data and phone usage and make sure you’re only paying for what you use. Maybe you don’t really use a lot of data and can lower your data plan. A smaller data plan can often save you money on your monthly bill.

Interest on credit cards
Interest is like throwing money away. Paying interest does nothing for you. Still, we’ve probably all carried a little debt at one time or another. If you do have credit card debt you’re trying to pay off, you may be able to negotiate a lower interest rate. You can also apply for a no interest card and complete a balance transfer (if any associated fees make sense).

The other benefit of low or no interest on your debt is that more of your payment applies to the principal balance so you’ll potentially get rid of that debt faster.

Subscription services
These days there’s a subscription box service for just about everything – clothing, skin care products, wine, and even dinner. It can be easy to get caught up in these services because the surprise of something new arriving once a month is alluring and introductory offers may be hard to resist. But if you’re trying to save on your monthly expenses, give your subscription services a once over and make sure you’re really using what you’re buying. You may want to cut one or two of them loose to help save on your monthly expenses.

It is possible to cut back on your monthly budget without (too) much sacrifice. With a little effort and know-how, you can help lower your expenses and save a little cash.

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March 27, 2019

Emergency Fund Basics

Emergency Fund Basics

Unexpected expenses are a part of life.

They can crop up at any time and often occur when you least expect them. An emergency expense is usually not a welcome one – it can include anything from car repairs to veterinary care to that field trip fee your 12 year old informed you about the day of. So, what’s the best way to deal with those financial curve balls that life inevitably throws at you? Enter one of the most important personal financial tools you can have – an emergency fund.

What is an emergency fund?
An emergency fund is essential, but it’s also simple. It’s merely a stash of cash reserved solely for a financial emergency. It’s best to keep it in a place where you can access it easily, such as a savings account or a money market fund. (It also might not hurt to keep some actual cash on hand in a safe place in your house.) When disaster strikes – e.g., your water heater dies right before your in-laws arrive for a long weekend – you can pull funds from your emergency stash to make the repairs and then feel free to enjoy a pleasant time with your family.

Some experts recommend building an emergency fund equal to about 6-12 months of your monthly expenses. Don’t let that scare you. This may seem like an enormous amount if you’ve never committed to establishing an emergency fund before. But having any amount of money in an emergency fund is a valuable financial resource which may make the difference between getting past an unexpected bump in the road, and having long term financial hindrances hanging over you, such as credit card debt.

Start where you are
It’s okay to start small when building your emergency fund. Set manageable savings goals. Aim to save $100 by the end of the month, for example. Or shoot for $1,000 if that’s doable for you. Once you get that first big chunk put away, you might be amazed at how good it feels and how much momentum you have to keep going.

Take advantage of automatic savings tools
When starting your emergency fund, it’s a good idea to set up a regular savings strategy. Take a cold, hard look at your budget. Be as objective as possible. This is a new day! Now isn’t the time to beat yourself up over bad money habits you might have had in the past, or how you rationalized about purchases you thought you needed. After going through your budget, decide how much you can realistically put away each month and take that money directly off the top of your income. This is called “paying yourself first”, and it’s a solid habit to form that can serve you the rest of your life.

Once you know the amount you can save each month, see if you can set up an automatic direct deposit for it. (Oftentimes your paycheck can be set to go into two different accounts.) This way the money can be directly deposited into a savings account each time you get paid, and you might not even miss it. But you’ll probably be glad it’s there when you need it!

Don’t touch your emergency fund for anything other than emergencies
This is rule #1. The commitment to use your emergency fund for emergencies only is key to making this powerful financial tool work. If you’re dipping into this fund every time you come across a great seasonal sale or a popular new mail-order subscription box, the funds for emergencies might be gone when a true emergency comes up.

So keep in mind: A girls’ three day weekend, buying new designer boots – no matter how big the mark-down is – and enjoying the occasional spa day are probably NOT really emergencies (although these things may be important). Set up a separate “treat yourself fund” for them. Reserve your emergency fund for those persnickety car breakdowns, unexpected medical bills, or urgent home repairs.

The underpinning of financial security
An emergency fund is about staying prepared financially and having the resources to handle life if (and when) things go sideways. If you don’t have an emergency fund, begin building one today. Start small, save consistently, and you’ll be better prepared to catch those life-sized curve balls.

