Even though I write for a personal finance blog, I don’t often talk to my friends about money. It’s an awkward situation. I have a few friends who I discuss finances with, but we’re in similar financial situations and have similar perspectives on spending and saving. It’s different with friends in different financial situations.
I have to be honest, it can be tough sometimes. I have very clear opinions on the best ways to manage your money. (Otherwise, why would I be writing for a personal finance blog?) I think that credit card debt isn’t a great thing and should be paid down as much as possible. I think that financial splurges are a good thing, but you still have to be careful about how you splurge. I think spending within your means is hugely important.
Now don’t get me wrong – in general, I’m not judgmental about how you spend your money. If you’re paying your bills and not accumulating debt, the places where you spend your extra money is up to you. For example, I am a triathlete. I have a stupidly expensive bike and spend a stupid amount of money on races. But it’s my money and it’s what makes me happy. I have a friend who is a huge fountain pen collector and has pens worth more than my stupidly expensive bike. But they make him happy, so it’s all good. Another friend is big into a particular band and travels all the time to see them. Awesome choice.
But this assumes you have the extra money to spend.
I have two friends in particular who I just see making terrible financial choices, and there’s only so much that I can do.
This past week, I went to lunch with a friend who was telling me all about her plan to get out of debt. Her credit score is pretty bad, but she’s determined to fix it, most notably by paying her bills on time. I support this plan. I think the plan is going to take longer than she thinks, but it’s a good idea.
Then she shows me the $400 purse she just bought at the mall because she deserved a treat.
Now. I’m all for financial splurges, but you have to be reasonable about things. If you’re trying to get out of debt, perhaps splurging on something for $400 is a bit much. Perhaps a $40 splurge would have been better. But I didn’t want to come off as judgmental, so I just said “That looks like it will last you a long time!” (It was a super cute purse, but still…)
Another friend has decided that she has hit the age where she should be purchasing a home. (Note – I do not think this age exists. If you want to be a home owner, go for it. If you want to rent, go for it. Each has perks.) But her opinions on what she thinks she can afford and what she can actually afford are pretty far apart. She also doesn’t want to listen to what owning a home actually costs. Unfortunately, it’s not just a mortgage. But again, I can only do so much. She’s seen me go through repair costs and heard me say “I can’t afford to do that because I had to just pay for X on my house.” So I just advise carefully and if I see her starting to go in a bad financial direction (right now, it’s just plans), I may speak a little more loudly.
Talking to friends about money can be very tough. You have to know when to speak up and when to hold back. And just try to educate with what you have learned along the way. Not everyone spends their free time reading financial blogs, after all!
Credit scores. Mysterious numbers that mean so much when you’re trying to get a loan, say for a house or a car, but numbers that a lot of us don’t understand. There are a lot of tips out there about how to improve your credit score, and a lot of them are very bad, in my opinion.
But first off, what is a credit score?
A credit score is a number that analyzes a consumer’s credit risk. The higher your score, the less risky it is to loan to you. If you are a high risk, you are likely to get a higher interest rate, because if a company’s going to take a risk on you, they want to be sure that they get more money out of you, especially if you end up only paying off part of the loan. The most commonly used score is the FICO score. FICO is actually a software analytics company that created a piece of software that calculates a credit score.
There are five elements that make up your credit score.
- Payment History
- Debt Amounts
- Length of Credit History
- New Credit
- Credit Mix
Some of these are confusing, so let’s break it down.
This one’s pretty simple. Historically, do you pay your bills on time?
This is one you’ll hear a lot about. How much of your available credit are you using? For example, let’s say you have a card with a $10,000 limit. Is your balance usually around $2000? Or is it closer to $9500? It’s better to keep that number low so the percentage of your credit that you’re using is good. But this doesn’t mean that you should open a bunch of new accounts. We’ll discuss this later.
Length of Credit History
How long have you had your credit cards? This is one reason that it’s good for college students to get a credit card – so they can start their credit history early. Unfortunately, that can also lead to them getting into trouble. My oldest card is one that I opened in college. I never use it, but I refuse to close it. The longer you’ve had credit, the better. This is also why you should never close your oldest credit card, even if you don’t use it.
Similar to the above, do you have a bunch of new credit cards? If you’ve suddenly gone from no credit cards or loans to a whole bunch of them, creditors are going to wonder what you’re doing. This is also where “hits” to your credit show up. Every time you apply for a loan or credit card, the company pulls your credit. This shows up on your credit report. (Note – if you get credit card offers in the mail and don’t respond to them, those aren’t hits on your report.) If you’re just rate shopping for a mortgage, that’s no big deal, because a bunch of hits in one short period of time for the same type of loan are treated as one, but a hit every few months will be viewed very differently.
Essentially, this one means what types of credit do you have? Revolving accounts like credit cards? Installment accounts like mortgages and car loans? This one isn’t very practical to alter, so it’s less of a concern.
