5 Tips to Financially Prepare for the Holidays

Fall is upon us, football season has begun, and school is back in session. NOW is the ideal time to prepare financially for the holidays. Do yourself a favor and commit to not extending holiday debt into the new year! #noholidaydebt We’ll give you a start with 5 tips to financially prepare for the holidays.

1. Make Your Budget and Gift List Now

The holidays are a great time of year, but from a financial standpoint, the holidays can be really expensive. We are not just talking about gifts, but also food, travel, clothing, decorations, holiday cards, activities, and donations. If you’re not careful, you may end up purchasing random items for yourself while out shopping for others. November and December are likely two of the most expensive months of the year spending-wise. Planning in advance gives you some structure and discipline, just like having a shopping list for grocery shopping. It also allows you the benefit of time to take advantage of discounts. Flights, for example, typically get much more expensive a month before the travel date. Try to purchase flights months in advance to get the best pricing. Make a gift list with all people you plan on purchasing gifts for (don’t forget those unfortunate folks with late December/early January birthdays). Set a budget amount for each on of them and brainstorm possible gifts. Then list all of the additional expenses (travel, food, decorations, cards, donations) that you will incur during the holidays and set a budget for them.

 

2. Set aside money now and automate it

Many banks, especially online banks, allow customers to open additional savings accounts with no charge or additional paperwork. You can name your accounts and separate your emergency fund from your holiday savings.

Reminder: The holidays do not qualify as an emergency. Do not co-mingle or withdraw from your emergency fund for holiday expenses you could have planned for in September and October.

Set up a separate holiday savings account. Based on your regular monthly budget and your holiday budget from above, create scheduled deposits go into this account (weekly, bi-weekly, or monthly). The most effective way to save is setting up automatic deposits on payday.

3. Communicate with your family and friends

It’s important that you communicate early with your family and friends about expectations for the holidays. If you are struggling financially and are trying to get back on track. There’s no shame in that. If you were sick or injured, would your family have the same daily expectations of you? No! They would do whatever they could to support you getting well. The holidays should be about spending quality time and creating lasting memories with the ones you love, not spending money you don’t have buying trinkets your family and friends don’t need! If your family member told you, “Hey, one of my goals for next year is to get my finances under control, so I’m not going to be spending much on Christmas gifts, can we do <insert activity> together instead?” Would that make you feel underappreciated? Of course not. Communicate expectations early, you may be surprised that they are likely in the same boat and just didn’t want to say it.

4. Black Friday is a Scam. Period. Full Stop.

Let’s be clear. Spending all day Thursday giving thanks for who and what we already have to then sit outside of a retail store at the crack of dawn the VERY NEXT DAY to buy stuff we don’t need defies all common sense. The truth is many retailers steadily raise their prices from October through December only to reduce them temporarily to make consumers feel like they are getting a deal. Even the items that do have deep discounts often have very limited quantity. So if you really want discounts, start looking in September and October before the prices go up so you don’t need to trample people to save $50 of an espresso machine.

5. Be Creative

Last, but certainly not least, don’t forget the reason for the season. If you think about some of the best gifts you’ve been given, they likely weren’t very expensive and if you’re really honest with yourself, the time you spent with your family and friends was much more valuable and memorable than the gifts. With that said, creativity is often lost during the holidays because of the time crunch at the end of the year. We often end up with a bevy of gift cards. Starting early and getting creative can take many forms. Secret Santas, homemade gifts, family movie night, volunteering activities are just a few examples.

[bctt tweet=”Let’s resolve not to bring holiday debt into the new year! #noholidaydebt” username=”moneyspeakeasy”]

If we plan in advance, automate savings, communicate with loved ones, avoid scams and get creative we can leave our holiday spending behind us, enjoy and give ourselves the gift of no additional debt next year.

What You Need to Know About Credit Scores: Part 2

Credit scores are an important piece of your overall financial puzzle. In Part 1, we demystified credit scores by discussing what they are, who uses them and where to find them. Now we’ll describe the best ways to improve your credit score.
In order to improve your score, you need to understand the rules of the game, so you can play it effectively. First, let’s review the five elements of a credit score and then we’ll discuss the best ways to improve your score.

  1. Payment History (35% of the total score) – This element measures whether you have paid your past accounts on time (e.g credit cards, retail store cards, car loans, mortgage loans, student loans)
  2. Amounts Owed/Credit Utilization (30% of the total score) – This element measures the total amount of debt owed on all of your accounts. It looks at different types of debt like installment accounts with a fixed payment schedule (e.g. car, mortgage) as well as revolving accounts (i.e. credit cards).
  3. Length of Credit History (15% of the total score) – This element measures the time since your credit accounts have been established. The longer the credit history, the better. It will consider an average length of your credit accounts.
  4. New Credit (10% of the total score) – This element measures the number of recent credit inquiries in the prior 12 months.
  5. Credit Mix (10% of the total score) – This element simply measures the different types of credit accounts you have.

Note that the first two elements represent nearly two-thirds of your overall credit score. This is where you get the biggest bang for your buck. So let’s get right to it. Here are five tips to improve your credit score.

  1. Review Your Credit Report and Dispute Errors

This may be obvious, but you don’t want to be held responsible for transactions that aren’t yours. Reporting errors happen with regularity, so you should check your credit reports from all three bureaus every few months. By law, you are allowed one report per year from each of the three credit bureaus from annualcreditreport.com, so you can stagger them and check one every four months.
If you see an error (e.g. accounts that don’t belong to you, paid off collection accounts showing as unpaid, incorrect name or address listed) you are able to dispute it online and it is the obligation of the creditor to prove to the bureau that the report is valid 30-45 days from receipt.
 

  1. Pay Bills on Time (Payment History)

    Late payments can significantly impact your credit score, particularly if you do not have much credit history. Even if you can only make the minimum payment, always try to stay current. This includes bills like rent, utilities, medical bills and student loans. If you can’t make the minimum payment, notify your creditor beforehand and see if you can work out a payment plan. Communication in advance is preferable to simply not paying and ignoring them. Creditors will typically report late payments to credit bureaus for balances that are 30+ days past due (180+ days for medical bills).
    Bonus Tip: Recent late payments affect your score more that older late payments, so if you have multiple accounts that you’re behind on, consider getting current on the more recent one first. Also, note that you have a longer window (180 days vs. 30 days) with medical bills before they are reported to get current.

