Boosting Savings: The No Spend Challenge

are-you-up-for-the-challenge

In a previous post I briefly discussed money challenges and how people use them as extra motivators to either boost savings or pay down debt. Whether you’re saving for a vacation, a house or just want to improve your money management skills, you can never have too many tools or tricks at your disposal. This is why I encourage people to get creative about improving their financial behaviors. Not everyone gets as excited about personal finances as I do, so it doesn’t hurt to find a way to spice it up.

Today’s post is dedicated to the No Spend Challenge.

What is it: It’s exactly what it sounds like: No spending for 30 days. “But I have to pay rent and eat!” The goal of this challenge is to cut non-essential spending from your budget, so please don’t use this post as a reason why you haven’t paid your landlord. You still have to pay for the necessities like food, shelter and medical care. However discretionary spending like clothes, eating out, coffee, cigarettes, alcohol, etc. are out. If you don’t need it to live, it’s OUT!

Outcome: It varies per person. Some people will have more discretionary spending in their budget than others. It all depends on your spending habits.

Variations: The most common way to switch this up is to increase the number of days of the challenge. You can further boost it by cutting out additional things that you may not have cut out before like cable.

Why I like it: It forces you to reevaluate your spending habits and make you realize that you don’t really NEED all the things you think you do and it could be a start to a more frugal you.

You can start this challenge at any time during the year as long as there are still 30 or more days left.

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The 7-Step Guide to Healing Your Credit

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Before you read this post, I encourage you to take a look at the previous blog that talks about what makes up a credit score. You will have a better understanding of how the steps that I am recommending will impact your score every step of the way.

Welcome back! Now that you know what makes up a credit score, I hope you’re ready to fix yours.

A capitalist society is a consumer driven society. Few people are as consumption driven as Americans. Unfortunately, many of us aren’t patient enough to wait until we can afford the luxuries of life before we decide to indulge. As a result, we overextend ourselves, borrowing our lives away to keep up with the Jones’. However, as various entities we do business with begin to put increasing value on credit history, we are starting to wake up to the fact that things need to change.

But before they change, we must right the wrongs of the past. So it is no surprise that credit repair has become big business. The other fact about the credit repair industry is that they are preying on low-income consumers. What if I told you that with a little bit of guidance, patience and a whole lot of discipline you could repair your own credit score for free? Well you can and I will outline all the steps below.

The following list is a guide for how you can repair your credit or keep your credit score high if you already have good credit.

  1. Pay on time – Pay all of your bills on time, every time. Verizon, T-Mobile, Comcast can all send you to collection and ruin your credit. While you want to prioritize things like your mortgage so you aren’t homeless, don’t think there is a company out there that you owe money to that doesn’t have the ability to report you to all 3 credit bureaus.
  2. Pay down your balances aggressively – Your outstanding debt balance, especially on revolving lines of credit (i.e. credit cards) negatively impact your debt usage ratio (how much of your available credit line that you are using). Therefore, your score will benefit  greatly from you paying off your balance due and not just the minimum payment.
  3. Do not apply for credit – If you read the previous article that I linked above, you will know that hard inquiries (shopping for credit vs. “soft” inquiries marketing/promotional inquiries) on your report adversely affect your score. Additionally, those inquiries remain on your report for about 2 years.
  4. Pay, don’t shift– Do not move your debt around. I know someone who spent nearly 3 years moving their credit card balances to 0% interest promotional cards until she was no longer getting those offers. This does not eliminate your debt. It just helps you avoid interest for a period of time while you’re paying a balance transfer fee as a percentage of your owed amount. It is costing you money to still carry the debt. Ignore those promotional offers as they only benefit the company that you’re moving to, while you continue to be in debt and your score continues to suffer.
  5. Don’t close good accounts – If you have accounts in good standing with little or no balances, especially if they are aged, keep them open. They help establish your history and offset negative information on your credit. However, you have to be able to resist the urge of using the card or credit line. You are NOT required to use your account to have good credit.
  6. Be patient – Time heals all wounds. Inquiry “wounds” 2 years. Delinquency “wounds” 7 years. Bankruptcy “wounds” 10 years. As you work your tail off to show improve the data that shows up on your credit report going forward, there is not much you can do about ACCURATE adverse information. However, all information, good or bad goes away eventually. This is why it is important to remain consistent once you decide to make a change. Once the bad information falls off, you want to make sure that new bad information doesn’t rear its ugly head as it has a 7 year shelf-life.
  7. Fight – Remember how I said you can’t do anything about accurate information? That is not the case for incorrect information. If someone has the same name as you, or their social security number is 1 digit off from yours, or if you were the victim of identity theft, you don’t have to be punished for an error or a thief. The law says that you have the right to fix errors on your credit report and you should absolutely exercise that right.

