Category Archives: Credit

Change is Hard

January is a month for hope and optimism. You wouldn’t know it based upon the doom and gloom floating around in the newspapers and social media this year, but most folks are as optimistic as ever during the first month of a new year. They know change is hard, but emotions fly high.

The distance between change and complacency is small - a single step in the right direction. Change is hard because complacency is easier. But you can win!Many people hit the gym and begin a new diet with dogged determination that they will finally lose that extra weight. Others pledge to finally start saving for their dream purchase or investing for their retirement. Some people pledge to reestablish their priorities with regard to work, family, friends, and leisure.

The month of January represents new beginnings. A clean slate. A chance to start afresh and anew.

It is an opportunity to implement changes big and small. Yet January also brings about a sobering reminder each and every year:

Change is hard.

Figuratively speaking, the distance between change and complacency is very short. The difference is a single step in the direction of our goals. But taking that single step is often challenging.

Change is hard, complacency is easier

The human search for homeostasis has led us to really enjoy our comforts. I know that is why I love dining out, even if at McDonald’s. It is why I love sports, TV, and movies. It is why men love their recliners. These things provide comfort.

In order to change, you and I have to exit that comfort zone. On purpose. Repeatedly. We have to force ourselves to live on the edge of discomfort. Sometimes we may have to face our fears.

To lose a few pounds, I need to stay away from the comforts of restaurants and overindulgence in dairy, fried foods, and beer, and increase my intake of lean protein, vegetables, and fruits.

If saving money is my goal, I need to take a long, hard look at my spending habits and trim away waste. Psychologically, this type of self-correction is very necessary yet incredibly difficult to achieve with honesty and integrity.

Improving the performance of my investments is a difficult change to enact. It reveals that simple human desire and motivation are not always enough if we seek complex change. Sometimes we can do everything right and still fall short of our goals. This leads us to fear failure and avoid change.

Even our goals change from time to time. For example, a few months ago on my 30th birthday, I set five primary investment goals for the next year:

INVESTMENT GOALS
1 – Max out both of our IRAs for 2016. $11,000 total investment.
2 – Invest a minimum of $2,000 with Fundrise.
3 – Grow my overall account value with Betterment.
4 – Increase our overall net worth by 50%.
5 – Set a target date for early retirement and formulate a plan to get there.

Related Post: The Fundrise eREIT: Accessible Real Estate Investing for the Average Investor

As I write, we are most likely to fail at goals 1 and 3. Instead, due to changing circumstances, we opted to invest funds earmarked to achieve these goals in finishing our basement. These circumstances even led us to make a surprising decision – we borrowed money to complete this project. Gasp, I know. But the extremely low interest rate combined with maintaining liquidity were just too significant to pass up.

Even the decision to change our investment goals and instead invest in our home was not an easy one. My wife and I went back and forth on it many times, even though we knew that completing the project would instantly increase the value of our home by an additional 40-50% beyond the initial investment.

We hemmed on and hawed over a decision that would increase our net worth? Yup.

Change is hard because the act of change admits that are wrong in the present. Sometimes this hefty dose of humility can be too much to accept.

Change is hard because it is an act of giving up something to gain something else. And we don’t know if we all we hope to gain will be better than that which we are giving up.

Change is hard because we are often left swimming upstream, fighting against the currents of life. Two or three steps forward followed by one step backward only feels like progress for so long to our instant-gratification-seeking hearts.

Change is hard because it requires renewed commitment on a daily basis. As my father-in-law often says, there is no glory in yesterday’s victory.

Change is hard because we do not always instantly see the fruits of our labor. This is why your local gym is full in January and half empty again by the end of February.

So how can you and I change?

Change Comes From Within

I’m reminded of a vivid training scene in Rocky III, in which an over-the-hill Apollo Creed is training Rocky Balboa for his rematch with Clubber Lang. Creed pummels Rocky with a steady stream of right hooks, and Rocky’s lifeless approach to improving his technique leads Creed to question, “What’s the matter with you?!”

Rocky responds, “Tomorrow. We’ll do it tomorrow.”

A fired up Creed denounces this attitude, stating repeatedly, “There is no tomorrow!”

Rocky continues to go through the motions in training until he hits the ultimate low point. Creed deserts him and states, “It’s over.” Rocky is really on the ropes this time.

When he needs it the most, Rocky’s wife, Adrian, provides a dose of wisdom.

“Apollo thinks you can do it. So do I. But you gotta wanna do it for the right reasons. . . Not for the people, not for the title, not for the money, or me – but for you.”