 

  1. Keep Balances Low on Revolving Debt (Amounts Owed)

    A credit utilization ratio (Amount Owed/Credit Available) above 30% will begin to negatively affect your score. Even if you’re paying minimum payments, if your credit cards are maxed out, your credit score will be impacted. Also, trying to reduce your credit card balances while still using the credit card is a losing game. Stop using the card if you are trying to significantly reduce your balance.
    Bonus Tip #1: If your credit card is in good standing and you’ve made on time payments for 12 consecutive months, contact the creditor to see if they will increase your credit limit without a hard pull credit inquiry. If they are willing to increase your limit, you can improve your utilization ratio with little effort.
    Bonus Tip #2: If you have a spouse or close family member you trust who has a credit card in good standing, they can add you as an authorized user on their credit card. They don’t have to give you the card (it’s preferable if they didn’t), but they are simply extending their credit to you, which increases Credit Available and decreases the Utilization Ratio.
    Caution: Being an authorized user goes both ways, so any negative behavior (late payments, collections, etc.) on that account (by either party) can negatively impact your credit just like your individual account.

 

  1. Don’t Close Old Credit Card Accounts (Length of Credit History)

You may have heard advice in the past that if you have old credit cards on your credit report, you should call them and close them out to keep your credit report “clean.” That’s likely bad advice for two reasons. First, even if you don’t use the card, the credit limit adds to your Available Credit and helps your Credit Utilization. Second, the Length of Credit History takes an average of all of your open accounts. The more old accounts you have the longer that average will be. Closing the account simply eliminates the history from benefitting your score.
Bonus Tip:  You can request creditors remove negative incidents from your report. For example, if you had a late payment a year ago or more and you’ve been current, you can contact the creditor and request they remove that incident. They are not obligated to (until after 7 years), but they may oblige as a courtesy for customer satisfaction and to keep your business.
 

  1. Don’t Apply for New Credit Cards Solely to Increase your Available Credit (New Credit)

    Even though New Credit is only 10% of your score, credit inquiries (also called hard credit pulls) stay on your credit for a full year. So applying for a new credit card solely to increase your available credit is counterproductive. You get dinged for the hard credit pull and you’ve reduced the average length of your credit history. If you’re looking more long-term and not concerned about the short-term impact on your score, this is less of a concern.
    Bonus Tip: Checking your own credit is not considered a hard pull credit inquiry (it’s called a soft pull inquiry). Soft pulls are typically for background checks, opening utility accounts, and open a checking or savings accounts. Soft pull inquiries will not affect your credit score.

 
Those are some of the best ways to improve your credit score. Remember to be patient as scores don’t shift dramatically overnight and account changes often lagged by 30 days or more. If you’re looking to make dramatic changes to your score (100+ points) it may take 6 months or more depending on your situation. Credit scores are much easier to pull down than to bring up, so it’s important that you stay diligent. Finally, remember your credit score is just a number, a debt management score. It doesn’t measure your overall financial health and it is a point-in-time metric that can be improved.

What You Need to Know About Credit Scores: Part 1

Credit scores are an important aspect of your financial life and unfortunately, there is quite a bit of confusion about what credit scores are, how they work and who uses them. There’s also a ton of shaming involved with credit that is unjustified. In this two-part series, we will clear up some confusion about credit scores and help you improve your scores.
 

What is a Credit Score?

A credit score is a three-digit number (typically from 300-850) calculated to assess an individual’s credit-worthiness. Said another way, a credit score is based on multiple factors which allow a lender to determine how risky it may be to lend to an individual. The lower the credit score, the riskier (theoretically) to lend.
Remember when you were a kid and you lent your friend a few dollars for lunch or you let them borrow one of your video games. You may actually still remember some of your “ex-friends” that didn’t pay you back or return your possessions! What if you had a way to determine the likelihood of your friend paying you back or returning your item in advance based on their history of borrowing from others in the past? THAT’S the goal of credit scores and while it is flawed, it is important to understand how you are being measured.
There are many companies involved in the business of measuring credit-worthiness. The most widely known and used score in the U.S. is called a FICO Score and there are three major credit bureaus which the majority of lenders access to obtain individual FICO credit scores. TransUnion, Equifax, and Experian are the three major credit bureaus that hold your credit data and calculate your credit score.

Why is a Credit Score Important?

Clearly, credit scores are important for financial lenders because it helps them make decisions on whether or not to lend money and how much to charge. However, even if you are debt free and don’t borrow money, your credit score can still impact you. Increasingly more companies are using credit scores to make decisions including landlords for renting apartments, home and auto insurance companies, and utilities such as cell phone and cable companies.
The ranges on the credit score allow lenders charge you more (i.e. higher interest rates) for the same products. Of course, these ranges can vary by lender, but here’s an example:

  • 720 – 850: Excellent ‘A’ Credit – This score range typically qualifies the best rates on mortgages, credit cards, and car loans.
  • 680 – 719: Good ‘B’ Credit – This score range will qualify for different types of credit, but may not always get the advertised or premium rates
  • 630 – 679: Fair ‘C’ Credit – This score range may or may not qualify for different types of credit and will have higher interest rates.
  • Under 629: Poor ‘F’ Credit – This score range will typically not qualify for different types of credit and may require a cosigner or collateral (i.e. a secured deposit). This is also referred to as ‘subprime’ credit.

For a benchmark, the average credit score in the U.S. is about 690. What is important to understand is not to personalize or internalize your credit score. You are not wonderful and successful if you have an 800 score and you are not a failure if you have a sub 600 score. It is simply a point-in-time metric of your past interactions with credit and fortunately, you have some level of control to significantly impact that score over time which we will discuss in Part 2.

What Credit Scores Do NOT Consider

As mentioned, credit scores are flawed. They can be based on inaccurate or even fraudulent data and there are also important factors that are not taken into consideration. Credit reports (different from credit scores) list the details of financial accounts upon which the credit score is based. Personally, I have found errors on my credit report simply because I share a name with my father. In a separate instance, my father discovered identity theft when checking his credit report and found a $20,000 loan for dentistry school taken out in his name that he had no connection to. These errors are YOUR responsibility to correct which is why you should check your credit score and credit reports regularly.
Credit scores neither take income nor savings into account and credit scores are not a complete measure of how well you are doing financially. Many refer to the credit score as a ‘debt management score’ because it simply measures how well you borrowed money and paid it back. Net Worth is a much better measure of financial success. For example, two individuals (Person A & B) could have the same credit history and the same credit score even though person A makes $1 million in income per year and has $1 million in savings and Person B makes $30,000 per year and has $0 in savings. As a lender, I would likely prefer to lend to Person A, but the scores will show the exact same number. Keep in mind lenders can ask about income and savings before lending, but it is not a factor in your credit score. Also, for those coming out of high school or college that do not have a credit card and have not borrowed money in the past, they may not even have a credit score. So if you diligently manage your finances with cash and don’t rely on credit, you may find that you do not have a credit score.

What are the Elements of a Credit Score?

