Credit Reports: Annual Check-Up Time!

What do you call an annual health check-up for your credit? A credit report! If you have ever used a credit card in your name or borrowed a loan from a financial institution, you have credit history. Your credit history shows whether you can be trusted with borrowing money and paying it back.

Your credit history gets filed at three bureaus: Equifax, Experian, and TransUnion. Whenever you apply for a new loan or credit card, the company that is offering the loan or credit card will check your credit with one, two, or all three bureaus. That is why you need to make sure your credit history is accurate. How do you check your credit history? Through a credit report!

Every twelve months, you are entitled to request your credit report at no charge from each bureau. Notice I said each bureau. You can request all three bureaus at the same time or you can view each report at different times in the year. If you are about to get a new loan, such as a mortgage, you may want to check all three before you apply. But if you are just doing a routine check-up, you could request one bureau first, the next one in four months, and the last one in another four months. It’s almost like getting three reports each year!

What are some of the things to check on your credit report?

  • Payment History. Does the report show that you made payments late, even though you were on-time? Paying on-time will tell future lenders if you are dependable when paying back borrowed money.
  • Available Credit. How high is your credit limit, and are the amounts of current balances listed properly? Contrary to popular belief, having too much credit, even if not being used, is a bad thing because it makes borrowing any more money a risk factor. From the lender’s perspective, there might come a day when you max out all your credit cards and then can’t pay them back.
  • Accounts. Are all the accounts listed correctly? Have you closed unnecessary accounts that you no longer use? Nowadays with identity theft and stolen credit cards, it’s of utmost importance to review your credit report carefully. If anything appears incorrect, contact the credit reporting bureaus.

Credit reports sometimes get confused with credit scores. A credit score is generated from your credit history, but acts more like a quick rating. A credit report goes into greater detail about your credit activity. Compare it to a friend asking what score you got on a test versus going over the actual test questions and mark-ups. Although the credit score is not typically noted on your credit report, some credit card companies are now offering free access to credit score monitoring as an added benefit for cardholders.

Why the need for three credit bureaus instead of one? There are times when your information doesn’t get captured by one of the credit bureaus. Each bureau also weighs certain types of credit differently, so your credit score could alter slightly from one bureau to the next. Regardless, it’s a good way to check one against the other, instead of getting all of your information from one source.

Just as you visit the doctor for an annual check-up, do your finances a favor by getting a copy of your credit report. It’s free!

Homework: Request and review your credit report by visiting www.annualcreditreport.com. How would you rate your own creditworthiness?

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The Road To Recovery

Everyone tells you to “Save, Save, Save,” but no one talks about what happens if you can’t save or you found yourself in a pinch and spent all your savings. Are you doomed for a life of poverty? Not necessarily.

When I worked in finance, there was a common theme in every situation I met. All of my financial clients wanted something they didn’t have, and all of them had to work towards it. Whether they had savings or didn’t have savings or even worse, had debt and no savings, there was always a solution. Is it possible to fix financial mistakes? Yes! And one more glimmer of hope: It gets easier along the way.

When it comes to people and their money, the most difficult hurdle to overcome is erasing a deeply ingrained mindset. Like the lavish lifestyle they lead. Or the age they think they can retire. Or their way of buying things and then figuring how to pay for them afterwards. But if they take the right steps to alter course, something interesting happens. As they get closer to their goals by doing things differently, they don’t remember how they did things before. That’s exactly what happened with my clients. That lavish lifestyle of the past? Who cares when you have food and shelter? Retiring at 58 vs. 55? Beats having to think about going back to work at 70. Can’t afford to buy an extra handbag when you have 3 others? Big deal! Those were the responses when I reminded them of where they had come from.

If others can do it, you can too. When faced with one of these hurdles, here is how you can get on the right track.

Living Large. Do you find it hard to save on a monthly basis? Then your answer is to downsize! Cut expenses you don’t need, and lead a more modest lifestyle. For instance, go with a smaller home. Take public transit or opt for a used car. Give yourself a budget for dining out. No matter if you earn $30,000 or $100,000 a year, everyone can afford to save. Don’t just take it from me. Look at how Suze Orman reacts to a millennial who spends $720 a month on a car when she makes $80,000 a year. At least she makes her own coffee.