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March 25, 2019

Credit unions: What you should know

Credit unions: What you should know

If you’ve always used the services of a traditional bank, you might not know the ins and outs of credit unions and if using one might be better for your financial situation.

Credit unions are generally known for their customer-focused operations and friendliness. But the main difference between a bank and a credit union is that a credit union is a nonprofit organization that you have to be a member of to participate in its services. Credit unions may offer higher interest rates and lower fees than banks, but banks may provide more services and a greater range of products.[i]

Read on for some basics about what you should know before you join one.

Protection and insurance
Just like banks, your accounts at a credit union should be insured. The National Credit Union Share Insurance Fund (NCUSIF) functions to protect consumer deposits if the credit union becomes insolvent. The fund protects up to $250,000 per customer in deposits.[ii] Be sure the credit union you select is backed by the NCUSIF.

What credit union is best for you?
Today there are many credit unions available. Many now offer 100 percent online banking so you may never need to visit a branch at all.

The most important feature in selecting a credit union is to make sure they meet your personal banking needs and criteria. Here are a few things to consider:

  • Does the credit union offer the products and services you want? Can you live without the ones they don’t?
  • Do they have competitive interest rates when compared to banks?
  • Are the digital and online banking features useful?
  • What are the fee schedules?
  • What are the credit union membership requirements? Do you qualify for membership?

Take your time and do some research. Credit unions vary in the services provided as well as the fees for such services.

What to expect when opening a credit union account
Each credit union may have slightly different requirements when opening an account, but in general, you will most likely need a few things:

Expect to complete an application and sign documents. When opening a credit union account, you will likely have to fill out some forms and sign other paperwork. If you don’t understand something you are asked to sign, make sure you get clarification. Be prepared to show identification. You will likely be asked to show at least two forms of identification when opening an account. Your credit union will also probably ask for your social security number, date of birth, and physical address. Be prepared to show proof of your personal information.

Make the required opening deposit. On the day you open your credit union account, you’ll likely be asked to make an opening deposit. Each credit union may have a different minimum deposit required to open the account. It could be up to $100 (or more), but call the credit union to make sure.

Unique benefits
Credit union accounts offer some unique advantages for members. You may enjoy more comfortable access to personal loans or even auto financing and mortgages. Credit unions may offer other perks such as fee waivers, as well as discounts on other products and services that come from being a member.

If participating in a customer-owned bank sounds interesting to you, a credit union may be a good option. There are more credit unions available today than ever. Do your research. You may find an option that compares to your current bank, but offers some greater benefits that will make it worth the switch.

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This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies for saving and/or investing that may be available to you. Any examples used in this article are hypothetical. Before investing or enacting a savings or retirement strategy, seek the advice of a licensed financial professional, accountant, and/or tax expert to discuss your options.

[i] https://www.creditkarma.com/advice/i/difference-between-credit-union-and-bank/
[ii] https://www.ncua.gov/support-services/share-insurance-fund

March 4, 2019

Tackling long term financial goals

Tackling long term financial goals

Many of us have probably had some trouble meeting a long-term goal from time to time.

Health, career, and personal enrichment goals are often abandoned or relegated to some other time after the initial excitement wears away. So how can you keep yourself committed to important long term goals – especially financial ones? Let’s look at a few strategies to help you stay committed and hang in there for the long haul.

Start small when building the big financial picture
Most financial goals require sustained commitment over time. Whether you’re working on paying off credit card debt, knocking out your student loans, or saving for retirement, financial heavyweight goals can make even the most determined among us feel like Sisyphus – doomed for eternity to push a rock up a mountain only to have it roll back down.

The good news is that there is a strategy to put down the rock and reach those big financial goals. To achieve a big financial goal, it must be broken down into small pieces. For example, let’s say you want to get your student loan debt paid off once and for all, but when you look at the balance you think, “This is never going to happen. Where do I even start?” Cue despair.

But let’s say you took a different approach and focused on what you can do – something small. You’ve scoured your budget and decided you can cut back on some incidentals. This gives you an extra $75 a month to add to your regular student loan payment. So now each month you can make a principal-only payment of $75. This feels great. You’re starting to get somewhere. You took the huge financial objective – paying off your student loan – and broke it down into a manageable, sustainable goal – making an extra payment every month. That’s what it takes.