“And if I lose?”

“Then you lose. But at least you lose with no excuses. No fear. And I know you could live with that.”

I think I could live with that, too. Can you?


How are you striving to change in 2017? How will you sacrifice to make it happen?

Credit Consciousness is Key to Financial Health

This post, “Credit Consciousness is Key to Financial Health,”  is sponsored and authored by Ethan who writes for Readies.co.uk. It presents a clear message on the importance of credit consciousness as a component of overall financial health.


Credit Consciousness & Financial Health

Modern consumers face myriad borrowing and credit alternatives, tempting them to buy on margin. From daily-use credit cards to home equity financing (and everything in-between), existing credit options help users cover wide-ranging costs of living. Using credit is not only convenient, but access to loans makes it possible for consumers to make big-ticket purchases they otherwise could not afford.

With so much at stake, building and preserving a strong credit rating is an essential financial pursuit. If you are armed with a sturdy credit score; financing is at your fingertips. A troubled credit history, on the other hand, can limit your options. And since credit missteps are hard to overcome, keeping-up with bill payments and other credit obligations is the only way to ensure a healthy credit score. Whether you are in the market for a loan or simply strengthening your financial understanding, consider the following credit concerns.

When it comes to credit consciousness, there are many factors to consider in order to maintain overall financial health and well-being.

Borrow Only What You Need

Well-managed debt does not strain household cash flow. On the contrary, loan payments and other obligations are a natural part of personal finance. It is only when debt levels rise beyond your ability to pay timely, that you become vulnerable to financial difficulties.

Consider the long-term ramifications of opening credit accounts and taking-on debt. Building balances on credit card accounts, for instance, can rise to an unmanageable level, leaving you to pay interest only, minimum payments. Too often, the cycle becomes unbreakable, as income levels are insufficient to chip-away at the principle balance. Worse yet, adding new charges – even as oppressive balances linger, can lead to delinquent payments, default, and damaged credit.

In order to hold debt at reasonable levels, prioritize the way you use credit. In other words, apply loans and personal financing when they are most needed, paying cash for day to day purchases. By limiting credit card use to a convenience, rather than a bank account, you’ll stay timely with monthly payments, and remain on the right side of creditors.

Evaluate Lending Options

Financing options fall across a wide range of banking products. Long term mortgages, for example, serve high-dollar real-estate deals, extending low interest rates for decades. Short-term, fast cash loans, like payday loans are available at the other end of the spectrum, using your future pay as collateral for money today. Personal loans, consolidation loans and secured equity alternatives offer even more choices for borrowers, supplying funding for everything from home improvements to automobile purchases.

Whether you’re in need of quick cash or a 30-year fixed residential home loan, evaluating lending options from several providers is the only way to be sure the financing you select has a competitive rate and favorable terms. Before committing to installment credit, compare financing terms online. And don’t hesitate to shop around for the most affordable forms of revolving credit, protecting you from predatory interest rates and unreasonable credit card fees and penalties.

Use the Best Loan for the Job

Several distinct forms of financing are available to consumers, so it is important to match the types of credit you use to the jobs at hand. A credit card charge, for instance, would not be well-suited for a big-ticket purchase to be paid-off over time. In this case, an installment loan or low-interest equity financing would be a better alternative, resulting in lower interest payments.

On the other hand, day-to-day purchases you intend to settle at the end of each billing cycle are easily managed on a revolving credit account – often earning “miles” or reward “points.” Depending upon the urgency of your financial need, you may select a short-term, “payday” loan to help bridge a financial gap. This type of financing is issued without a formal credit check, so it doesn’t take long for applicants to receive needed funding. As long as you have a job and pledge to pay timely, payday lenders are willing to float a short-term loan. Late payment triggers penalties and fees, so this type of loan is not cost-effective, beyond a single pay period.

The way you manage credit has a meaningful impact on your financial health. By staying informed and evaluating credit options up-front, you’ll avoid missteps and build positive credit relationships. Turning away from credit challenges, on the other hand, leads to financial instability and can limit your options for future financing.


How do you maintain credit consciousness? 

Has The Credit Card Ruined Personal Finance?

When I was a kid, Superhero Dad defied convention. While others carried around a checkbook and a credit card or five, Dad preferred cash. Each Friday, he took his paycheck to the local bank where my Mom worked. I still have vivid memories of the marble-clad lobby and the smell of crisp cash inside the bank.

