Interest and finance charges lead to getting discouraged about your overall financial situation. All of these problems occur once you let yourself fall behind on your payments. Whether it’s normal monthly bills, credit cards, or student loan payments, falling behind on your payments can be a difficult problem to dig yourself out of. The more money you sepnd on finance charges, the less money you have to invest in your future.
If you don’t know where you are headed, how on earth do you get there? In order to begin building wealth, you need a roadmap. Write out your goals, very specifically, including a way to achieve them, and you’ll be on your way to wealth building.
The greatest thing you can do for yourself is to start early. Even if you can’t invest much, start with what you can (even $5 per week) and let your money begin to grow.
Whether you are looking to invest in real estate, stocks, or gold and silver, make sure you know how the investment works from top to bottom. If you don’t understand the company's business model, what the company actually does on a day to day basis, or how it generates revenue, then do not invest a single penny in it. This principle should be heede at all times and applied to all the different types of investing.
When everyone is talking about an investment, that is generally when the smartest investors are getting out of their position. If everybody understands a stock is hot, or that the real estate market is booming, it generally indicates an economic bubble. In other words, it is time to cash out. Investors make money buying low and selling high. If an investment is already hot and lots of money is flowing into it, you aren't buying low.
Don’t get greedy with your money. This is easier said then done, but don’t try to be a hero with your investments and take on too much risk. Building wealth takes time and dedication to your craft. There are no shortcuts or easy ways to get rich.
This is one technique that sounds really basic, but can be really difficult to achieve. Most people want instant gratification and go out to treat themselves on a regular basis. Before you start spending that money burning a hole in your pocket, try to save 30% of it. Split your 30% between charity, church tithes, emergency fund savings, and other investment goals.
Many investors are ignorant when it comes to investing. There is nothing wrong with being ignorant. Ignorance simply means that you do not have enough education on a subject or field of study.
When starting something new, most people want to jump right in with both feet. Sadly, most people will not be successful by throwing money into something that they do not fully understand. It would be much wiser to realize that ALL investments have risk associated with them. The reality of losing some, or even all of your money, is a very real possibility. Any kind of investing, no matter what, will require you to have some basic skills.
It is prudent, long before you start investing, to gain as much information as possible on the subject of investing. It is my recommendation to focus on only one investment vehicle initially. Do you know how the stock market really works? Would you rather make money by investing in real estate? Picking just one area of expertise will allow you to master that specific subject through education and experience.
Additionally, you also need to lay out your investment goals. Do you know what you really want to achieve by investing in this specific area? For example, your goal may be to be able to provide for your child's college education. Before you start investing your money, it is a good idea to consider what goals you want to target with your investment. Set your goal to be a certain amount of money in 15 years time. With your goal clearly in your mind, you will be in a much better position to make intelligent decisions. As things progress, you can make better choices and adjust your risk tolerance.
Sadly, many people invest with the hopes of becoming rich overnight. This is not impossible, but it seldom happens, so don’t count on it. It is a bad idea to start investing with a goal of trying to get rich overnight. For one thing, your goal is much too vague and undefined. For another, your goal requires you to take way too much risk in order to achieve your goal.
A much safer approach is to plan to invest in a way that will enable your money to grow over time, slowly. If you have read my book, Start Winning With Money, you will remember that step one to investing is preservation of your hard earned capital. Trying to achieve wealth overnight does not allow you to preserve capital, as you will take on way too much risk in your investments.
Once you have achieved your targeted goal however, you will be able to use the return on your investment for your child’s education. Ideally, you will have invested a lot less money than the total amount of money received at the end of your investment term. The big idea behind investing is that your money compounds on itself without you having to physically do anything for that money.
Before making any investment, it is a good idea to consult with a financial planner. I recommend that you sit down with an advisor that charges by the hour, not an advisor that gets paid based on how much money you give them to manage. A good, fee-based financial planner should be able to advise you and help you with the financial goals you've got in mind. He or she should be able to give you an idea of the realistic returns your investment will return over the long term, and when you can expect to reach your overall financial goals.
Investing is much more complicated than just buying and selling something, whether that something be stocks, bonds, mutual funds, ETF's or real estate. In order to be successful, and achieve positive returns from your investments, you will need to do some basic research and have some general understanding about your chosen investment vehicles.
Using your credit cards wisely might be one of the most important decisions you can make towards overall financial health. The reasoning behind this is incredibly simple; high interest rates on credit cards can cost you a lot more than money if you can not make your payments on time, every time, without fail.
For most people, rent or mortgage payments, along with auto loans, are the two largest debts they carry in terms of actual dollars. These two payments often account for well over 30% of someone's take home pay each month. When credit cards and personal loans are added to this mix, the overall debt costs each month can quickly reach 60% or more of your take home pay. Having this much debt does not leave a lot of money for other living expenses such as food, clothing, utilities etc. For most consumers, the payments on their credit cards or personal loans are also the highest interest rate loans that they have.