Use the power of automation
It seems there has been a lot of talk lately in pop psychology circles about the force of habit. The theory is if you create a practice of something, you are more likely to do it consistently.

The power of habit can work wonders for financial health, and with most financial goals, we can use automation tools to help build our habits. For example, let’s say you want to save for retirement – a great financial goal – but it may seem abstract, far away, and overwhelming.

Instead of quitting before you even begin, or succumbing to confusion about how to start, harness the power of automation. Start with your 401(k) plan – an automated savings tool by nature. Money comes out of your paycheck directly into the account. But did you know you can set your plan to increase every year by a certain percentage? So if this year you’re putting in three percent, next year you might try five percent, and so on. In this way, you’re steadily increasing your retirement savings every year – automatically without even having to think about it.

Find support when working on financial goals
Long term goals are more comfortable to meet with the proper support – it’s also a lot more fun. Help yourself get to your goals by making sure you have friends and allies to help you along the way. Don’t be afraid to talk about your financial goals and challenges.

Finding support for financial goals has never been easier – there are social media groups as well as many other blogs and websites devoted to personal financial health. Join in and begin sharing. Another benefit of having a support network is that it seems like when we announce our goals to the world (or even just our corner of it), we’re more likely to stick to them.

Reaching large financial goals
Big, dreamy financial goals are great – we should have those – but to help make them attainable, we must recast them into smaller manageable actions. Focus on small goals, find support, and harness the power of habit and automation.

Remember, it’s a marathon – you finish the race by running one mile at a time.

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February 27, 2019

Why do banks pay interest?

Why do banks pay interest?

When you deposit money into certain bank accounts, they’ll pay you interest.

Have you ever wondered why they do this? Banks perform lots of services. They’re holding your money for you, making it accessible at tens of thousands of points across the globe, facilitating purchases from e-commerce sites, processing automatic payments, etc. Oftentimes this is done for free or for a small fee. So why would they pay interest on top of all this?

Let’s find out.

Banks play both sides
We need a place to store our money. Some people might not like the idea of handing over their hard-earned cash to a financial institution, but storing their savings under the mattress might make it difficult to perform many transactions, especially online. Banks perform the essential service of giving much of the population a place to store their money while simultaneously facilitating payments between different participants.

Modern economies function on debt (so not all debt is necessarily bad). Corporate debt owed to a bank might be used to grow a business quickly by taking advantage of a great business opportunity.

People don’t always have the entire amount of money all at once to buy something very costly like a house, so banks can help out by lending them the money. To collect the money to lend out, banks receive deposits from other customers.

Thus banks play a fundamental role in the economy, but why do they pay interest? They obviously receive interest on loans, but on the other side, they already offer several free services, like facilitating payments and helping to safeguard cash. Why would they pay people to give them money?

Banks need depositors
Similar to other industries, the banking industry needs customers. This is not only true on the lending side, though. Banks also need customers on the depositing side, because they need to get their money for lending from somewhere. The more customers they have, the more money they can lend out, in turn generating more income.

Since banks compete with each other just like members of any industry, they need a way to attract customers. Sometimes they may offer more features for an account or more free services, but the most enticing incentive is usually the interest rate. And that is the simple idea behind why banks pay interest: zero interest in theory would attract zero customers.

Why more interest for longer deposit periods?
It seems like savings accounts usually pay better interest rates than checking accounts. Why is that? A person probably opens a savings account with the intention of storing their money over a relatively long period of time. The expectation is that the money wouldn’t frequently be removed from that account.

So why do banks generally pay more interest if they believe you’ll leave money untouched for longer? Here’s why. The money you deposit with a bank doesn’t sit idle. It’s lent out to other individuals and businesses in the form of loans. But every bank must abide by minimum reserve requirements[i], and if they fall below the threshold, they can face serious consequences. Thus they are motivated to have their customers park their money for longer periods of time, and savings accounts are intended for just that purpose. The longer a customer intends to leave their money untouched at a bank, the more the bank might be willing to pay in interest.

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[i] https://www.investopedia.com/terms/r/requiredreserves.asp

February 18, 2019

Do you use the 20/4/10 rule?

Do you use the 20/4/10 rule?

If you’re in the market for a new car, you may already be aware that the average cost of a new car is about $35,000.