Retirement Loan Vs. Withdrawal. Normally taking out retirement savings before retirement is a big no-no, but when faced with financial hardship, there might not be a lot of choices. If a retirement loan is allowed, that is the better option compared to a withdrawal, assuming you can pay back the loan later. You will lose out on the opportunity for market gains that you could have seen with that retirement money, but you don’t have to wash away your hard-earned savings. With either a loan or withdrawal, not staying invested will likely carry some impact to retirement. This may mean delaying retirement age or adjusting what life looks like in retirement. Since the rules have changed with the CARES Act of 2020, consult a financial or tax professional before taking a loan or withdrawal from your retirement.

Credit Card Debt. One of the hardest money challenges to get out of is credit card debt. It’s a vicious cycle. Just when you’re done paying one thing, something else strikes and you’re stuck with a new debt. It’s tempting, too, since you’ve done it once, what’s borrowing again? To get out of the cycle, you need to understand the root cause for debt. Where are you spending your money that it’s landing you in debt? If you’re spending more than you make, then you need to draft a budget and stick to it. Freeze or cut your credit card in half and instead use a cash allowance for everything on your budget. If you’re living within your means but still encounter debt, was it the result of an unanticipated expense? Chances are that your emergency fund is too low or that you don’t have one. Rather than putting all available income towards paying off debt, set aside a portion to bulking up your emergency fund. That way, if another unexpected event occurs, you have cash to pay for it, not your credit card.

With a change in perspective and a lot of work and discipline, you can turn around any money situation. Financial challenges can happen, but remember, there is hope!

Homework: What did you take away from watching Suze Orman’s video commentary? Name some of the good and bad financial choices reflected in the video. How can you apply these lessons to your life?

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So You Got A Stimulus, Now What?

By now, most Americans have received a boost in the form of a stimulus, in this case, free money from the federal government to combat financial woes stemming from coronavirus. Now that you have money you didn’t have before, what do you do with it?

The most likely option is to spend it, as intended, to stimulate the economy. However, now is not really the time for an impulse purchase, so spending it on practical things like rent or food makes the most sense. If you are one of the 40 million filing for unemployment, spending your stimulus on basic needs becomes a clear-cut choice.

The next option is to save it, that is, if you have sufficient income to meet existing financial obligations. For those with an ample emergency fund and no need to dip into it, it might be time to invest more money towards your long-term goals. If you don’t already have a comfortable rainy day fund set aside, then add that stimulus cash to your rainy day fund.

For those not needing to rely on stimulus money, consider sharing it with others or donating to a cause you believe in. Perhaps it’s the mom-and-pop store you frequented before quarantine or the religious institution where you now join weekly service through Zoom or a non-profit organization that is suddenly without as many donors as before. No matter who you give to, your support not only provides for them, but it also lifts the economy as a whole.

Share, Save, Spend. Sound familiar? These are the 3 financial pillars we frequently talk about. You don’t have to choose just one either. You could use that stimulus money in two ways or all three! For those who did not receive a stimulus check or received less than the full amount, that’s ok. The 3 S’s still apply to you too, even though you have to rely on your own pocketbook.

While a stimulus provides a nice boost, the key is to not depend on having one. That way, if and when you get a stimulus, you have choices!

Homework: Do some research to find out what Americans did with their stimulus. Does this match your predictions?

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Spare Change

In the modern day of cashless transactions, cash still remains a popular mode of payment. According to the US Federal Reserve in 2019, cash ranks as one of the top two payment methods, used in 26% of transactions, just behind debit cards (28% of transactions). For children who don’t have a bank account yet, cash probably accounts for 100% of transactions. If cash is used so often, counting money is important for everyone, whether spending money or receiving money.

Take the following QUIZ to see how your children do when handling cash:

  • Do they know how to limit spending to what’s on hand? (i.e. Can $15 cash buy a $20 toy?)
  • If they get change back from a purchase, can they quickly verify that they received the right amount?
  • Working the cash register, can they count money quickly to make sure that the customer paid correctly?
  • If there are no dollar bills but a lot of quarters available, can they produce the right amount of change?

If your children need to brush up on these skills, or if they are just starting to learn about cash, below are several ideas that might help.

Ages 3-6: Sort change by denomination. Use clear containers/jars or an empty egg carton to separate pennies, nickels, dimes, and quarters (or your own country’s currency, for international readers). Or whenever you have spare change, give them a coin and ask for the name of the coin and amount, letting them keep whatever they identify correctly.