There are many reasons why credit cards can specifically become the biggest threat to your overall financial health. The number one reason is that credit cards are so easy to use. The number of people who use credit cards for everyday purchases is incredibly high. Consumers tend to forget that if they do not pay off the entire balance each month, they will be charged interest. Most credit card companies will happily charge you as much as they legally can for the credit they are extending to you.
To make matters worse, if you are late on your payments, or if you do not make any payment at all, the credit card companies will ruin your credit score. 35% of your FICO score is based on credit repayment frequency and timeliness. It does not take very long for delinquent payments (or non-payment) to derail your credit score. Additionally, these negative marks on your credit report can stay there for up to seven years. These negative marks against your credit will to either deny you future credit, or cost you much higher interest rates on new accounts. To make this incredibly simple, late payments will simply cost you more money in the future.
The very best way to handle your credit cards is to pay off the balance each month. This not only makes your credit report look good, but it also keeps you from paying high interest rates. The second thing to do is to avoid using your credit cards for unnecessary expense. Instead of paying with your credit card, try using your debit card, or that green stuff called cash. This one incredibly simple action can save you more money than you ever imagined.
If you feel you are already in trouble with your credit cards, sit down with your statements and make a plan to begin paying them down. I suggest you look at my Budgeting 101 page for more help on getting out of your situation. Start by using the debt snowball, or paying off the credit cards that have the lowest balances. Once these are paid off, move to the next lowest balance and begin paying that card down by adding the same amount you were paying on the now "paid off" card as well as the regular payment you make currently. It will take patience and some financial sacrifice, but it can be done.
Your ability to qualify for any kind of financing, from auto loans to mortgages, depends on your FICO credit score. Most lenders will pull your credit report looking for just one key piece of information, your FICO score.
The FICO score is used to evaluate your ability to handle a particular line of credit or loan and to also calculate the appropriate interest rate for you. Depending on their institutional financial goals, some lenders may use your highest FICO score. Others will look at the middle score, or in some cases, only one FICO score.
For example, if you were applying for a credit card at a department store, they would run your credit profile (only with your signed permission, of course) and obtain your FICO score. If the store reports to only one of the three credit bureaus, and not all three, then the credit inquiry will only pull from that specific credit bureau. The credit card is either then opened or denied based on only that one specific bureau’s information, and thus uses only one FICO score in it's application process.
The credit system works much differently for mortgage applications. Banks and mortgage lenders report to all three of the credit bureaus (Experian, Equifax and Trans Union if you didn't know), so when you apply for a mortgage they would receive three different FICO scores. These three scores are calculated on the three DIFFERENT credit reports that the credit bureaus send to the lender. Since there are now three different FICO scores, mortgage lenders will only use the middle (or average) FICO score in this instance.
Also, depending on the type of financing you are seeking, whether it is for a new car, a credit card, or a home mortgage, your FICO score makes up a major portion of the decision making process. A lot of lenders will look at nothing more that your score in order to make their decision. Some companies will also flag your file for a recent bankruptcy or forclosure and repossession as well.
Your FICO score is really a "how well I pay my bills score" that consists of the following keys:
35% of your FICO score is based on your payment history. The key points being frequency of payments (read: whether it was paid on time), and most recent occurrences of non-payment. In other words, all late or completely missed payments will hurt your FICO credit score, but more recently missed payments will have a bigger effect on your score than older ones.
30% of your personal FICO score is based on credit utilization. This is calculated based on the balance of all your credit accounts in relation to the maximum credit lines available. Revolving credit lines (read: credit cards) are the most significant part of this score.
Just these two factors comprise 65% of your credit score! That is why I call it a "how well I pay my bills score".
15% of your FICO score covers your individual credit history. This is based on the number of years your credit has been established (the longer, the better). Having one account for 5 years with consistent payments will look better than 3 accounts all paid off and closed within 6 months.
10% of your FICO score involves what types of credit you have, and the mix of revolving credit inquiries (read: credit card applications). This does not include inquiries with no financial rating (Read: an inquiry from a potential employer).
As I mentioned earlier, there are three different FICO scores developed by the Fair Isaac Company, one from each of the three major credit bureaus. Experian uses the Experian/Fair Isaac Risk Model, Equifax uses Beacon, and Trans Union has something called Empirica. Consumers are likely to have a different score with each individual agency because each credit reporting bureau has its own set of reporting companies and there will be variations in the credit information that is sent in to them.
Your FICO score ranges from 300 to 850 and suggests a general credit profile such as:
FICO score of 720 and above
This is a great FICO score, and it suggests that the risk of you defaulting on your credit is very low. If the lender finds any exceptions in your credit report, they will most likely be waived and set aside. If there are any weaknesses in the underwriting your credit (such as not a very long history), your high FICO credit score compensates for that particualr weakness.