These are all steps you can take on your own, for free. I hope you find the information useful and that the credit repair business has just lost another customer.

Boosting Savings: 52 Week Money Challenge

are-you-up-for-the-challenge

In a previous post I briefly discussed money challenges and how people use them as extra motivators to either boost savings or pay down debt. Whether you’re saving for a vacation, a house or just want to improve your money management skills, you can never have too many tools or tricks at your disposal. This is why I encourage people to get creative about improving their financial behaviors. Not everyone gets as excited about personal finances as I do, so it doesn’t hurt to find a way to spice it up.

Today’s post is dedicated to the 52 Week Money Challege.

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What it is: According to experts, it takes between 21 days and 2 months to build a habit. If you are a novice looking to establish a patter of good behavior, this is the right place to start. This challenge helps you build consistency while gradually ramping up the levels of savings to give you better results. It sets long-term goals which forces you to understand that good money habits are a life-long strategy rooted in permanent change and that wealth building is a marathon, not a sprint.

You start out by selecting a small amount of money to save the first week of the year and you add to it every week until the last week. You start with a small amount, usually about $1 and you add a dollar every week until the last week of the year where you would deposit $52.

Outcome: You should have no less than $1,378 as of the last week of the year.

Variations: You can ramp it up by doing $5 on the first week and adding five dollars every other week after that and you would end up with $1,755 as of the last deposit. If you’ve already done the challenge and you’re really looking to spice things up and push your limits, you can try depositing $10 the first week and add $10 every two weeks. Although this means you’re looking at a deposit of over $500 the final month, you’re also looking at doubling your savings for the year to $3,510. Other variations include the reverse challenge where you start saving the most in the start of the year as people find it more difficult to save as the holidays roll around.

Why I like it: It’s a great starting point for anyone who is just starting out. It helps you understand the value of saving early and often and most importantly, it helps build good habits.

The Anatomy of a Credit Score

What makes up a credit score?

Credit scores are the most popular mysteries. We know they’re important and we know that we all have one. Furthermore, people and organizations who are not lenders that we interact with (landlords, insurance companies, employers) are placing increase value on the credit score as they evaluate us in all aspect of our lives, making it some type of character evaluation tool. But most of the time, we don’t know the most important thing we should know about our credit score: what it consists of, what influences it. Below, you’ll see a graph of your credit score and a written breakdown of the various components.