This pricetag has been increasing steadily in recent decades.[i] As a result, there are some “new” loan options that allow you to spread out your payments for up to 7 years.

Having a longer time to pay back your auto loan may seem like a great idea – stretching out the loan period may lower the payments month-to-month, and help squeeze a new car purchase into your family budget without too much financial juggling.

Reality check
One thing to keep in mind is that cars depreciate faster than you might imagine. Within the first 30 days, your new car’s value will have dropped by 10%. A year later, the car will have lost 20% of its value. Fast forward to 5 years after your purchase and your car is now worth less than 40% of its initial cost.[ii]

If you go with a longer loan term, it will take that much more time to build equity in the vehicle. A forced sale due to an emergency or an accident that totals your vehicle may mean you’ll still owe money on a car you no longer have. (This is what’s meant by being “upside down” in a loan: you owe more than the item is worth.)

If you’re not sure what to do, consider the 20/4/10 rule.

1. Try to put down 20% or more. Whether using cash or a trade-in that has equity, put down at least 20% of the new vehicle’s purchase price. This builds instant equity and may help you stay ahead of depreciation. Also add the cost for tax and tags to your down payment. You won’t want to pay interest on these expenses.

2. Take a loan of no longer than 4 years. Longer term loans may lower the monthly payments, but feeling like you need a loan term of more than 4 years may be a red flag that you’re buying more car than you can comfortably afford. With a shorter term loan, you may get a better interest rate and pay less interest overall because of the shorter term. This may make quite a difference in savings for you.

3. Commit no more than 10% of your gross annual income to primary car expenses. Your primary expenses would include the car payment (principal and interest), as well as your insurance payment. Other expenses, like fuel and maintenance, aren’t considered in this figure. The 10% part of the 20/4/10 rule may be the most difficult part to follow for many households considering purchasing a new car. Feeling pinched if you go with a new car could suggest that a reliable used car may be a better financial fit.

Cars are often symbolic of freedom, so it’s no wonder that we sometimes get emotional about car-buying decisions. It’s often best – as with any major purchase – to take a step back and look at the numbers and how they would affect your overall financial strategy, budget, emergency fund, etc. The money you save if you need to go with a used car could be used to build your savings or treat your family to something special now and then – and you’ll enjoy the real freedom of not being a slave to your monthly auto payment.

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This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies that may be available to you. Before taking out any loan, seek the advice of a financial professional, accountant, and/or tax expert to discuss your options.

[i] https://www.prnewswire.com/news-releases/average-new-car-prices-jump-2-percent-for-march-2018-on-suv-sales-strength-according-to-kelley-blue-book-300623110.html
[ii] https://www.carfax.com/blog/car-depreciation

January 28, 2019

Your credit score – 4 things you need to know

Your credit score – 4 things you need to know

You’re probably aware that your credit score is usually accessed when you apply for new credit, such as a credit card or an auto loan.

But you may not know it might also be requested by landlords, employers, and even romantic partners.[i]

So what are your credit score and report, what are the factors that determine them, and why do so many diverse parties request to see them?

What is a credit score and what is a credit report?
Your credit score is simply a number that encapsulates your ability to repay debt. It isn’t the only way interested parties can assess your creditworthiness, but it’s certainly often used as a preliminary factor. Having a higher score may lead to lower interest rates, more successful credit applications, and possibly more trust in general.

Your credit report is much more comprehensive and shows your outstanding debts, how well you pay them, the age of the accounts, and so forth. A single bad account on your credit report might damage your score, but your counterparty may be willing to work with you if you can show a strong history with your other accounts – and can justify the problem account.

What constitutes your credit score?
Credit reports are maintained by the three main credit reporting agencies: TransUnion, Equifax, and Experian. A credit score is generated by FICO, VantageScore, and some financial institutions may have their own proprietary algorithms to determine their own scores.

In general, scores are determined by the variously-weighted categories of payment history, the amount owed (credit utilization), the age of the accounts, how much new credit you’ve requested recently, and the types of accounts (revolving, mortgage, student loans, etc.).[ii] Of course proprietary scores may take many other factors into consideration.

Who wants to see your credit score?
Lenders may screen you based on your credit score, then use other factors to determine if they’ll give you a loan. Instant-approval lenders, like credit card companies, may just use your credit score to determine your creditworthiness. For large, long-term loans, like mortgages, you can expect to have to turn over your credit report as well.

