Episode 14: How Much You Should Really be Saving and What to Know When Selecting a Credit Card
I’ve had the same credit card for as long as I can remember. I’m hearing a lot about rewards programs and the need to maximize my options. What should I know when I’m shopping for a credit card?
I’m in my late 30s and I feel like I’m doing okay with savings, but I’m not sure that I’m doing enough. How much should I have saved by now?
One of the fun parts of being a financial planner is getting to field and answer questions from clients and readers all around the country. In these Work Your Wealth episodes I’ll be taking time to address and answer questions I’ve come across from readers and clients throughout my career. Today I’m answering the above questions:
WHAT YOU’LL LEARN FROM THIS EPISODE:
How we maximize credit card rewards in our household.
Why your APR is and how it varies for different uses.
What to keep in mind when looking for the best rewards programs.
How your credit score can impact your APR and the credit limit available to you.
Why your personal situation will determine what you need to stash away.
Questions to ask yourself about goals and life to determine the amount you need to stash away.
How to tell if you’re doing enough on your own.
Rules of thumb to use in determining the amount you need to save.
Buying a home comes with a huge financial stake, a lot of responsibility, and even more fine print. While investing in this aspect of the American dream is exciting, it’s important to reflect on your current and future plans before buying. Here are five questions to consider:
1. What Are Your Goals for the Next 5 to 7 Years? Are you happy with your job and feeling content with how your life is going? Do you anticipate any career, family, or financial changes in the next few years?
If you’re considering growing your family or changing careers, factor into your budget any anticipated changes, such as extra room for a baby or an income cut. That’s better than taking a financial loss by having to turn around and sell your new property.
2. What Will It Cost to Both Purchase and Own Your New Property? A general rule of thumb is to keep your PITI (principal, interest, taxes, and insurance) costs below 28% of your gross monthly income, while your overall debt-to-income ratio should be no more than 36%.
Are you buying a bigger space than what you currently have? Don’t forget to factor in increased heating and cooling costs. Also, plan for homeowner’s association dues if applicable.
In addition to the funds you have for your down payment, don’t overlook the following expenses you’ll incur once you purchase your home:
I recommend opening a separate savings account in addition to your down payment fund to save for these expenses.
3. What’s Your Credit Score? Your credit score is your financial report card, except it will follow you long after college. This number can either save or cost you thousands of dollars when it comes to locking in an interest rate on your mortgage. The lower your score, the higher your interest rate and the more you’ll pay to borrow from a lender. The higher your credit score, the lower your interest and the more money you’ll keep in your pocket.
If you have any issues on your credit report, tackle them as soon as possible.
4. How Will You Handle Home Repairs and Maintenance? Is there a lawn to mow or a pool to clean? Do you enjoy the idea of tinkering with appliances and fixing things around the house? Consider if you’ll DIY or delegate. If you’re a delegator, price services ahead of time to ensure there’s room in your budget.
One of the first things I told my husband upon seeing our new backyard was that I don’t do landscaping. Apparently, neither does he, because 12 months in, we have a monthly line item in our budget for a gardener.
5. How Will Your Ideal Location Affect Your Monthly Nut? It’s important to consider more than just the home price in your desired community. Will you be farther from or closer to work? How will your home’s location affect your commuting costs? Our family purchased in a community that has a toll road, so we’ve added tolls to the monthly budget.
In addition to transportation costs, consider whether your food and utility costs will increase or decrease, and whether you’ll enroll kids in the local school district or opt for private schooling.
This post was written in partnership with The National Association of Realtors. I have been compensated, but the thoughts and ideas are my own. For additional home finance tips, check out HouseLogic.com.
When meeting with prospects for an initial consultation and with clients for their first meeting, I tend to get the question of “how do we compare to your other clients?” Most people have an image in mind of where they think they stand with their finances. It’s either bad, reallllyy bad, okay, good or great. Ultimately though, it’s hard to have a sense of confidence about where you stand without first doing the work to figure out, well… where you are standing. I wish I could tell you that it won’t be as bad as you think or it will be as great as you imagine, but honestly, we won’t know until you take the time to evaluate where you stand and figure out what kind of moves you need to make to get to (or stay) where you need to be. If you’re looking to take stock and see which boxes you have “checked off,” here are some important, self-evaluating questions to ask yourself to assess the current state of your finances:
Do you have a fully funded emergency fund?