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  1. Payment History – 35%: For obvious reasons, this is the most important and largest component of your credit score. It tells anyone who reviews your credit report how likely you are to pay your debts based on your payment history. Are you chronically late? Do you have 7 accounts in collection? Are you consistently on time? Lenders want their payments on time every time. That is the most important thing when anyone gives you a loan. Both parties agree on a payment date and the lender is counting on getting that money on the date specified.
    • How it affects your score: If you don’t have a good history of making payments, that is the biggest risk for a lender and report reflects that poor history, your score will suffer.
  2. Amount of Debts – 30%: This one is a little tricky. While it tells the story of how much debt you have outstanding, all debts are not equally weighted in this category. Revolving lines of credit impact that area more than an installment loan would. This is because the principal balance of an installment loan can only go down while a revolving line tells them how likely you are to borrow up to or close to your limit. To a lender, anyone who continually maxes out a card or gets close to doing so is someone who is not able to manage their debt responsibly.
    • How it affects your score: Maxing out your cards or even using more than 30% of your credit line will negatively affect you.
  3. Length of Credit History – 15%: This one is pretty intuitive. It’s much harder to “fake the funk” over a long period of time. If you’ve had a credit card for 10 months, it’s much easier to have a positive history. However, if you’ve had it for 10 years, chances are you have gone through some major changes both positive and negative and you have managed your finances a certain way throughout it all. Creditors can best evaluate your long-term financial behavior when you’re past the honeymoon phase.
    • How it affects your score:  The older your accounts are, the better your score.
  4. New Credit – 10%: This component tells creditors if you’re out here seeking to borrow money from anyone who will lend it to you. It also give them an idea if you’ve been denied by other lenders as they can see when you had an inquiry but no new account has been reported opened.
    • How it affects your score: The more new inquiries you have on your report, the lower your score.
  5. Other Factors/Types of Credit – 10%: This is the variety or diversity of credit you use and how well you manage them all. If you only have student loans, it doesn’t mean that you won’t have a good score but your score may not be as high as someone with a variety of credit types, all else being equal. However, it is not very heavily weighted and there are enough points in the other categories to allow younger borrowers to still have an excellent score.
    • How it affects your score: The most varied your credit types, the more experience it shows you have managing different types of lenders and credits.

Now that you know the anatomy of a credit score, hopefully you have all the necessary tools to heal it.

Habits of Wealthy People

rich

I live in a part of the country where there is a lot of new and old money. There are people from all walks of life but the dominant industries in this area, as well as some elite educational institutions has made it a magnet for wealth and success. Although Boston isn’t NYC, there are a lot of opportunities here. And because we are a much smaller city located in a much smaller state, I have had the opportunity to observe some of the habits of very successful people.

We all know that the rich, middle class and poor live very different lives and most of the time, have very different backgrounds and habits. Of course we can always find anecdotal evidence of a really hardworking poor person or a lazy do-nothing rich kid who inherited all his wealth. However, that is not always the case as many rich/wealthy individuals are self-made. So how do they earn the millions and how do they keep what they earn? Here are some of the things that I’ve observed:

  1. They keep an eye on their money. When you don’t have much money, you tend to know where every dollar goes because you can’t afford to be wasteful. You might also mistakenly believe that this is a “poor person habit” as the rich do not care about such insignificant things. However, they do. They might not necessarily track every $5 latte they purchase, but they know overall where their money is going, what it’s being invested in and what things cost.
  2. They love other people’s money. They didn’t become rich by being completely risk adverse. While a loan is a risk and can potentially jeopardize your asset through a foreclosure, you can do much more by leveraging your net worth and borrowing at a low rate than you can by buying cash. I could buy 1 house with $200k or I could buy 5 houses with $40k down and 5 mortgages.
  3. They don’t shop, they invest. This doesn’t mean they never buy anything, but they understand what is an asset and what is a liability and they spend accordingly. They tend to direct most their money towards goods that can give them a return, either through an increase in value, generating income or both.
  4. They have multiple streams of income. I’ve already discussed the importance of having multiple sources of revenue here and  here . Whether it is 2 jobs, investment properties, high dividend stocks, you should maximize all of your earning potential. The wealthy rarely rely on just once source of income. It goes against diversification which is one of the basics concepts in investing. Whether we’re talking billionaires like Oprah or the local real estate investor, they all know the importance of diversifying and increasing income streams.
  5. They are goal oriented. Having a goal helps you have something to strive for. Whether it’s to be the richest guy or gal in town, be able to travel the world, retire early or donate to the less fortunate, setting goals gives you purpose and becomes a measurable tool for your progress.