Landlords may ask for a report, but might also request your credit score as well. They have the obvious financial interest in relying on you to pay your rent from month to month, but they also may have in mind that if you’re responsible with your money, perhaps you’ll also be responsible to take care of your rented living quarters.

Employers may ask to see your credit report. They may make hiring decisions based on the report, but some states have disallowed the practice.[iii] The chance that financial hardship may prompt employee theft is one reason they may ask, as well as wanting to see your consistency in paying debts over time, which may correlate with your punctuality and persistence at work.

How to improve your score
Those with poor credit may want to improve their credit history, which may in turn improve their credit scores. Payment history makes up 35% of the FICO scoring factors, and this will take time to improve. However, 30% of the score is determined by how much you owe, which can quickly be improved by paying down your debt. The 15% determinant that is credit age can, of course, only improve with time, but the 10% of your score attributed to new requests and 10% to types of credit can be managed in a short timeframe, too; try to avoid applying for a lot of new credit and, when you do, try to get different types of credit.[iv]

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[i] https://www.businessinsider.com/good-credit-score-can-help-you-get-a-date-2018-2
[ii] https://www.thebalance.com/fico-credit-score-315552
[iii] https://www.thebalancecareers.com/why-do-employers-check-credit-history-2059598
[iv] http://money.com/money/collection-post/2791957/what-is-my-credit-score/

January 14, 2019

Should I pay off my car or my credit cards?

Should I pay off my car or my credit cards?

Credit card statements and auto loan statements are often among the bigger bills the mail carrier brings.

Wouldn’t it be great to just pay them off and then use those monthly payments for something else, like building your savings and giving yourself a bit of breathing room for a treat now and then?

Paying extra money on your credit card bills and your car loan at the same time may not be an option, so which is better to pay off first?

In most cases, paying down credit cards might be a better strategy. But the reasons for paying off your credit cards first are numerous. Let’s look at why that usually may make more sense.

  • Credit cards have high interest rates. When you look at the balances for your auto loan vs. your credit card, the larger amount may often be the auto loan. Big balances can be unnerving, so your inclination may be to pay that down first. However, auto loans usually have a relatively low interest rate, so if you have an extra $100 or $200 per month to put toward debt, credit cards make a better choice. The average credit card interest rate is about 15%, whereas the average auto loan rate is usually under 7%, if you have good credit.[i]

  • Credit cards charge compound interest. Most auto loans are simple-interest loans, which means you only pay interest on the principal. Credit cards, however, charge compound interest, which means any interest that accrues on your account can generate interest of its own. Yikes!

  • You’ll lower your credit utilization. Part of your credit score is based on your credit utilization, which specifically refers to how much of your revolving credit you use. As you pay down your balance, you’ll not only pay less in interest, you may also give your credit score a boost by reducing your credit utilization.

The numbers don’t lie
Let’s say you have a 5-year auto loan for $30,000 at 7% interest. You also have an extra $100 per month you’d like to use to pay down debt. By adding that 100 bucks to your car payments, over the course of the loan you can cut your loan length by 10 months and save $972.32.[ii] Impressive.

Let’s look at a credit card balance. Maybe the credit card interest rate is higher than the car loan, but hopefully the balance is lower. Let’s assume a balance of only $10,000 and an interest rate of 15%. With your minimum payment, you’d probably pay about $225 monthly. Putting the extra $100 per month toward the credit card balance and paying $325 shortens the payment length for the card balance by 26 months and saves $1,986 in interest expense.[iii] Wow!

The math tells the truth. In the above hypothetical scenarios, even though the balance on the credit card is one-third that of the total owed for the car, you would save more money by paying off the credit card balance first.

Financial strategy isn’t just about paying down debt though. As you go, be sure you’re saving as well. You’ll need an emergency fund and you’ll need to invest for your retirement. Let’s talk. I have some ideas that can help you build toward your goals for your future.

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[i] https://www.valuepenguin.com/auto-loans/average-auto-loan-interest-rates
[ii] https://www.bankrate.com/calculators/auto/early-payment-payoff-calculator.aspx
[iii] https://www.bankrate.com/calculators/credit-cards/credit-card-payoff-calculator.aspx

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