Now that you have all this information, what should you do to improve your credit score?
First, check your credit reports. Make sure that the information that is indicated is correct and actually belongs to you. While it’s not common, mistakes do happen, and you don’t want someone else’s poor money management affecting your ability to get a loan.
The easiest thing to do is to start paying down your credit card debt. Reduce the percentage outstanding on your credit cards. People choose to tackle this in different ways. Some people like to pay off the cards starting with the smallest balance so they get a quicker win. Others like to start with the highest interest rate. Both of these methods have benefits, so it’s about what works best for you.
Pay your bills on time. Set up reminders or put a sticker on your calendar. Set up automatic payments if that’s something your finances can handle. My credit card company texts me ten days before my payment is due. I typically already have it scheduled, but better safe than sorry.
You will hear some people say that you should open more accounts so that your available credit is higher. Don’t do this! Why? Because of that new credit category. A bunch of new accounts is not going to look good, and potential lenders are going to wonder what you’re doing.
If you search, you will see tips on how to improve your credit in 30 days. These tips are typically a terrible idea and won’t work, and may even hurt your credit score. It’s a slow process, but with time, you can get that score up to where you want it to be.
Whether you’re about to retire or want to plan in advance, knowing which steps to take can be a real challenge. Your financial situation is what’s most important. You want to make sure that you are going to be able to live comfortably and have enough money to get by once you’re retired. By planning things out and taking the right steps now, this should be perfectly possible. It’s always better to think about the financial implications of retirement now rather than later. In fact, you’re never too young to start thinking about how you will get by when you retire. So, the tips below can be useful to you no matter how old or young you are.
Learn More About Financial Management
As you get older and enter retirement, managing your finances will only become more important. If you want to ensure that you don’t make any mistakes, then you should learn more about it now. Being able to manage your finances in a structured and sensible way will make a big difference. Things like budgeting and other issues often change when you retire. But having the basic skills of financial management in place can aid you before and after retirement. It’s best to get and develop those skills now rather than when you have already entered retirement. You could even take a course that helps you learn more about managing personal finances.
Pay Off Old Debts
Trying to pay off debts is always more difficult when you’re in retirement. That’s why it’s so important to pay off old debts as quickly as you can. It might seem convenient to put these kinds of things off until tomorrow. But if you keep doing that, you could end up entering retirement with large debts hanging over your head. That’s not something anyone wants to have to deal with, so don’t let it happen to you. It makes sense to pay off your debts as soon as you can. This can be difficult, but by cutting back, you can find the money you need to pay them off. Entering retirement free of debt will give you some peace of mind.
Plan Your Insurance Needs
Your insurance needs often change as you grow up. This is something to keep in mind throughout your life as your circumstance develop and change. For example, many young parents have life insurance to offer their children financial security no matter what happens to them. But when your children have grown up, this becomes less of a pressing issue. So, it’s vital to stay on top of your insurance needs and plan them in advance as much as possible. You can cut your expenditure massively by making sure you have the right cover and ditching the cover you don’t need.
Invest in Stocks
Investing can be a really good way of boosting your savings. Saving money is no way to grow your finances these days. With interest rates so low, it makes sense to look elsewhere. And by investing your money, you can improve your financial situation before you enter retirement. It can offer a big boost to anyone who wants a bit more comfort and security in their old age. It’s something that pretty much anyone can do if they put their mind to it. Money Morning details the ups and downs of the stock market, so learn more about it there.
Consider Ways in Which You Can Earn in Retirement
Entering retirement doesn’t necessarily mean that you have to stop earning. There are many opportunities for you to make money when you’re in retirement. You just have to be willing to think outside the box and use the skills that you have gained throughout your life. You can plan these things out in advance. That way, you can be prepared to make money when you do enter retirement. Many people take on part-time or freelance consulting roles when they retire. These kinds of jobs involve passing on knowledge to people who work in the same sector that you used to work in.
Learn to Live in Healthy Way
As you get older, you often think about your health more than ever before. But there are financial reasons to start thinking about your health as you move closer towards retirement. For example, you can improve your health by eating fresh foods, drinking less alcohol or quitting smoking. And it’s also true that all of these things can save you some money too. So, think about what you can do to improve your finances and make yourself a bit healthier at the same time. It could turn out to be the smartest move you ever make as you enter retirement.
Once You Retire, Update Your Will
When the time eventually does come to retire, you should remember to update your will. Many people use this milestone to return to their will and update it if they haven’t done so for a while. Yoru circumstances often change massively when you enter retirement, so it’s a good time to take on this task. For many people, they don’t even bother to make a will until they enter retirement. It’s something that you will have to give some thought to. It can make things much easier for everyone if you have a will that is clear and in order. And it means that it will be executed to your precise desires in the future.