This list is a very short list of a few habits of some wealthy people. It is by no means a comprehensive list, nor does it necessarily apply to everyone. So, take a moment to think about your own observations.

Applying for a Mortgage: The 5 Cs

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I talk a lot about real estate, but we all know real estate is expensive. There are few, if any, of us with the capabilities of buying real property with cash. Even some of the people who are in a position to do it, choose to leverage their net worth and maximize their purchasing power using borrowings. In a consumer-driven society, lending is king and that is why something as minor as a 25 basis point shift in interest rates is a news headline and a stock market mover. We hear about rates, banks and borrowers. Everyone talks about how you have to have a good credit score and some type of down payment. However the discussion usually does not expand beyond these points.

I have put a little guide together that might give you a better understanding of why they request the documents they do. But most importantly, it helps you prepare your finances so you present yourself as the type of borrower they wish to lend to.

Credit: The first thing the lender will do is look at your credit history to determine if you are “credit worthy”. In the simplest of terms, they will look at your credit score and history. These 2 things will tell them whether or not you pay your bills on time, every time. This will help them decide if they even want to move forward without or if the risk is too great that you will turn out to be a problem borrower and will default, leaving them holding the bag.

Capacity: This evaluates your ability to take on any additional debt and pay on time. This is what they mean by “debt-to-income ratio”. You may be very good at paying all your bills, but if you are breaking even every month, you are likely not able to continue meeting all your financial obligations should you take on more debt.

Collateral: Also known as “protection”, collateral is something that you own but a lender puts a claim on it, as a way of protecting their investment. The law allows them to take possession of that asset to offset any loss from you not paying your debt. In real estate, the asset used as collateral is the very property you’re buying. In rare cases where the loan is more than what the purchased property is worth, you can use another property as a second piece of collateral.

Capital: That is usually liquid assets that you may have. Primarily they want to see that you have the ability to give a down payment or at the very least pay your closing costs. If the purpose is to get an investment property, they want to see a few months worth of reserves should you have vacancies. It’s also a way to evaluate whether or not you have other sources to tap and make payments if you were to ever lose your job.

Condition: This is the purpose of the loan. Some loans are higher risk than others depending on their purpose. Not all real estate loans are created equal. A loan for a residential building will have a better interest rate than a loan for a strip mall because of the risk involved. A used car loan will also be more expensive than a new car loan. Whether it’s an equity line or a purchase or refinance will also matter.

I hope this will give you a better understanding and some of the information you need to prepare for a successful mortgage application.

Boosting Savings Series: Money Challenges

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January is the month of challenges. That’s the time of year that people want to be their best selves and they are motivated to be better than they were last year (2 weeks ago). There is no better way to motivate yourself than with a challenge, especially when you’re competitive and results-driven like me.

Challenges work for competitive and result-oriented people because you compete with everyone, even yourself. You want to “beat” who you were last year/month/week. You want to beat everyone too, but if there’s no one around, you’ll settle for beating your own self at the game of life. When you’re result-oriented, it’s even better. Not only are you striving to be better than you were before, the challenge forces you to set a goal and you can see it materializing right in front of you.

There are various money challenges out there. Honestly, they are all fantastic. They give you a solid framework for improving your savings (or debt reduction) goals, the benefits far outweigh the costs (if there are any) and they are a much more fun way of pushing yousrelf to improve your money management skills than being driven by excessive overdrafts or soul-crushing debt. They also are an interactive way to be held accountable since the people who participate tend to share their progress on social media.

Here is a list of some of the most popular ones:

  1. 52 week money challenge (along with multiple variations like the bi-weekly, double week and reverse 52 challenge).
  2. No spend challenge
  3. $5 challenge
  4. Coin challenge also known as the jar challenge
  5. Auto-save challenge
  6. De-clutter challenge
  7. Spending Match Challenge

In later posts, I will go into more details about what these challenges entail and how we can maximize them for success.

Happy Savings!