3Notes: The Finance and Credit Primer


The basic keys to your personal finance are debt control, savings, and credit.  ALL of these things are tied to cash flow, the cash that comes in and goes towards your responsibilities. For most this is one paycheck, but we should all aim for secondary and residual income coming in the door. Advisers will tell you only their strategy works, but do what works FOR YOU to get into financial shape.

$1 Debt Control

There are many expenses that we take on just because “that’s what you’re supposed to do.” Before I got married I cut the cable cord, operating just fine with a tv antenna, internet, and my PlayStation 4. However, my wife had cable and we kept her subscription when we tied the knot. It took nearly a year to convince her that we could operate just fine without a cable package, but we made the switch and have no regrets. Strategically placing a Chromecast (or 3), Apple tv, and Amazon Fire Stick allowed us to move on with ease. We also save over $100 a month.

Taking a comprehensive look at all of your expenditures allows you to separate wants from the needs. Analyze what you can eliminate and how. The second phase to debt control is paying down old debt. It makes sense for some folks to identify their smallest debt and pay them off first, rolling those payments into their bigger bills as they go. For others, it makes sense to eliminate the debts with the highest interest rates first (i.e. credit cards), then move on to others. Look at your monthly statements and calculate how much money you pay in interest. You might be surprised.

$2 Savings

One of the main measures that all Americans, and especially Millennials, are falling short on is savings.  Saving begins with a rainy day/emergency fund. There is no right answer for the amount to stash away; is it 3 months worth of bills? Is it 6? A year’s worth? Let your situation dictate this. NOTE: Paying down debt also equals saving. This point misses a lot of people because they think the end all is spare cash in the bank.

If your savings account or investments are not paying out more than your interest payments on your debt, you are losing money! Whether your credit card charges 9% or 24%, no bank account is paying you that much interest. PAY OFF THAT DEBT! The payouts that banks offer are highway robbery. Rather than settle for .05-1.05%, pay down home loans, car loans, or invest in various markets and make 3%+. I argue that all people should invest in the market (via index ETF) at minimum to achieve passive gains. Of course, do not risk all of your emergency funds as you may need instant liquidity from time to time.  More on saving and investing in future posts.

$3 Credit

The premise of credit is often infuriating, but is necessary to achieve those “exceeding abundantly” level dreams. Credit is ultimately what allows you do multiple your money many times over, greatly reducing your risk in investing. I can prove many times over that it is less risky for individuals and businesses alike to take on debt rather than spend money now, but I will leave that for another day. When your credit is good, major purchases are more easily achievable and actually less risky.

How do you build your credit then? Use a free service such as Credit Karma or your bank to get to know and monitor your score. Study your record and write to companies for forgiveness of derogatory information. Even if you didn’t pay your bills and had debt charged off, some will settle with you and remove the bad marks. Secondly, build a credit history. If you have never been extended credit through credit cards, auto loan, or mortgage, open a credit card. Find one with favorable rates; use it for minor necessities and pay it off every month. The additional factor this adds to your report is use of credit. Lenders want to see a consumer with 30% or less usage of their available credit. So on a $1000 line of credit, rack up no more than $300 in charges on average. Consistency is key, so pay your revolving bills on time, monitor your FICO score and dispute all derogatory information. This plus maintaining the 30% rule will bring consistently improving scores.

The Wrap Up

None of these things can be achieved without regular budgeting. Set an annual budget and check it monthly to keep you on track. Include room for fun in your budget so as not to feel guilty about getting your mani/pedi or date night. If you have issues budgeting or have never done it before, reach out to a professional for help.

These things set the stage to invest, make major purchases, grow your family, and leave money worries behind.  Please feel free to comment below to offer your own tips and tricks to healthy personal finance.

-Joe

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