Let’s talk about what is actually included in the credit score and in Part 2 we’ll discuss tips on how to improve that score. There are five elements in the calculation of a credit score and they have different weights of importance.

  1. Payment History (35% of the total score) – This element measures whether you have paid your past accounts on time (e.g credit cards, retail store cards, car loans, mortgage loans, student loans)
  2. Amounts Owed/Credit Utilization (30% of the total score) – This element measures the total amount of debt owed on all of your accounts. It looks at different types of debt like installment accounts with a fixed payment schedule (e.g. car, mortgage) as well as revolving accounts (i.e. credit cards). For installment accounts, it looks at the remaining balance versus the total amount borrowed, so if you have a $10,000 balance on your car loan and you originally borrowed $20,000, it would show that you still owe 50% of the balance of the loan. For revolving accounts, a credit utilization ratio is used to determine the percentage of your overall credit limit is being used. For example, if you have three credit cards with a total credit limit of $10,000 and you owe a total of $2,000, your credit utilization ratio would be 20%.
  3. Length of Credit History (15% of the total score) – This element measures the time since your credit accounts have been established. The longer the credit history, the better. It will consider an average length of your credit accounts.
    Tip: This is why you should reconsider before closing or canceling your oldest credit card accounts, even if you no longer use them.
  4. New Credit (10% of the total score) – This element measures the number of recent credit inquiries in the prior 12 months. The idea is if you are signing up for several credit cards in a short span of time, it increases the risk to lenders. In other words, people who open up several accounts in a short span of time typically plan to use them and use them heavily.
  5. Credit Mix (10% of the total score) – This element simply measures the different types of credit accounts you have. This is biased toward having credit cards, but also includes installment loans like car loans or mortgages as well as retail card accounts.

Where Do I Find My Credit Score?

Finally, let’s talk about where to get both our credit scores and reports. For the official FICO scores and credit reports, you can purchase them from FICO for a one-time purchase of $60 or different monthly plans. A better option, in our view, is to use FREE sites like Mint, Credit Karma, or Credit Sesame that are not the ‘official’ FICO score but do a decent job getting a close approximation. You can use one or all three and it will not affect your credit score. They can also provide you with the details of your credit report which you can view and check for erroneous information.
So we have demystified the credit score, discussed why it’s important and the elements considered and not considered. Again, your credit score is not a measure of personal value or personal success much like a GPA is not a measure of intelligence, but rather the combination of course grades. Also much like a GPA, your credit score is much easier to bring down than it is to pull up, so we have to be diligent about our finances. The purpose isn’t to have an 850 score, but to monitor your score and know how you can improve it to save money if you borrow in the future.

Credit Cards – To Use or Not To Use

Credit cards have dramatically changed consumers’ saving and spending habits. It would not be an exaggeration to say that credit cards have impacted personal finance as much as cell phones have impacted personal communication. Whether you are pro or anti-credit card, the impact of credit cards is indisputable, but it is important to understand common myths, as well as the pros and cons of credit cards so they don’t derail your financial goals.
We won’t go through the history of credit cards, but as a financial product, it’s relatively young. Credit cards as we know them today are a little more than 50 years old. That means Gen Xer’s grew up with them as they became prominent, and Millennials have never known a world without them. Let’s use this as an opportunity to quickly debunk some myths about credit cards:

  1. I have to have a credit card as some places won’t accept a debit card or cash

    Credit cards are not a necessity! If we stop and think about that thought process, that’s basically saying that we cannot survive without borrowing from Visa, AMEX or MasterCard. Insanity. Despite popular belief, cash is still king and debit cards are accepted everywhere credit cards are. To be fair, there are some caveats on debit cards for places like hotels and rental car companies that may put a hold on your debit card for the full amount until the transaction is complete (though you shouldn’t be using a debit card if there are insufficient funds in your bank account).I have to have a credit card in order to build my credit

  2. I have to have a credit card in order to build my credit

    Credit cards are not the only way to develop your credit or to improve your credit score. A college student came in for a financial counseling session. She was considering getting a credit card before she graduated. She wanted to build her credit to get a car loan and an apartment in the future after she graduated and got a job. We pulled her credit report and it turns out she had an 800+ credit score. (Credit scores range from 300-850, the higher the better. Anything over 720 is considered to be excellent credit). Upon review of her credit report, it showed she had a credit card account in good standing since 2006. Now since she was born in 1995, I was pretty sure that she didn’t open a credit card when she was 11. I simply told her to call her parents, make sure it wasn’t a fraudulent account and then thank them for giving her the gift of great credit. Also, she shouldn’t even think about getting a credit card until she had a full-time job for at least one year.
    Her parents made her an authorized user on one of their credit cards as a child. They never told her, obviously didn’t give her a card, and most importantly they keep the card in good standing. As a 20-year-old college student, she had 9 years of positive credit history never having used a credit card before. Much like using your parents’ Netflix or cable password, you can (legally) piggyback on someone else’s credit by becoming an authorized user on their account. Make sure it’s someone you trust and the account remains in good standing (paid on-time and in full).
    Another way to build credit without a credit card is by paying installment loans (loans with a regular payment for a fixed period) such as car loans, student loans, mortgages. Paying the required payments on time will count towards your credit history and improve your credit score.
    Finally, fixing errors on your credit report is also a way to improve your credit without getting a credit card. Errors are prevalent in credit reports and you shouldn’t be punished because of an erroneous entry on your credit report. Review your reports from the three major credit bureaus quarterly to ensure accuracy.

  3. Carrying a credit card balance improves my credit score

    I’m not sure how this one got out into the ether, but having a credit balance in no way improves your score. Credit bureaus measure utilization rates meaning what percentage of your available credit are you using. Your credit score will begin to go down if you are using more than 30% of your available credit, but you are not penalized for paying off your cards in full each month.
    While we are at it, the number of cards you have is also not a factor. The average length of time you have a card is a factor, so you may see a slight decline after signing up for a new card, but the pure number of cards is not a factor.

So we’ve debunked some common credit card myths, let’s get into the pros and cons of credit cards:

Pros

  • Ease of transactions
  • Grace period to pay for charges
  • Easy to track spending
  • Protection for fraudulent transactions and ID Theft
  • Rewards points/Cash back/Airline Miles
  • Can be used to build credit score[/col-md-6][col-md-6]

Cons

  • Significantly reduces the ‘pain’ of transactions, increasing spending
  • Masks overspending with grace period
  • Charge cards are designed to pay interest
  • Interest rates are high (average 15%+)
  • Credit cards rewards incentivize additional spending not saving
  • Late payments and high utilization rates can significantly reduce your credit score

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It is not an exhaustive list, but we captured some key aspects of how credit cards can be positive and negative. Personally, we are not a fan of credit cards because they incentivize spending and reduce saving. A cash back reward or miles is an incentive to spend, whereas a 401k match, for example, is an incentive to save.

