ADDITIONAL RESOURCES
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A Guide to making Smart Financial Decisions
Money
SAVING AND INVESTING
Saving is incredibly important to achieving financial independence. Financial experts recommend saving three months of income in an “Emergency account.” In addition, you should save for major purchases and retirement. Many people do not start saving early enough for their retirement. You should begin saving for retirement as soon as you start working. Money deposited in your early twenties will have more time to grow before you begin to need it. For example, due to the power of compounding interest, $3,500 deposited at the age of 25 will grow to $95,783 by the age of 67 (assuming an 8% growth rate.) You can see that it will be much easier to afford retirement if you start saving early! So what are you options for retirement plans? Well, you have plenty! The two most popular are the 401K and the IRA. You can open up a 401K account through your employer. A portion of your paycheck will automatically be deducted and invested for you. Usually, your employer will match your contribution up to a certain percentage. If you are self-employed or your employer doesn’t offer a 401K plan, then an IRA, or independent retirement account, is right for you! An IRA allows you to make pre-tax contributions to a retirement account, and any interest earned on the account is not taxed until it is withdrawn. There are five types of IRAs, so find the one that works best for you!
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IS ALL DEBT BAD?
There are many theories about the best plan for debt management. While some financial experts say that all consumers should be completely debt free, most believe that good debt management is not necessarily having no debt at all. A “good debt” would be a debt acquired to attain an asset that will increase in value. For example, taking out student loans to finance your education or purchasing a house would be a “good debt.” It is important to note, however, that debt is not “good” unless you accomplish your goal. If you buy a house that is too expensive, and you cannot make the monthly payments the debt is not “good.” A “bad debt” is debt for a consumable good. This is also known as “living beyond your means.” Credit card debt, car loans and debt on other goods that decrease in value are all “bad debt.” This type of debt can be dangerous, especially if it becomes habitual. When paying off debt, always begin with the highest APR and work down to the lowest APR.
HOW TO MAKE A CREDIT CARD WORK FOR YOU!
Credit cards are quickly becoming a fixture in modern society, but many people do not know how to manage their credit card correctly. Failing to manage credit card debt has left many people in bankruptcy. Credit cards can be dangerous. They charge very high interest rates, and they allow people to live beyond their means. However, credit cards offer many advantages along with these disadvantages. They are efficient and easy to use, they help you build up a good credit score, and many offer protection from identity theft. Good management will allow you to benefit from the use of a credit card. The best way to use your credit card is to charge only what you can afford to pay off at the end of each month. Paying off your full balance each month and paying it on time will allow you to avoid paying those sky-high interest rates. When searching for a credit card, do your research! The most important information is presented in the “Schumer Box.” It will tell you the APR (the interest rate), finance charges, the minimum payment, the credit limit, any annual fee and more. Choose a card with a low APR and the fewest added fees. Also, make sure that the APR shown is not just an introductory rate. Introductory rates only apply for the first few months; after that your rates will change!
A credit score or FICO score is a number between 200 and 800 that potential lenders look at before extending credit. It is important when you are trying to obtain financing for a house or car. Often, loan applicants with lower credit scores are required to pay larger interest rates. Calculation of your credit score combines information from your payment history, the amount owed, the type of credit you use, the amount of credit you have qualified for and length of time you have had credit. How do you improve your credit score? Consistently making payments on time and keeping a low balance on credit cards will improve your score.
BUDGETING: MAKE IT STICK!
The most important thing you can do to take control of your finances is budgeting. Many templates are available online free of charge to guide you in this process. You must first estimate your monthly expenses and your monthly income. Start with your income. Take out any deductions for your savings. List your necessary expenses first, like rent or groceries. Next, deduct your “extras,” like traveling or eating out. Now the hard part: sticking to it! Remember, your budget won’t help you improve your financial status unless you are willing to make it work!
WHAT GOES INTO A CREDIT SCORE?