Ages 5-9: Ever heard of the muffin tin coin counting game? Write small amounts onto paper cupcake liners (for instance, $1.10 on one liner, 88-cents on another liner, 63-cents on another liner, etc). Pop the liners into a muffin tin, and then provide a bunch of loose change for the children to fill each liner with the correct amount in change.

Ages 9-12: Now that multiplication and decimal numbers have been introduced, learn to add tax and/or tip. Looking at a menu, what can you order with $15, assuming you account for tax and tip? If you pay with $20, tally the change due using bills and coins. Take a handful of past store receipts, and calculate how much change you get back if you paid with the closest denomination of 10 (such as paying $30 for a receipt totaling $25.79).

What children can comprehend about cash depends on their age, but starting early will empower them to make their own decisions around money. When children become adept at counting cash, they can mentally tally against their budget when shopping or dining out. Keeping to a budget allows them to live within their means and save for the future. That’s why understanding cash is so important to becoming financially independent!

Homework: Try one of the activities above. For older kids who want an extra challenge, work with parents to decide on a spending limit the next time you dine-out or order food delivery. After everyone else in the family has selected from the menu, choose your own item(s) from the menu that will allow the total after tax/tip to remain under the limit.

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The Download On Deals

What does “saving money” mean? Setting aside money for the long term is typically how we define savings, but another important discipline for building wealth is finding savings when we spend money. When you pay less than full price, you are saving money. One transaction may not seem like much savings, but many transactions together add up to big savings.

Spotting deals can take some work. Fortunately, with some practice, it becomes easier. Here are tips to help you become a better spender, and by that, I mean a better saver.

  1. Read the fine print. Often, sales and coupons have exclusions, so make sure you read the fine print ahead of time.
  2. Have a plan. Just like writing out a grocery shopping list, circling items in the weekly ad or compiling all coupons before starting to shop will allow you to capture every deal.
  3. Stack those deals. One of the best feelings you get from shopping is when you stack a coupon on top of a sale. Qualify for a rebate afterwards, and rise up to the ranks of a pro shopper!
  4. Choose an alternate. If you’re not crazy about the brand name product, you can get more for your money with generic. Or go with a substitute, like buying groceries that are in season instead of ones that are not.
  5. Be patient. Sometimes the things you want are not available at a lower price right away, but you know the price will come down in time. If you can go without that item for a little longer, wait.

Although getting the best deal requires some effort, the satisfaction you get is worth it. Once you’ve had some practice, being a smart shopper will become second nature!

Homework: Set a spending limit to buy all the groceries you need this week. Involve kids by giving them $10 to purchase some of the necessary categories on your list. For example, if fruit is one of the categories, they can choose whichever fruit(s) will last one week. Challenge them to get as much leftover change as possible on the entire purchase.

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Needs Vs. Wants

This week’s lesson is a short one, but a very important one: Needs Vs. Wants. Everyone has both things they want and things they need. But when faced with spending a finite amount of money, needs come first.

Learning about needs and wants starts at a young age. The good news is that you can learn the difference without spending any money at all. Use everyday situations to guide your decisions. For instance, what will you eat for dinner? Instead of choosing only dessert, which you may want, pick an item from each food group you need: grains, proteins, and vegetables. Another example could be how you choose to spend your time. Are you doing necessary chores and homework or playing games or watching TV instead? We have needs and wants in everyday life. Knowing the difference and putting needs first will come in handy when it comes to spending money wisely.

Homework: Take inventory around the house or at a store, and identify which items are needs and which items are wants. If the difference between both is still confusing, there are many helpful kids’ videos on “Needs Vs. Wants.”

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“Playing” With Cash

With all the cashless ways to use money in this day and age, it’s difficult to show kids the value of a dollar. Substitutes just aren’t the same. Do you sense the same satisfaction from earning an extra $500 when it is deposited directly to your account instead of visiting the bank with a paycheck? Would you buy that $20 sweater if you only had $15 in your wallet vs. pulling out a credit card? When a friend pays back via Venmo for a coffee that you bought with your parents’ money, do you still return the money to your parents?

The old adage is true:

It’s never too early to teach kids about money.