‘The more you spend, the more you save’ does not pass the smell test.
IN FACT IT SMELLS A LOT LIKE BULL.

 
Also, there is a real difference between pulling $50 cash out of your pocket and swiping a card. Pulling the $50 cash involves a bit of psychological pain. It forces you to observe how you are reducing the total amount of cash in your pocket instantaneously and may cause you to make a different decision. Have you ever been hungry and ate way too much? Well, it takes about 20 minutes for your brain to register that your stomach is full. That delay can cause us to overeat. When you use credit cards, that delay can be 30 days! You may not realize you overspent until the statement comes in a month later. Pain is actually a sensation that gives us an indication that there may be something wrong. Removing the pain of financial transactions is not all positive. Keep that in mind as we further reduce the pain by moving from credit cards to electronic payments such as PayPal, ApplePay, and Android Pay.
Our purpose is not to say credit cards are evil and should be banned entirely. However, the average US household had just under $16,000 in credit card debt in 2015. That means thousands of dollars in interest payments each year paid to MasterCard and VISA and not to savings or investments. Giving your hard-earned money to credit card companies is not the way to financial independence.
Personal finance is just that, it’s personal. You need to know what’s best for your own situation. In our opinion, the benefits of credit cards do not outweigh the costs. Spend less than you earn with cash and build an emergency fund, and if there is an emergency; borrow from yourself, not VISA.

7 Do’s and Don’ts of Managing Your Finances

Money management can be difficult. There are lots of opinions on how to manage your money successfully, but sifting through all that can be a challenge. We have boiled down our 7 top recommendations for managing your finances.

1. Do: Plan Your Spending Before the Money Arrives

You are the CEO and CFO of You, Inc. Think about running your personal finances like a business. Companies plan their revenues and expenses well in advance. Budgeting gets a bad rep, but successful, profitable businesses formally plan their finances and make decisions in advance of their spending.

Money is like a toddler. If you don’t monitor it carefully, it will wander off and disappear quickly!

2. Do: Aggregate Your Accounts and Track Your Spending

Aggregating your accounts, allows you to see the big picture and a number we highly recommend you track regularly – your net worth. It can be difficult to make tough choices if you don’t have the bigger picture in mind. Tracking is also important. You cannot change what you do not measure. In order to make meaningful change, know exactly how much you spent last month versus the month prior. Guessing doesn’t work well with personal finances. Once you build a habit of tracking your finances, making smart decisions about your money becomes much easier.

3. Do: Understand and Deal with Your Impulse Purchases.

For some it’s the mall, for others it may be online shopping. Have you ever gone into a store planning to spend $50 and come out spending $300? Evaluate how and why that happened. Keep in mind; it is a marketer’s job to turn a “want” into a “need.” Notice on television commercials, often the product or company isn’t revealed until the very end of the commercial. Instead of selling a can of soda, they are selling happiness. Instead of a gym shoe, they are selling peak athletic performance. Instead of selling their own product, they may have a celebrity endorse it as if it is heaven-sent. Companies hire social scientists who study how to influence human behavior, emotions and decision-making to get an edge in selling their products and services. Here are some examples to protect yourself and your wallet:

  1. 24-hour rule – Wait at least 24 hours before making purchases over a certain amount
  2. Do not go grocery shopping on an empty stomach
  3. Deconstruct advertisements: what are they really selling?
  4. Use cash for non-regular expenses
  5. Don’t fall for terrible excuses (“I deserve it”, “it’s on sale”, “I’ll pay it off next month”)

4. Do: Develop a Habit of Saving and Automate It.

Even if you start small (i.e. $25/week), put systems in place that force you to save. The government understands this very well, which is why employee payroll taxes come out of your paycheck even before you are able to touch it. Apply the same strategy for your savings. Some employers will allow splitting your paycheck to different bank accounts (i.e. 75% checking, 25% savings). Another idea is to set a recurring transfer from your checking account to your savings on the same schedule as your paycheck. There are other automatic features to consider such as:

  1. Auto escalating your 401k contributions – some employers with a 401(k) offer an option to automatically increase your retirement savings by a certain percentage on a regular basis (i.e. increase 1% annually)
  2. Keep the change features in checking accounts – Some checking accounts will round up your purchases and put the change in your savings account. It is the e-version of the piggy bank. If you purchase an item for $5.60, it will round up to $6.00 and $0.40 will be deposited in your linked savings account.

5. Don’t: Ignore Your Credit Score and Credit Report

A credit score is very important to be aware of and to know how to improve. Credit scores have traditionally been used to evaluate credit-worthiness for extending loans (e.g. personal loans, mortgage, car loans, credit cards) and the higher the credit score, the more financially credit-worthy one is. The reality now is that both credit scores and credit reports are being used beyond financial transactions. Credit scores and reports are being used for employment decisions, housing, insurance premiums, and even utilities such as cell phones and cable. The challenge is credit reports often have mistakes which can negatively impact your credit. Check out our Resources Page for resources on checking both your credit report and credit score.

6. Don’t: Ignore Your Workplace Benefits

If you work for a company and do not understand the full scope of your employee benefits, it may be time to check out your HR Benefits website or set up a meeting. Particularly with larger companies, there are often benefits that go underutilized that can save you hundreds if not thousands annually. One of the largest ones is the 401k match. For most people, this is a no-brainer to at least invest as much to maximize the match as it is a 100% return on your investment. Wellness Initiatives can often mean big savings as well. Many companies are offering rebates on health insurance premiums for wellness activities, such as physicals or wearing fitness trackers. Let’s think about that for a second, companies are paying additional cash to employees to be healthier. There are several other types of benefits, and we’ve created a FREE Guide to help you maximize benefits that are offered to you.

7. Don’t: Keep up With the Joneses

Most people are familiar with the term ‘Keeping up with the Joneses,’ but just so we are all on the same page, it refers to making material comparisons to your social circle. The idea that if your neighbors or friends buy a new car, you should too. We call this the comparison trap and its one of the lessons we learned paying off our student loan debt. Part of the problem with comparing your financial status with others is that it is very difficult to know someone’s complete financial picture. Money is still a private topic and everyone has different income, expenses, debt obligations and assets. The people you are comparing yourself to could be completely up to their eyeballs in debt or fund their lifestyle through an inheritance. Making comparisons, not only could be comparing apples and oranges, but it also casts your own possessions in a negative light.