During each visit, Dad deposited a portion of each paycheck into their joint checking account and cashed the rest. After he had counted his cash, meticulously added it to his existing fold of money, and placed it in his front pants pocket, we took the elevator upstairs to visit Mom in the Trust Department. Invariably, these visits involved shooting the breeze with Mom’s bosses, peering inside the large-and-mysterious vault, and eating lots and lots of candy.

I was a unique kid. I thought banks were the greatest place on Earth. It is probably better that I only learned the truth at a much later age.

Early Banking History

Most historians believe that banks have existed for centuries. Many scholars believe that the concept of banking began in ancient times with the advent of grain loans issued to farmers. The concept continued to emerge and evolve through the reign of the Roman Empire, Medieval Europe, and into the 17th century. The modern bank as we know it today is an evolutionary product of these systems.

Related: The Evolution of Banking by Andrew Beattie at Investopedia

As a child, I did not realize that banks existed to profit from customers due to interest and fees. And I certainly did not understand the nuances of credit cards and the role of banks in this massive industry.

The Credit Card – A Radical Shift

The story behind the launch of the credit card, likely part-truth and part-legend, is intriguing. According to Diner’s Club International,

In 1949, businessman Frank McNamara forgot his wallet while dining out at a New York City restaurant. It was an embarrassment he resolved never to face again. Luckily, his wife rescued him and paid the tab.

February 1950. McNamara returned to Major’s Cabin Grill with his partner Ralph Schneider. When the bill arrived, McNamara paid with a small cardboard card, known today as a Diners Club® Card. This event was hailed as the “First Supper,” paving the way for the world’s first multipurpose charge card.

In its first year of business, Diners Club® grew to 10,000 members from New York’s business elite, with 28 restaurants and two hotels prepared to accept monthly billing in respect of this select clientele.

In the 1950s, Diners Club led the way in credit card innovation by introducing a travel insurance policy. The cardboard card turned plastic in the 1960s, and bewitched Audrey Hepburn in the classic film “Breakfast at Tiffany’s”.

In the 1970s, Diners Club launched its first range of corporate cards and, one decade later, lived up to its reputation as the pioneer of the industry with the introduction of Club Rewards®.

On December 31, 2009, BMO® Financial Group acquired the Diners Club North American franchise. The agreement gives BMO Financial Group exclusive rights to issue Diners Club Cards to corporate and personal clients in the U.S. and Canada.

Each time I hear this story, I marvel at the irony that the credit card was born due to one man’s forgetfulness. The industry has come a long way since, obviously, as the charge card concept has morphed into today’s credit card.

Interestingly, while the credit card industry has witnessed a near-constant state of flux, average interest rates have not changed drastically from year-to-year, according to the research below by NerdWallet.com.

Average interest charged by commercial banks, on credit cards, 1974-present

 

Year Historical Credit Card Interest Rate Inflation (CPI) Credit Card Interest Rate, In Excess of CPI
1974 17.20% 9.14% 8.06%
1975 17.16% 5.77% 11.39%
1976 17.05% 6.47% 10.58%
1977 16.88% 7.63% 9.25%
1978 17.03% 11.25% 5.78%
1979 17.03% 13.50% 3.53%
1980 17.31% 10.38% 6.93%
1981 17.78% 6.16% 11.62%
1982 18.51% 3.16% 15.35%
1983 18.78% 4.37% 14.41%
1984 18.77% 3.53% 15.24%
1985 18.69% 1.94% 16.75%
1986 18.26% 3.58% 14.68%
1987 17.92% 4.10% 13.82%
1988 17.78% 4.79% 12.99%
1989 18.02% 5.42% 12.60%
1990 18.17% 4.22% 13.95%
1991 18.23% 3.04% 15.19%
1992 17.78% 2.97% 14.81%
1993 16.83% 2.60% 14.23%
1994 15.77% 2.81% 12.96%
1995 15.79% 2.94% 12.85%
1996 15.50% 2.34% 13.16%
1997 15.57% 1.55% 14.02%
1998 15.59% 2.19% 13.40%
1999 14.81% 3.37% 11.44%
2000 14.91% 2.82% 12.09%
2001 14.44% 1.60% 12.84%
2002 13.09% 2.30% 10.79%
2003 12.92% 2.67% 10.25%
2004 13.21% 3.37% 9.84%
2005 14.54% 3.22% 11.32%
2006 14.73% 2.87% 11.86%
2007 14.68% 3.82% 10.86%
2008 13.57% -0.33% 13.90%
2009 14.31% 1.65% 12.66%
2010 14.26% 3.14% 11.12%
2011 13.04% 2.70% 10.34%

Source: https://www.nerdwallet.com/blog/credit-card-data/historical-credit-card-interest-rates/

The Cultural Impact of the Credit Card

In the late 1930s and early 1940s, Superhero Grandpa was already hard at work, even as a teenager, to earn money. He routinely spent hours working at his father’s butcher shop and was happy to collect a few nickels for his efforts. Those nickels paid for the gas in his car and dates with his bride-to-be.