Before children enter the world of direct deposit, credit cards, and Venmo, get them acquainted with cash. What do bills and coins look like, how do you make change, how do you get money, and what choices do you have with money? If your children are still too young to do math, play a game of “pretend” with them. Run through the following exercises with just $1 dollar. Wouldn’t you rather have children learn with $1 dollar than make mistakes when dealing with much more money later on? Exactly. Start NOW!

Exercise 1: From Earning to Spending

Ask your children to create an ad for a product or chore task that you can buy for $1 dollar. Pay $1 dollar once the product or service is sold, and then ask them to spend that $1 dollar on themselves, whether it be for food or a toy. Challenge them to spend $1 dollar on something they need (like lunch), not something they want (like candy). Maybe they can find a way to get both?

Exercise 2: Saving Money

Give 50-cents to your children, and ask them to hold onto the money for a week. Tell them that you will double whatever remains at the end of the week. Each day that week, tempt them with a treat, such as ice cream, and charge 5-cents for it. If they can hold onto the entire 50-cents for a whole week, you will match all 50-cents, so that they are rewarded with $1 whole dollar at the end of the week. If they are tempted into spending down to the last 15-cents, you match 15-cents, so they end up with only 30-cents.

Exercise 3: Borrowing Money

This exercise is easier with an allowance, so let’s play out that scenario first. As the creditor, you offer to lend 90-cents, if your children deduct 25-cents from each allowance payment for the next 4 payments (totals $1 dollar to demonstrate interest charged on the 90-cent loan). Do they take the loan?

If there is no allowance to repay from, opting into the loan means your children agree to do one extra household chore every week for 4 weeks. If that chore is missed in any of the 4 weeks, the “credit score” takes a hit, which means no more loans. Was the loan worth it?

Homework: Try one or all of the exercises above. What lessons did you learn?

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Allowance

April marks National Financial Literacy Month in the US, so why not take this time to learn (and teach) about money? It can be difficult to understand money at a young age because children cannot make money through employment like adults do. By the time children reach an age where they can work for money, they have already witnessed many financial transactions and have pre-determined values and practices around money. There is a void between when children form money habits and when they can start to earn money of their own. That is the case for an allowance — to fill in this gap.

Once children are old enough to start helping around the house (usually by age 3), it’s time to consider an allowance.

Just like money doesn’t come free for adults, children should “work” for their allowance, doing things like household chores or achieving good grades. Once children are old enough to start helping around the house (usually by age 3), it’s time to consider an allowance. Other than money that is gifted and the occasional lemonade stand (or passion project), an allowance gives children money of their own to manage.

Deciding on all the rules around an allowance requires some planning ahead. Here are some questions to think about.

  • Does the amount change every year based on bills or obligations that the child assumes, such as a cell phone, or school lunch, or gas? Or does allowance simply increase by a pre-determined amount each year?
  • What frequency makes the most sense — weekly, bi-weekly, monthly?
  • Would it be easier for you and your child to handle allowance in cash or through direct deposit or cashless transfer (Venmo, Zelle, etc.)?
  • What situations warrant a partial or zero allowance?
  • Does paying allowance rely on task completion? If so, how do you measure and monitor on an ongoing basis?

Ideally, the requirements are the same for each child and do not stray from the plan over time, but you can certainly make exceptions if financial circumstances change. Pay reductions and unemployment happen in real life, so the allowance may have to be lowered or paused at times. On the flip side, when times are good, consider adding a bonus for a job well done or starting a matching contribution when certain savings milestones are met. An allowance should teach about both the good and bad times.

If you’re puzzled on where to begin with an allowance, stick to this simple plan. Base the amount of allowance on the age of the child, and pay on a weekly basis. For a child who is 3, the allowance would be $3 per week. For a teenager who is 15, allowance is $15 per week. This continues until your child starts working or graduates from high school, whichever comes first. Lean towards paying allowance in cash, so that your child can hold the true fruits of their labor.

Once an allowance is in place, then all the other lessons about money become easier to learn. A good first lesson is Share, Save, Spend. From there, help children understand taxes by automatically deducting a household tax. Instead of paying $4 per week, the household tax reduces allowance to $3 per week. Set up an auto-savings for one-third (1/3) of the allowance to deposit directly into a bank account for long-term savings. If children need to borrow money, ask them to come up with a payment plan, and reduce allowance by the amount of the payment plan accordingly. These are the lessons that will mentally prepare children for a future of managing their own money.