“Comparison is the thief of joy” – Mark Twain

A few reasons why keeping up with the Joneses is a bad idea:

  1. The Joneses are broke! According to a recent Bankrate survey, 76% of Americans are living paycheck to paycheck with little to no emergency savings. Why keep pace with people that are one emergency away from financial catastrophe?
  2. When you compare yourself to others, it’s much easier for wants to become needs. Wanting a car becomes needing a brand new SUV. Technology like smart phones, that didn’t exist 10 years ago, are a now a need. We have a desire to show off and have our success validated by others.
  3. Companies are spending billions of dollars to market their products and services to you. Many luxury brands are selling a temporary feeling of exclusivity in exchange for premium pricing. For example, a luxury shoe could be made in the same factory as an off brand shoe, but once they slap the logo on, they can charge five or ten times more. Luxury and quality are not the same. It is easy to get sucked into the consumerism culture. Happiness from possessions is always temporary and fleeting.

This leads us to the fundamental challenge of managing your finances. We live in a consumerism culture and an economy fueled by consumer spending. On one hand, we have many of the influences we described (social, corporate, psychological, economic) with a clear mission to separate you from your income. Those influences contend with our own goals to keep our income and grow it for the future. These recommendations will help you be better equipped to keep more of your income to reach your financial goals.

If You Hate Maintaining a Budget, Track these Two Numbers Monthly

As personal finance nerds, we are interested in where every dollar goes, what bucket it falls into and how that compares to the previous week, month, and year. Most people are generally not interested in tracking every dollar. Some people say, “I’m just not a math person” or “that’s just more detail than I care to know.”

If forced to come up with two metrics to evaluate your financial progress, we would have to say without a doubt, it’s your net income and net worth. Let’s define both and then let’s talk about why these are the most important financial measures to track.

What is your Net Income?

Your net income is simply taking your monthly after-tax income (the amount that comes into your bank account) and subtracting all of your expenses during the month (housing, food, utilities, transportation, debt payments, personal, etc).

Net Income = After Tax Income – Expenses

If you were a business, your Net Income would be called ‘profit’. You need to know what your profit is each monthly. You don’t want to run a business that’s losing money each month. You want your net income to be positive each month and you want it to be growing over time.

A common mistake people make is that as their income increases, they increase their spending along with it (a.k.a. lifestyle inflation). So if you get a 3% raise at work, but you increase your spending by 4%, you could actually be worse off financially, that’s why tracking net income (profit) monthly is so important.

 

What is your Financial Net Worth?

Your financial net worth is simply adding up all your financial assets (everything you own) and subtracting all of your financial debts (everything you owe).

Net Worth = Assets – Debts

Financial Assets can include real estate, securities (stocks, bonds, mutual funds), vehicles, checking, savings, cash or anything you can sell and turn into cash. Alternatively, your debts can include mortgages, credit card debt, personal loans, home equity loans, student loans, etc.

Let’s be clear about a few things, first, never confuse your financial net worth for self-worth. Regardless of whether you’re a millionaire or your net worth is negative, it says nothing about who you are as a human being. We live in a ‘more is always better’ culture, we glorify millionaires and condemn the poor, but that is not the goal of this measure. Your financial net worth is simply a number that applies to you individually or as a family to track and increase over time to assess how close you are to reaching your financial goals (i.e. financial independence).

Second, the majority of Americans have either zero or negative financial net worth, so if they sold everything they owned, they would either have nothing left over or would still owe money. Many young professionals fall into this bucket due in part to student loans. Building your savings and getting out of debt both increases your assets and reduces your debt, thereby increasing your net worth.

Why are net income and net worth the most important numbers to track?

Good question! Why not Salary? Savings? Credit Score? The answer is simple, your net worth is the bigger picture goal, net income is how quickly you’re moving towards that big picture goal.  In your financial journey to your financial destination, your net worth would be the miles traveled to your destination, your net income is how fast you’re driving.  There are all sorts of metrics that you could measure if you were taking a cross-country journey, but if we had to choose only two, we would want to know how far we’ve gone (net worth) and how fast we’re moving (net income).

Both Net Income and Net Worth are simple formulas and there are only two ways to increase them:

  • Increase income/assets
  • Reduce expenses/debt

Increasing Income/Assets

Unfortunately, the majority of our expenses (after our essential expenses) are for items that decrease or depreciate in value. So when we buy a pair of shoes or a phone, if we were to sell it used a month later, we would receive much less in return than we paid for it. On the other hand, if used the same money to purchase stock ownership in the company that manufactured that shoe or phone, that stock could potentially increase or appreciate in value over time. When you hear phrases like ‘the rich get richer and the poor get poorer’ that is partially because wealthy people are more likely and able to purchase appreciating assets (e.g. businesses, securities) and the middle class and working class are more likely to buy depreciating liabilities (i.e. debt – a.k.a. stuff that makes us look/feel rich, but actually make us less wealthy). A depreciating liability, such as a car note, is a double loser because not only is the car rapidly declining in value, but it’s also financed from a bank, which means paying additional money in interest (increased cost & reducing value).

We have to change how we look at what we buy and whether showing off our expensive stuff is more important than actually growing our wealth. Recent studies have shown that 76% of Americans are living paycheck to paycheck, that includes high-income earners, so the people we compare ourselves to or try to impress are likely broke.

We also have to change the way we think about our income. It’s often said when talking about investing, that ‘you don’t want all your eggs in one basket’, you have to diversify your investment assets to reduce risk. Well it’s much less talked about, but just as important to diversify your income because having one source of income is just as risky as having all your investments in one stock.

In order to put more wins in the asset/income columns, the focus should be to develop multiple sources of income and free your income to purchase assets that appreciate in value. Building an emergency fund, increasing your 401k contributions, contributing to an IRA, are all ways to increase your assets in the near term.

Reducing Debt/Expenses

The other end of increasing your net worth is reducing your debt. Everyone has different types and levels of debt, but the most advantageous position to be in financially is having no debt. There are entire industries that rely on people getting and staying in debt. Credit cards, auto manufacturers, mortgage lenders, banks are examples. In fact, the credit card industry calls people that pay their balance in full every month, deadbeats. They are deadbeats because the card companies aren’t making any money off them in finance charges. If you choose to use credit cards, please be a deadbeat! Unfortunately, in our culture we have become accustomed to debt as a way of life. When we start to understand how much debt impacts our ability to reach our financial goals, we begin to make different choices. Keep in mind, our debt is someone else’s asset (i.e. banks, credit cards, auto companies, mortgage lenders), just like your loss is someone else’s win.  If you are a lender, the loan contract is an asset that appreciates. You lend someone $20K for a car purchase and you’re paid back $22K over 5 years.

In order to reduce losses in the debt/expenses columns, the focus should be to free your income to pay off debt more quickly and avoid additional debt. Also, reduce the purchasing of items that depreciate in value. Tracking your spending for a month, using only cash for 60 days or selling possessions are all ways to increase income or reduce expenses in order to reduce debt.