If you’re a single income home, you should aim to have 6 month of “must have” expenses set aside into an easily accessible and liquid (i.e. cash / savings) account. If you’re a dual income family, you can likely get a way with 3 months, but 6 is better. Life is unpredictable and unexpected things happen all the time. It’s not a question of if things will happen, but a question of when and your finances will be in a much better state if you have the cash set aside to handle those unplanned moments than if you need to rely on credit cards and dig yourself into debt.
Is your credit score in the “excellent” range?
Aim for a credit score to be 720 or higher. Your credit score is your financial report card, except there’s no getting rid of it after college. This number will save or cost you money over your life. The higher your score, the lower the interest rates you receive and the more money you save when it comes to taking out a mortgage or car loan. Your credit score simply indicates your creditworthiness and tells a lender how reliable and timely you will be in repaying a loan. Having a strong credit score is invaluable to always provide you the best financing options. Related article: What Millennials Need to Know about Their Credit Scores
Are you saving at least 10% for retirement?
If you’re in your 20s, you should aim to save 10% of your income for retirement. If you’re in your 30s, aim for 15%. The earlier you start saving, the better and when it comes to determining how much you should save, it’s important to think through the future you want. Take the time to consider what it is you would love to do in retirement and when you think you’d want to retire.
Are you able to meet everyday expenses?
If you’re relying on credit cards and debt to get by, chances are it’s time for a financial change. Often times the reason people feel like they’re living paycheck to paycheck isn’t because they don’t have enough money. It’s that they aren’t wisely spending the money they do have. When this is the case, it can be a fairly straight forward exercise to get your cash flow in order so that you can meet everyday expenses with ease. It’s important to first understand your current spending habits by tracking your spending. Once you know where your money is going, you can determine which expenses you can eliminate altogether and other spending habits that could be altered to more easily cover your fixed expenses and align the rest of your money in the areas you care about the most. (Note, if getting out of debt is necessary – I recommend freeing up money to go towards a debt pay down plan).
Do you feel well compensated for your job?
Remember that when it comes to compensation, it doesn’t have to only be about the salary. You can also consider benefits, bonus structure, employee stock options, flexible vacation policies and work from home arrangements. If the income and benefits you earn for the work you do doesn’t feel good, it might be time for a change. Don’t be unwilling to negotiate a pay raise, especially after successfully completing an important project. If you’re working hard and doing great work, ask to be compensated for that. If your current employer isn’t able or willing to pay you what you’d like, are you ready to consider a move to another company or start a side hustle? Forbes reports that employees who stay in companies longer than two years get paid 50% less. If you don’t feel well compensated right now, know that you have options if you’re willing to take action.
Is your net worth growing?
Your net worth is your total financial worth – measured in dollars and is something I consider a measure of your financial health. After you take all your assets and subtract all your liabilities, what you’re left with is your total net worth. As the years progress, what you want to see happen is that your assets grow and your liabilities decrease. Start with where you are today – know your number – and keep track every 6-12 months to see if your assets are, in fact, increasing over time. If your net worth is stagnant or in decline, you’ll want to know what is causing the lack of growth so that you can tackle any issues getting in the way of your financial health.
Do you have a debt pay down plan in place?
If you have debt, you’ll definitely want to have a pay down plan in place. There are many ways to get out of debt, but the two most effective ways are the debt snowball and the debt avalanche. Both plans involve aggressively paying down one balance while making the minimum payments on the rest. The difference lies in what order you tackle the debts. With the debt snowball method, you pay off your debt from the smallest to the largest balance so that you establish good habits and roll more and more money into the next debt. With the debt avalanche method, you pay debts down from the highest interest rate to the lowest interest rate so that you pay as little in interest as you can and roll that savings into the next debt. The most important thing is to have a plan in place on how YOU are going to pay down your debt and stick to it.
Are your taxes under control – did you owe or receive a refund?
Ideally, you want to break even at tax time, otherwise you’re giving an interest free loan to the government if you get a refund (or you feel kind of annoyed if you owe). Zero is the goal! If you owed a lot for taxes or you received a sizeable tax refund, something went awry this year. The way to make sure you don’t owe again next year is to understand your tax liability and adjust your withholdings accordingly. Perhaps reach out to your human resources department to update your W-4 or adjust your quarterly payments if you’re self-employed and business is growing.