Be Frugal, But Still Enjoy Life
Many people decide to live frugally as they edge closer to retirement. This is a good idea because it frees up some money that can then be saved or invested. It will make your life more comfortable later on. But there is no need to live so frugally that it damages your quality of life. You can worry about these things too much sometimes. It’s often best to live life the way you want to, while also keeping in mind your finances and how your lifestyle will affect them. It’s a balance you’ll need to get right before retiring.
For me, July is a glorious month? Why? Because July is a rare three paycheck month.
*cue choir of angels*
I am paid every other week. Typically, that means two paychecks a month, but with 12 months in a year and 26 paychecks, two months out of the year, I get three paychecks. Since I use the YNAB method, I budget on last month’s income, which means that I’m typically budgeting with only two paychecks, but in August, I will get to budget with three. What in the world will I do with all of that money?
It’s so very easy to just think “Okay, extra money coming in! Time to splurge.” Or maybe I don’t splurge, but I think “Hey, I’ve wanted that $100 item for a while, maybe now is the time to get it.”
This extra paycheck is coming at a good time though. My budget has been a little tight due to overspending. This is a good chance for me to get back on track and put a little more money into some of my budget categories for future spending.
I also just received my property tax assessment for the year. I knew it was going up this year, but I wasn’t sure the full amount. I made a guess and have been budgeting monthly to hit that amount by December. Turns out my estimate was low, but by less than $200. So I can pop an extra $200 into that savings account and then continue with my automatic savings plan for that bill.
I discovered a small home repair issue that needs to be taken care of, one that I can’t DIY and that I probably shouldn’t put off. That’s going to cost a pretty penny.
Finally, it’s July. It’s hot. I always joke that I will freeze in the winter so that I have more money to spend on staying cool in the summer. I hate sleeping in the hot weather and love my air conditioning. Yes, I could save money by bumping up the thermostat, but I’ve found a comfortable point and I’m happy with it. But with the heat we’re having, my electric bill is going to be high next month.
So as you can see, this bonus money is quickly disappearing. In fact, once I do some padding of my budget categories for upcoming expenses, there might not be much left. I do plan to put some of it into savings, but I would love to get back to the days where those “bonus” paychecks went straight into the savings account. My expenses are just higher than they used to be with home ownership.
Okay, so maybe I’ll splurge a little. I’ve gotten back into fountain pens after a hiatus, and I would love to pick up a new bottle of ink or two. They’re only about $20, but I’ve been putting it off because I haven’t had the disposable income to drop. Maybe now I can get at least one of them. Like I always say, don’t forget to treat yourself every so often.
How do you spend extra money that comes your way?
If you have paid any attention to the news lately, you have heard the word “Brexit.” And in the US and elsewhere, people are panicking about what it means for them.
First off, a quick discussion about Brexit. Brexit is a portmanteau (two words blended into one) of Britain and Exit. In a nutshell, a majority (though a small one at that) of UK citizens have voted that the United Kingdom should leave the European Union. This has significant consequences for UK citizens as well as EU citizens working in the UK. It is a very big deal, and there are a lot of questions left to be answered.
But what does it mean for those of us over in North America?
Well, if you pay attention to the markets, you’ll know that the stock market took a hit. Why? Uncertainty. People aren’t sure what’s going to happen next. Will the EU crumble if the UK leaves? What does this mean for global trade? In times of uncertainty, investors panic and put their funds into safer options. So is that what you should do?
In my opinion (as a non-professional in the industry), unless you are planning to retire soon, no. For most of us, investments are long-term. The markets go up and down, but in general, the numbers trend upwards over the long haul. So sit tight.
When people pull their money out of stocks, they aren’t just sticking it under their mattresses. They’re investing in safer options like CDs and bonds. With more people wanting to invest, expect those rates to drop. Kind of a bummer for people like me who rely on CD ladders for savings.
But if you’re looking to buy a house or refinance your mortgage, this could be good news! When US Treasury bonds drop, so do mortgage rates (usually). So if you’ve been thinking about refinancing, this might be your time.
Thinking about traveling? Now’s not a bad time to book a trip to the UK! Yes, they are going through some uncertainty, but it’s a political uncertainty, and not the sort that should make you want to stay home. Unfortunately for Brits, after the vote, the Pound dropped significantly against the US Dollar. That basically means that the US Dollar now buys more in the UK than it would have a month ago.
But is it wrong to take advantage of the plight of another nation? Well, regardless of the value of the Pound, the tourism industry still needs your dollars. They don’t care what it’s worth to you in your nation, they care what it’s worth to them in theirs. When the US dollar was low, foreign tourism was up because people could do more with their money and it was great for the tourism industry. Check out other EU countries too, because the uncertainty has caused a lot of rates to drop against the US dollar.
And if you are a UK or EU citizen reading this, I’m sorry for what you’re going through. It’s clear that this was not an easy vote and the next few years could be very tumultuous for you. But whatever happens next, this too shall pass.