The Bottom Line

The bottom line is that we cannot wear or drive wealth. In one camp, the majority of millionaires live well below their means, drive used cars, and live in modest homes (read: The Millionaire Next Door).  However, in the other camp, the majority of Americans live far above their means, live from paycheck to paycheck and finance their lifestyle with debt. There are free online financial aggregators such as mint.com that will allow you to centralize all your financial accounts and calculate your net worth automatically. Tracking your net worth monthly allows you to become more aware of not only which camp you’re in, but also allows you to know how close you are from moving from one to the other.

Am I Financially Ready to Buy a Home? 6 Questions to Ask Yourself

Buying a home will likely be the most expensive purchase in your lifetime. You want to make sure you are prepared to be in the best position financially. There are some common misconceptions about renting that you may want to understand, but if you are emotionally ready to take on the home buying challenge, here are six questions to ask yourself to make sure you’re financially ready!

1. Do I have any consumer debt? (Student Loans, Personal Loans, Car Loans, Credit Cards)

Adding six-figure debt is a serious challenge and commitment. If you already have a significant amount of debt, you should consider focusing and eliminating these debts prior to incurring mortgage debt. A mortgage on top of consumer debt would increase your overall expenses and give you less financial flexibility. Paying lenders interest on debt is the opposite of building wealth.

2. Is my credit score above 720?

A credit score is simply a calculated score credit rating agencies produce that measures how well you manage debt; the higher the score the better. Lenders use this score to help determine their risk in lending to you. The higher the risk, the higher your interest rate which makes the borrowing cost of your home more expensive. There are several ways to reduce your cost of borrowing, but one is to ensure your FICO score is above a 720. FICO credit scores range from 300-850, but in most cases, a score at or above 720 is considered excellent credit and will get you the most preferred rates. Below 720 and you will pay additional interest because of credit risk. In future posts, we’ll discuss how to increase your credit score to minimize your borrowing costs.

3. Do I have a fully funded emergency fund? (minimum 6 months of expenses)

Having a fully funded emergency fund is essential even if you’re not purchasing a home, however, it becomes more important when you do purchase. You can no longer simply notify the landlord of a water leak, heat/AC issues, or a major appliance outage – it’s on you. Homeowner’s Insurance may cover some particular events, but even so, the insurance also has a deductible that you’ll have to cover out of pocket. We can’t predict emergencies, but we can financially prepare to deal with them knowing they will happen. Don’t allow these situations to send you into a financial tailspin of debt. Be prepared with at least 6 months of basic living expenses (e.g. housing, insurance, food, transportation, utilities) which is not part of your down payment.

4. Do I have 20% cash for a down payment? (Separate from an emergency fund)

A 20% down payment is important for multiple reasons. First, if you’re going to make potentially the most expensive purchase of your lifetime, it’s important that you have skin in the game. This means that you had sacrificed for a period of time to save above and beyond to make this happen and you’re fully invested. It also greatly reduces the probability of an impulse purchase.
Second, 20% of the purchase price as a down payment avoids Private Mortgage Insurance (PMI). PMI is an insurance policy the homebuyer pays on behalf of the lender in case the homebuyer defaults. PMI typically costs about 1% of the home purchase price annually and is added to the monthly mortgage payment. PMI can be canceled by the homebuyer once the homebuyer has 20% equity (Loan-to-value ratio of 80%). The bank is required to cancel PMI when the Loan-to-value ratio hits 78%. Depending on the size of the down payment, this could mean several years of additional fees. So, if that sounds like a rip off to you, then you’re starting to understand.

5. Am I planning to move within 7 years?

Mortgages are structured in a way that front loads interest payments. The lender gets much of their borrowing costs before you get your equity. In other words, the majority of the interest of the loan is paid earlier and the principal of the loan is paid down later. For example, depending on the interest rate, the first year of monthly payments could be 75% interest and 25% principal. That is important because, within the first seven years, you will likely not have much equity. Without equity, you will likely not able to achieve a return on investment (ROI), when you are ready to sell. If home prices fall during that time, you could find yourself under water (the balance owed on the mortgage is more than the current value of the home). If you move sooner than the equity in the home grows, you could end up still having to pay a monthly mortgage on a home that has already been sold.

6. Will my monthly housing costs (mortgage, insurance, taxes) exceed 30% of my monthly take-home income?

If you ask a real estate professional, such as a real estate agent or a mortgage broker, “How much house can I afford?” they will likely hear and answer a completely different question – more like ‘How much risk is my bank willing to take?’ or ‘How much commission can I make?’ That’s not a negative statement about real estate professionals, but they are financially incentivized to give you the largest mortgage they can get approved. It is your job to determine how much house you can afford. We recommend that your housing costs including the mortgage, insurance, and taxes not exceed 30% of your monthly take-home income. Can you afford more than 30%? Of course, but the goal of the financially savvy isn’t to get the largest mortgage possible. The goal is to purchase a home while having the flexibility to achieve other financial goals such as saving for child’s education, paying off the mortgage early and achieving financial independence. You want your home to be a financial benefit to your family, not a financial burden.
Purchasing a home is an important emotional and financial decision. On the emotional side, often people will make the mistake of comparing their first home purchase to their parents’ current home.  What you can comfortably afford 15-20 years from now may be drastically different from what you can afford today and that’s okay. On the financial side, to be financially prepared for a home purchase means not allowing the home to overtake other financial goals. Having the biggest house on the block is pretty meaningless if you can’t afford to furnish it, maintain it or take a vacation from it. Keep the bigger picture in mind!

Why Retirement is Obsolete and the Goal Should Be Financial Independence

When you ask people under the age of 40 when they want to retire, you typically get three common answers:

  1.  ‘Age 50 or as soon as I can afford it’
  2.  ‘I have no idea. I can’t think that far ahead’
  3. ‘If I love what I do, why would I retire?’

The concept of retirement is based on an outdated model that doesn’t quite fit with today’s economy or the values of the millennial generation. In past generations, the corporate contract awarded you a pension if you worked for a company for 30 years that would cover your retirement. Pension plans have all but disappeared and now the corporate contract sounds more like the following:
Cubicle40 years (ages 25-65) of work, from 9 AM – 5 PM, Monday – Friday with two weeks of vacation per year.  Employers can terminate your employment at any time, so you may end up working for multiple companies and have several careers. You are responsible for your own retirement including how much you contribute and your investment selections. Employers can also choose whether or not to contribute to your retirement.
 
There are several issues with this corporate contract, but one of the most important is flexibility. Young professionals place the utmost value on flexibility and control. Flexibility in the hours, days and years they work.