In many respects, coins and cash money were the only currency for people in Grandpa’s generation. When he passed away in 2013, Grandpa carried only cash and a small coin purse in his pockets. He did not have any credit cards.

When contemplating a purchase, large or small, Grandpa always paid cash or went without. This approach flies in the face of today’s conventions.

As of May 2016, data collected from the Federal Reserve and Census Bureau and presented by ValuePenguin.com shows that the average American household credit card debt figure stands at $5,700. Furthermore, 38.1% of all households carry credit card, and it is the households with the lowest net worth figures which hold the highest credit card debt, on average. Even Grandpa’s generation is not immune to this cultural shift, as the average credit card debt for individuals 75 and over stands at $5,638.

In fairness to Grandpa’s generation as well as those who are currently less than 35 years old, research shows that these respective age groups are least likely to have a credit card. Despite this encouraging sign among Millennials, a quick look around reveals troubling trends, myths, and beliefs within our current culture:

  • Paying for today with tomorrow’s dollars. Without credit, this trend would not be possible. But, you know, YOLO, so go for it, right? Wrong. Though you will most assuredly only live once, that lifetime is likely to extend for a total of 75-80 years. You’ll wish you had today’s dollars back once that time comes.
  • The brainwashing of youth. While most readers and I grew up playing Monopoly with paper money or shopping with their Barbies and paying cash, children today experience different rites of passage. In 2007, Mattel released the Fashion Fever Shopping Boutique, complete with a credit card. Not to be outdone, Hasbro has updated the classic Monopoly board game, trading in dollar bills for bank cards with its “Ultimate Banking” edition. Parents today clearly face an uphill battle in teaching their children about responsible spending.
  • The 0% APR. First, let’s be honest: 0% really isn’t 0%. It is probably more like 5-10%. Why? Suppose you bought a new vehicle for $20,000 with 0% financing. You likely could have gotten a better deal paying with cash, say in the neighborhood of $18,750-$19,000. You are really paying upfront interest (and fees) in this deal. Depreciation is a factor, as well. I know this not a credit card example, but the associated principle applies: When you buy on credit, the bank has to get paid somehow.
  • Affordable payments. More honesty: The payment is probably stretching you thin. It is probably robbing you of the ability to save and invest. And even if it isn’t, then you probably have enough income or liquid money to just pay cash and eliminate risk entirely.Waiting is wise. By waiting, you can buy far nicer things later on down the line. Delayed gratification leads to greater gratification!
  • Obsession with building credit. From a practical standpoint, building your credit is not the worst thing you can do. You may someday need credit in order to apply for a mortgage. It is certainly to your advantage to maintain a responsible credit history. However, going into long-term debt simply to strengthen your future ability to take on more debt is nonsense.
  • A high credit limit as a sign of financial prowess. “My credit limit is very high. That means my financial institution believes that I can afford to borrow close to the limit,” many say.In reality, your overall credit utilization is just one of several factors considered by credit card issuers. They are rarely able to view the full picture of your finances, such as your budget, temporary expenses, or your current liquid cash. Just because you are issued a high credit limit does not mean your spending should approach that limit, and it certainly is not an indicator of financial well-being. If you get too close to the fire, you’re going to get burned.
  • Credit cards increase my security. While there is some truth to this (credit cards do have some advantages), cash is also highly-secure. For most people, the likelihood of cash or a credit being misplaced, lost, or stolen is fairly equal, in my opinion. However, the ramifications of a lost credit card are for more serious than lost cash. Today, credit card thieves must move quickly to take advantage after they have stolen your data. However, once your data is compromised, your likelihood of identity theft is significantly heightened. Plenty of victims of Target’s 2013 data breach can attest to this truth. Remember: Nobody ever experienced identity theft (or foreclosure or repossession) by using cash.