FICO score 660 to 719
This is good FICO score, and suggests that your risk of default is still relatively low. This FICO credit score indicates that your credit history is acceptable and most people fall within this range.
FICO score 620 to 659
This FICO credit score represents a certain amount of risk to the lender. The credit underwriter will more than likely consider you, but will investigate a lot further to check on some details. For example, whether you are self-employed, have a high loan to value ratio, have any cash reserves, or are exceeding normal debt to income ratios.
FICO Scores below 640
Anything below 640 is considered sub-prime. Your risk of default is very high, and you will need to present strong compensating factors to the lender before the underwriter would consider approving a loan. Most mortgage lenders will not approve you for a house without at least a minimum 640 credit score.
FICO score between 619 to 585.
The underwriter will consider approving a loan but that depends on your specific credit issues. You are now in the same class as an applicant with no previous delinquency and lack of sufficient credit history. Mortgage lenders are much more likely to see mortgage delinquencies rise if they loan money to a consumer with a FICO score below 620.
FICO score between 584 to 500
You will have to explain your credit history in writing, and will need to pay off most of your debts to even be considered for approval. The loan underwriter may still consider you an acceptable risk but the high risk factors your credit score presents will have a really high interest rate attached to a much smaller credit line.
FICO score below 500
This is really bad credit. There may be some serious issues outside your control that caused this financial setback, however. There are also some individuals who simply do not care about what happens to their credit score. This does not mean that the world has ended, though. There is still hope and a way to fix your score.
Additional Notes About Your Credit Score:
Your credit report changes each month and your FICO score will change as well. Your FICO credit score does not change drastically from one month to the next month, unless there has been a late payment or a negative report hit your account. While late payments, collections, or bankruptcies can be very damaging to your score, it simply takes time to raise your FICO scores back up. It is a good habit to check your credit report every 6 to 12 months.
Your credit report must contain at least one reporting credit line over a six month period in order for a FICO score to be generated at all. Your credit report must have one credit line that has been updated in the last six months as well. This will ensure that there is enough information overall, and enough recent information, to accurately calculate your FICO score.
Your FICO credit score is meant to be a measure of your creditworthiness to a potential lender. In the mortgage industry, mortgage products and lending terms change constantly. If you manage your credit well, you will certainly qualify for a home purchase loan. In the case of credit cards, your account is reviewed periodically (usually every 6 months), and if you manage your credit well, you will most likely be given higher credit limits and offers to upgrade to a better rewards program.
To quote Tracy Lawrence, time marches on...
It is important to notice that the current generation of younger people is getting involved with a lot of things that were either non-existent or simply not possible in the past. Today’s youth can write a text, talk to a friend, listen to a playlist of songs, update a social network page, and surf the Internet all at the same time from their "phone". When I grew up, we used a wall mounted phone to make "phone calls".
It should be fairly obvious that the younger generation has an entire world of opportunities within their reach. But along with these new and opportunities comes personal responsibility. Often, responsibility involves money and work. Today's generation needs to know how to handle their personal finances. That financial responsibility should be emphasized specifically for those getting ready to enroll, or are already enrolled, in a college or university.
Let's examine the case of an average college student. Their night begins at around midnight with either a late night out with friends, or a full blown house party. The next morning, reality kicks in with a hangover. All the money that was wasted on beef jerky and nacho chips, is now nothing but crumbs on the frat house floor. During the day there is class to attend, laundry to do, and papers to finish writing.
They probably went grocery shopping just 3 days ago, but all the food that was stocked up for the week is gone already. Now, here comes another trip to the nearest grocery store to restock the pantry shelves. What are they going to eat for lunch and dinner? They haven't even begun to deal with the real responsibilities. There are still payments to be made for rent, electricity, heating and water bills… wait. What about tuition?
In general, people have no problem spending more money even when they know there is no money left to spend. Even older, more mature, and supposedly more responsible adults fall into the same spending patterns. Why should we act surprised when our younger generation follows the same path we laid out?
The real problem is the lack of education being taught to younger generations, both from their adult parents and their circle of friends. The spending habits that you begin exhibiting early on in life carry through from childhood to adulthood. A teenager who spends sixty dollars on a "popular brand" shirt now will spend several hundred dollars for another "popular brand" shirt later on in life. These little "splurges" tend to stack up over time and become a huge financial crisis during one of life's many financial lessons. These "financial lessons" include divorce, job loss, credit card debt, or home and auto repossession.
It is much better for our younger generation to learn how money works before they graduate from high school. The earlier, the better! In the real world, where life consists of credit cards and mortgage payments, anyone who does not know how money works will end up in some sort of financial trouble. Young people should learn more about taking care of personal finances, while they are still young and able to change their course. The only problem that remains now is who is teaching them?