  • If I can do my job effectively from 10 AM – 2 PM, why do I need to be in the office for 8 hours?
  • What if I’m more effective working in the evening than I am in the morning?
  • Of our 16 waking hours, we likely spend 10+, either working or traveling to work, which leaves us less than 6 hours per weekday to spend with family and/or handle any personal affairs.
  • Five days working for every two days off is not ideal for anyone
  • Children are not conducive to 9-5 work schedules; they typically do not get sick on the weekends.
  • The idea that we may not get an opportunity to spend more than one week at a time on vacation until after age 65 is depressing.
  • Unpaid maternity leave is a joke. It makes no sense to have to work harder to afford to pay others to care for a child whose survival is dependent on the mother.

That is just a small sampling of the challenges that occur with the traditional corporate contract. This means young professionals must be radical about taking control of their finances in order to overcome these challenges and give themselves more flexibility and control in their careers. Financial Independence does not mean saving for retirement isn’t important, quite the contrary, it means you should drastically reduce your debt and expenses so that you can save even more!
Let’s give it a definition and describe what it looks like:
Financial Independence – The state of having sufficient personal wealth to live, without having to work actively for basic necessities.
Let’s take a family whose basic necessities (housing, food, health, transportation) are $2000/mo. Now remember, this family is debt free. Once that family develops enough passive income and/or built enough of a nest egg (interest/dividends from investments) to cover the $2000/mo, they will no longer be dependent on an employer. They canchoose to work, choose to volunteer, or choose to pursue their passions and interests.
People will say, “Easier said than done, I’m barely making it!” How much could you save each month if you didn’t have student loans, a car note, a mortgage, credit card payments, or personal loans? It doesn’t take much to imagine what could happen if you stopped paying banks interest and started paying yourself.
Please understand that if you’re in debt, your financial past is stealing from your financial future! Debt is simply an agreement that ‘Someone will give you money today if you pay them more tomorrow’. The problem is, like the Bond movie title, Tomorrow Never Dies. Credit card debt revolves, people in their 40’s and 50’s are still paying off student loans, and people continue to trade-in or lease new cars.
FlowingAmericanFlagPursuing financial independence is not a get-rich-quick scheme. We’re simply making the argument that if you want flexibility in your job and your life you have to earn it! If you want to renegotiate the traditional corporate contract, you have to have leverage. If you are able to save/invest enough to cover your basic necessities, you have leverage. The best way to accomplish that is to reduce your expenses, eliminate your debt and save radically.
So the next time you consider buying/leasing a new car, getting that new bag or great shoes, or the latest tech gadget, weigh that decision against the potential of moving closer to financial independence.  GM, Coach, and Apple are already wealthy; maybe you should focus more on investing in yourself.

EMERGENCY: Stop What You’re Doing If You Don’t Have an Emergency Fund!

Imagine this: You spend an entire year trying to pay off your credit card debt, just to have your car break down. You don’t have the cash to cover it, so the $2000 repair goes right back on the credit card. You right back where you started, or possibly even worse.
 
One of the biggest personal finance pitfalls is a lack of solid emergency fund. Emergency funds are critical because they can be the difference between an inconvenient bad day and a financial catastrophe that can take years to escape.
Let’s start some facts to get us on the same page.

  • A recent study showed that over 60% of Americans do not have enough cash saved to pay for unexpected emergencies such as a $1000 ER visit or a $500 car repair.1

That means that the majority of us are living so close to the edge of the cliff that even the slightest nudge can tip us over.

  • The average American household has over $15K in credit card debt, over $26K in auto loans, and over $47K in student loans. The average household is paying over $6K per year in interest on their household debt.2

Let me rephrase that last sentence, the average household is paying financial institutions $6,658 just in interest per year. If we don’t financially prepare for emergencies, we end up working harder to pay more in interest to financial institutions. No thanks!

Paying off debt without emergency savings is like running a long distance race in flip flops, you may be able to get to the finish line, but your chances of falling and hurting yourself are pretty high.

Most experts recommend 3-6 months of living expenses in cash savings. The only problem with that recommendation is that can be more than most people have ever saved, so it can be overwhelming. If that’s true for you, start small. Start with a goal of at least $1000 so that if you have an emergency while paying off debt, you don’t run to credit cards and add to the debt pile. However, if you have a house, car and children, $1000 may not go very far in an emergency. Set a goal that’s appropriate for your situation and build upon that.
We’ll discuss specific saving strategies in detail in later posts, but for emergency funds, some people like to use larger sums they receive to put it away quickly. Birthday money, income tax refunds, bonuses are just a few examples of how people can stash away savings quickly.
One of the most important aspects of building savings is your perspective. Many people view saving money as a chore and painful. There’s a common belief that saving money gives us less to spend when we should view saving as giving you more financial control and independence. Change your perspective and view saving as splurging on yourself and investing in your financial goals. Focus on how much better you’ll feel when you reach your savings goal and have confidence that you can tackle debt even harder.

How We Paid Off More Than $100K in Student Loans in 4 Years

I often read stories of people reaching amazing goals and sharing their inspirational stories. I enjoy reading them because they often give me an emotional lift to keep me going on my own journey. Sometimes it’s people losing significant weight and keeping it off, quitting smoking or overcoming an illness such as cancer or diabetes. One common thread I have seen among these stories is there is typically a turning point that changes their perspective from one of inconvenience to absolute obsession.
Sometimes they hit rock bottom and sometimes it’s an inspirational moment convincing them that their current circumstances are no longer acceptable. Whatever it is, they make a decision that ‘enough is enough’ and come hell or high water, with a passion and obsession these circumstances must change immediately.
For myself, that day came in June 2011 when I received the notice of the full amount of my graduate student loans. I was very financially conscious prior to going to graduate school, so I knew what I was getting into, but something about seeing the final bill after graduation really hit home for me. I had six-figure debt for the first time, I was recently engaged and nearing my 30th birthday and I didn’t even own a home. I always thought of myself as pretty financially savvy. As a teenager, my father had me read personal finance books for my allowance. Books like ‘Rich Dad, Poor Dad’, ‘The Millionaire Next Door’, ‘The Total Money Makeover’ and ‘The Road to Wealth’ shaped how I viewed money in my high school and undergraduate years before I received my first full-time paycheck.
With that perspective, I was very well aware how holding that much debt could impact my future, just as much as someone who is significantly obese realizes how the weight can shorten their lifespan and make life much more difficult. In my eyes, debt (especially at higher interest rates) meant that today’s earned dollars were going to pay for purchases made in the past. The more debt one has, the less one is able to put a financial focus on the present, much less on the future. Add to that the idea of enriching someone else through interest payments (read: Your financial institution of choice) at the expense of enriching yourself.