Do you have the right kinds of insurance in place?
Insurance is a tricky topic, but at a minimum you should ensure you have some sort of health insurance and disability insurance in place. In addition, you’ll need life insurance if there are others who are dependent on your income. Property and casualty insurance (such as auto, home, umbrella and renters insurance) are also important to have in place. Always work with your broker or agent to confirm you have the appropriate level of coverage needed for your situation. Don’t just guess at it!
Are your investments appropriately diversified?
If you’re saving for retirement and your investments are sitting in cash, chances are the answer to this question is “no.” Your investments should be allocated based upon the time frame until you’re needing the funds. There’s debate between when to invest or not invest for short to mid-term goals, but if you need the funds in less than 5 years, a CD is going to be your safest bet. If you’re investing for the long run, ensure you have a mix of equities and fixed income, small and large firms and domestic and international. Leverage mutual funds and exchange-traded funds, which will help you to diversify when starting out with smaller sums of money. How many of the above did you answer “yes” to? If you’re 10 for 10, then chances are you’re on a solid financial track! If there are any questions that left you wondering or thinking you might need a change, there’s no better time than now to make some adjustments. The best thing you can do is be aware of how you’re doing and keep track of your financial health year after year.
I’ve said it before and I’ll probably say it again –your credit score is one of the most important numbers in your life. This three-digit number essentially acts as your financial report card, except there’s no leaving it behind after graduation. Your credit score is used to represent your creditworthiness, which translates into the likelihood that you’ll pay your debts in a timely manner. If managed wisely, it can bring you peace of mind and result into dollars in your pocket via low interest rates and higher credit limits. If not managed properly, your credit score can delay your ability to reach goals and result in you spending more money than necessary to make up for past mistakes.
What makes up your score?
There are five elements that make up your FICO (Fair Isaac and Company) credit score:
35% of your score is based on how you pay your bills. (Are you paying on time or often late or missing payments?)
30% of your score is based on the amount of money you owe and the amount of available credit to you.
15% is based on the length of your credit history.
10% is based on the mix of your credit accounts. This involves both revolving credit, such as credit cards, and installment credit, such as mortgages and car loans.
The final 10% is based on new credit applications.
FICO score range:
Your FICO score will range from 300-850. The higher the number, the better. The breakdown of credit score ranges can vary, but this is a good overview:
690-719: Good credit
630-689: Fair (average) credit
580- 630: Poor credit
<580: Bad Credit
How to make sure your credit report/score is accurate:
To start, use a website such as annualcreditreport.com or creditkarma.com to obtain your credit report and look for discrepancies. If you find anything, you should immediately contact both the credit reporting agency and the company that is portraying inaccurate information. There will likely be phone calls, letters and e-mails involved to get it updated. It may be a headache, but having a good credit score translates into a lot of dollars back in your pocket.
How often you should be monitoring your report and checking your credit score:
A minimum of once a year to check for accuracy and potential fraud attempts. If you’ve been a victim of identity theft, enrolling in some type of credit monitoring service may be best for your score and your peace of mind going forward.
Tips for protecting your credit report and having a strong credit score:
Since how you pay your bills accounts for 35% of your score, it’s essential that you pay your bills on time. If you’re late on a consistent basis, or have been sent to collections, that can definitely hurt your score. This doesn’t just apply to credit card accounts. It also takes into account utilities, retail accounts, installment loans, finance company accounts and mortgages. Note: How recent and the frequency of late payments matters.
Ensure your credit cards are carrying a low or zero balance. Having maxed out cards translates into a low amount of available credit (meaning lenders think you need to borrow funds to live day to day or aren’t tracking your spending closely) and therefore lowers your score. When you’re perceived as overextended, it translates into a higher risk credit score. Note: Closing credit card accounts that have a zero balance and are in good standing will not raise your credit score and will reflect a decrease in the amount of credit available to you. Understand the pros and cons of closing credit card accounts before taking action.
Start building your credit NOW. The longer you’ve displayed a responsible credit history, the higher your score.
Be proactive. If there’s an issue that you foresee, such as being late on a payment, a bounced check or anything else of the matter – reach out to the company or creditor to give them a heads up. You’ll likely establish higher rapport and will prevent them from having to track you down. You may even be able to get any fees associated with the mishap waived.
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