Happy Financial Literacy Month!

Homework: There’s no such thing as free money! Before starting an allowance or making the next allowance payment, parents and children can collaborate together on a chores chart or achievement chart to earn that allowance.

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The Rhyme And Reason For A Roth IRA

Rap Ode To Roth IRA

Here's the thing about Roth IRAs.
Pay taxes now, no delays.
You won't owe any more while your investments grow.
Once you're ready to retire, it's ALL your money to sow!
Add contributions up to the annual max, 
Then pick the investment(s), and see how it stacks!
Don't touch the money before age 59 1/2,
'Cuz taking earnings early costs a penalty and tax.
Don't wait! Start a Roth soon as you can,
Earn that compound interest -- That is the plan! 

The topic of retirement savings is especially pertinent right now for two reasons: either people are considering tapping into retirement savings as cash runs short or on the opposite end, they are looking to invest more money while market prices are low. One type of retirement savings account, the Roth IRA, caters to both. Let’s dive deeper into both scenarios.

Roth IRA – Taking Money Out

Contributions to a Roth IRA can be withdrawn with no penalty and no tax at any time, as they were taxed once already. This is one retirement savings vehicle that offers more withdrawal flexibility than others. However, earnings, or how much your money grows, are subject to both tax and a penalty if taken before age 59 1/2. There are some exceptions to this rule, but a Roth IRA is largely meant to be used for retirement savings.

In response to financial hardships caused by COVID-19, the CARES Act changed a few rules this year. For those in financial need, the early withdrawal penalty on Roth IRA earnings is waived for 2020, and distributions up to $100,000 are allowed before age 59 1/2. These distributions of earnings are considered income and will be taxed as such, but there is the option to spread the tax burden over 3 years or pay back the “loan” within 3 years to avoid paying taxes. Before you withdraw from your Roth IRA, carefully consider what this means for your retirement. In addition, taking money out of any investments could mean selling at a loss. Consult your financial advisor and tax advisor if you are contemplating a withdrawal of retirement savings.

Roth IRA – Adding Money In

For those in a position to invest right now, adding money to a Roth IRA (up to the max) not only takes advantage of stock market lows, but also yields more tax savings down the road if you expect to be in a higher tax bracket in the future. The Roth IRA works especially well when investments have a long time horizon for growth because you get to keep every penny gained without sharing a cut of the profits with taxes.

An attractive option this year may be a Roth conversion, which converts an existing IRA to a Roth IRA by paying taxes on the amount converted. If your income is lower this year than most years, you may fall in a lower tax bracket and therefore, pay less tax on that Roth conversion than you normally would. Furthermore, as a result of the market downturn, your investments may be worth less than previously, so less taxes would be owed. It’s a good idea to check with a financial advisor and tax advisor before making these financial decisions.

Making The Right Choice

No matter the impact that COVID-19 has on our financial lives, savings are still important. In fact, times like these make us realize that having savings gives us one more safety net when falling on hard times. So regardless of whether you are saving for retirement or saving for a rainy day, the point is to remember to SAVE!

Homework: Pay tax now or pay tax later? One reason to choose a Roth IRA (pay tax now) vs. traditional IRA (pay tax later) is if you believe your tax rate will be higher when you withdraw the money. Use the following math problem to understand the difference.

Say you earn $5,000 this year that you pay 20% tax, or $1,000, and you decide to contribute the remaining $4,000 to a Roth IRA. You add no more money to that investment, and it averages 6% annual growth over the next 36 years — How much will your total investment be? (Hint: Use the Rule of 72 to get $32,000 for the Roth IRA.) Assume instead that you defer paying tax until withdrawal by investing the full $5,000 in a traditional IRA– How much will your total investment be after 36 years of 6% annual growth? ($40,000.) After 36 years, if your tax rate is 20%, your total investment will net the same amount in either the Roth IRA ($32,000) or traditional IRA ($32,000) after taxes. If your tax rate decreases to 15% after 36 years, the traditional IRA ($34,000) nets more than the Roth IRA ($32,000). If your tax rate increases to 25% after 36 years, the traditional IRA loses ($30,000), and the Roth IRA wins ($32,000).

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