Can you imagine if exercising today was only burning off calories from a burger you ate 10 years ago?

People have different theories and feelings on debt; how there’s good debt and bad debt and you can use other people’s money to leverage. It all boils down to your comfort with risk. For myself, I’m more risk-averse. I desperately wanted to leave the past in the past and focus my dollars on the present and even more on the future. Living without debt for me means freedom, flexibility, ownership, and choice. There’s an assumption of risk when you take on debt that there will be steady income to service that debt and the market will continue to rise. As we learned in 2009, those assumptions can have devastating implications.

If You Fail to Plan, You Plan to Fail

He-who-fails-to-plan-is-1For the first time in my life, I looked at my own personal balance sheet, added up my assets (i.e cash, investments, property), subtracted my liabilities (debt) and I was deeply in the red and I was embarrassed. Bringing this much debt into a marriage seemed unfair. Having children and buying a house seemed so elusive financially with that debt burden. That same day, I sat down with my fiancée and told her about my plan to pay off all debt in 5 years. It was not an easy conversation as I knew it would require sacrifices for both of us, but she fully supported me and we negotiated the sacrifices.
One of those sacrifices was our living expenses. My fiancee moved back to her parents’ home for a full year after we graduated to save money to pay cash for our wedding. We did not elope, we did not starve our guests, we simply agreed on a total cost upfront (including a honeymoon) and planned it far enough in advance that we could save for it all while still maintaining our debt pay down goals. So the first and most important aspect of our pay down program was planning. One of my personal favorite sayings is ‘If you fail to plan, you plan to fail.’

Money has a strange attribute in that it will wander off and disappear like a toddler unless you watch and monitor it carefully.

If you’ve ever had the experience of taking $100 out of an ATM to find that you only have $10 the next day and can’t explain exactly where the $90 went, you can probably relate.
Planning our finances in advance allowed us to live dramatically below our means. We were living comfortably on less than 40% of our combined monthly income. It’s amazing how much money we spend when we aren’t paying attention. One idea that I read from Dave Ramsey that resonated with me is that our monthly bank statement should reflect our personal values. If you were to print out your bank statement and organize the categories, are you spending the most money on the categories you value the most? Do you value eating out more than giving to charity? Bars/Clubs more than savings? These are the types of choices one should make before opening their wallet.
 

It’s a Journey Not a Sprint

With any new habit or regimen, you have to be patient and understand that success will not happen overnight. Planning can help you avoid failure, but adaptability, patience, and routine practice are what help you to succeed. The first time you create a budget, you’ll likely forget expenses that come up quarterly or annually. You’ll likely way overspend for Christmas shopping or completely under-budget for a vacation, some may even fall victim to retail therapy after a bad day. The important part about the process is that you’re playing the long game. We judge ourselves very harshly when we lose a small battle, but don’t lose perspective on the larger goal. Repetition, consistency, and resiliency are key. Notice the most serious runners run outside regardless of the weather conditions. I’ve always admired that level of consistency and dedication, but for them, it’s as routine as brushing their teeth. Build routines that last the test of time.
 
For us, it was sitting down together at the end of each month to budget and plan for the following month. We started slow and small. First by building a firewall. We agreed that during the process we would under no circumstances add additional debt. That firewall was an emergency fund, so whether we got sick, lost a job, or in our case Hurricane Sandy damaged our car beyond repair, we would not add any additional debt to the liability side of the balance sheet. Once we fully funded six months of expenses, we felt comfortable going full throttle on the debt.
Month after month of practicing to control your money, instead of having your money control you, creates a sense of discipline. You start to notice when you’re overcharged for small items, or you actually look at your cell phone bill detail when it’s a few dollars higher than it normally is. When you really start paying attention, that attention pays you back! Instead of becoming a chore (another budgeting meeting…), it becomes a challenge and fun (how much did I come in under budget this month?). You also have to celebrate the small wins. Paying off individual loans, coming in under budget for the month or making more income than you planned. It’s the small victories that keep you motivated throughout the journey.
I also don’t want to imply that it’s always fun and there are no roadblocks. We faced several roadblocks from the cost of living in Manhattan to Hurricane Sandy to job instability to intra-state and international moves. We also had our first child during this time and while I certainly wouldn’t consider him to be a roadblock, there are definitely costs associated with a child that weren’t factored into the original five-year plan. We paused on paying down debt to bolster our financial situation in preparation for his arrival and got back on track once we were satisfied.

Run Your Own Race

Compare-quote-200x300Finally, it’s important to note that in this time of social media and sharing information publicly, it becomes very easy to fall into the comparison trap. Prior to social media, television and magazines would model women and men whose body types, associated with less than 1% of the population, as the standard in order to push product. These days, with the prominence social media, it’s not only media and advertising companies, but the general public displaying their ‘highlight reel’ in vivid detail and portraying it as their everyday lives. It is particularly important to be aware of this for two reasons.
First, advertising is designed to engender an emotional reaction (i.e. You have a problem) and position its product as the solution. The more you recognize this, the more money you’ll save. Secondly, people have varying levels of income, expenses, debt, goals, and values. Money is still a very taboo and private topic, so it’s not wise to make assumptions on any of those factors. Statistics show that the vast majority of people handle money very poorly and the level of financial literacy to be very low. The comparison trap can be detrimental to accomplishing financial goals because it can alter one’s perspective on their own success by comparing to others with completely different circumstances. Run your own race and define success on your terms in your own situation.
 
So to sum up lessons we’ve learned in paying off six-figure debt, I would share the following:

  1. Know and be able to communicate your “WHY?” – What is it that will keep you running outside when the weather’s bad? Be passionate and obsessed.
  2. Start with a reasonable long-term plan (keep in mind life events)
  3. Break that down into shorter, specific goals (build an emergency fund by X, pay off loan #1 by Y).
  4. Develop consistent habits over time whether it’s a monthly planning meeting, checking your accounts daily or reducing unplanned spending.
  5. Get a trusted partner(s) that can keep you accountable (significant other, friend, relative), preferably someone that manages their own money well and celebrate the small victories together.
  6. Make budgeting fun! Budget for miscellaneous spending, but make it reasonable, so there’s no guilt.
  7. Expect roadblocks. There may be months where you cannot pay down any extra or you may have to pause your payoff plan. Life happens! That’s okay! Readjust the plan and continue forward.
  8. Run your own race. Everyone has different income, expenses, debt, goals, and values. Don’t fall into the comparison trap.
  9. Have a vivid picture of what success looks like. How will you feel the first month you have no more debt to pay? How will you celebrate accomplishing your goal? What are you going to allocate that money toward afterward?

We celebrated by sharing the good news with our friends and family and then starting this blog to share our story and continue the conversation.
I wish you the best of luck on your own journey.