Cash-Public-Domain

 

 

 

 

 

 

 

 

Recommendations

  1. Evaluate your current use of cash and credit. Use cash as much as possible.
  2. If you use credit cards, pay off the monthly balance on time every month. Ensure that you account for this spending in your budget. Also, make sure that you do not fall victim to overspending your budget due to using credit.
  3. Don’t waste time fretting about credit and monthly payments. If you have debt obligations, pay them off as fast as possible. Work overtime, start your own business, begin a new side hustle, or launch your own blog.
  4. Protect yourself and your family through strong credit monitoring and identity theft insurance. Enroll with Identity Guard today at no cost for 30 days.Their service is highly-rated and compared favorably to LifeLock by ASecureLife.com.
    Disclosure: Links to Identity Guard contained in this article are affiliate links.

Has the credit card ruined American personal finance? How does credit card use factor into your current financial strategy?

No April Fool – Lessons from Finance Superhero Grandpa

In my last post, I mentioned that my grandfather, whom I always called Grandpa, was my first Finance Superhero. When making financial decisions, I often ask myself, “What would Grandpa do?” It seems fitting to highlight several of the lessons he taught me, both in childhood and adulthood.

Don’t Pay Asking Price

Growing up in a dual-income household, I spent much of my summer under the watchful eye of family, including Grandpa and Grandma. Grandpa and I spent many hours working on my baseball fundamentals. One sunny summer morning, we ventured out to a local flea market, and while Grandpa searched high and low for miscellaneous treasures, I had my sights set on baseball gear. Upon finding a wooden baseball bat for sale, Grandpa and I had the following conversation:

“Grandpa, I want that bat! It’s only $5.”

“We’ll get you that bat, but not for $5. We will get it for $2, or that can guy can keep it.”

“But. . .”

“Now, take these two dollar bills and tell the man you want to buy that bat. Show him the money, and tell him that it’s all you’ve got. I’ll be right over here.”

Moments later, I was the proud new owner of a beautiful antique baseball bat. More importantly, I had just learned lasting lessons in communication, negotiation, and the power of willingness to walk away.

“Don’t let anyone buffalo you”

Grandpa used this phrase often, and ironically, it bewildered me for quite some time. I came to understand that Grandpa was reminding me of the simple nature of money. To him, those who aimed for sophistication or complexity in the management of their finances were “full of prunes.” Grandpa knew that stupidity could not be outearned, even with the most superior work ethic. The importance of consistent savings over time, spending only a portion of earned income, and seeking the best value in purchases were part of Grandpa’s plan to become and remain financially independent.

“Watch your pennies”

Most people in Grandpa’s generation understood the power of cash. Grandpa thoughtfully planned for a purchase, big or small, by ensuring he saved the money to pay for it in advance. Buying on credit was nonsense to Grandpa. Furthermore, Grandpa always knew the balances of his cash, checking, savings, and investment accounts, down to the dollar (or penny!).

Productive Hobbies

While other retirees spent mornings on the golf course and afternoons poolside and sipping an Arnold Palmer, Grandpa enjoyed hobbies that kept him busy, sharp, and boosted his income. In his youth, Grandpa built his first home from the ground up; in retirement, he used these skills to build and rehabilitate small and mid-size utility trailers and sell them for large profit. It was not uncommon for Grandpa to unexpectedly come home with a newly-purchased, dilapidated trailer, even when he had two or three other projects in progress.  He could not bear the prospect of an opportunity gone to waste. Grandpa was focused on constant maximization.

Trailer
A trailer much like one Grandpa would have built

Master of the Flip

Before HGTV taught America how to flip houses, Grandpa was the Master of the Flip. He enjoyed purchasing vehicles, driving them for a short time, building some sweat equity, and reselling the vehicle for a profit. While I previously explained his work with utility trailers, perhaps Grandpa’s wisest Superhero feat lay in his understanding of marketing and supply and demand. Grandpa often purchased trailers in the rural countryside and resold them in the city for significant profit. It was not uncommon for him to purchase a fine trailer for $250 (after flashing cash and talking down the seller, of course), drive it to a prime location in our town, post a bright orange FOR SALE sign, and sell the trailer that same day for $500.

Stealth Wealth

Outside of our family, few people knew that Grandpa was wealthy. He kept his Superhero identity a secret. He and Grandma lived in a modest, meticulously maintained ranch home. (Grandpa often boasted about his choice to move into a neighborhood with a low property tax rate.) He drove unassuming vehicles purchased with cash after someone else had taken the depreciation hit for 2-3 years. Grandpa and Grandma maintained exemplary landscaping which would not have been out of place on the cover of Better Homes and Gardens, and they did the work themselves. Paying someone to do what they could do themselves was simply out of the question.

Your Finance Superhero

Who was your first Finance Superhero? Who taught you the value of a dollar? What are some of the biggest financial lessons you have learned? Tell us in the comments section!