4 Money Lessons from the 2016 U.S. Presidential Election

The 2016 Presidential Election was historic on multiple fronts. Two of the most unpopular candidates battled in one of the most contentious, divisive and unconventional campaigns in modern history. For some, the result was a deeply shocking and painful event, for others it was redemption for voices long ignored. In all, nearly 120 Million Americans voted and the popular vote was separated by less than 200,000 votes, which is about the population of Little Rock, Arkansas. Regardless of your politics or preference of candidate, there’s no question that the country is divided politically. Whether you’re extremely disappointed or excited by the result there are lessons to be learned from the election and how it can affect our wallets and thus our livelihoods. How can the lessons from this election make us better managers of our finances?

1. Conventional Wisdom Isn’t Always Wise

Nearly every political expert and reputable polling firm who had been polling voters on a weekly basis for 18 months were completely wrong about the actual results of the election. Polling models that were used for the electorate in 2008 and 2012, became obsolete in 2016. Conventional wisdom can often be generalized and not specific to our individual situation.

There are certain standards of conventional wisdom in our finances that are also outdated or need to be challenged based on our individual situations. For example, conventional wisdom often stresses going to the best college one can get into (regardless of cost), pursuing a degree in a field of interest (regardless of expected future salary). This is not to say that people shouldn’t go to college or pursue a major solely based on expected future salary. It is to say that mode of thinking was developed at a time when people could pay their full student tuition by working part-time. That’s a 1970’s/80’s model, which needs to be challenged and may not take into account the realities of increased tuition costs and the impact of student loan debt on your future livelihood.

Our motto is Reject the Status Quo. In order to manage your finances well, there are times when you’ll make decisions that are not popular. The status quo embraces consumerism culture in which many people equate spending with projecting wealth or building relationships. It may be tough to navigate being the odd one out if you don’t subscribe to that mode of thinking. You may find that unnecessary spending actually doesn’t project wealth or make you happier, but rather delays and extends the time it takes for you to reach your personal and financial goals.

2. Prepare for the Unexpected

To say that Donald Trump becoming the 45th President of the United States was unexpected is a dramatic understatement, but life can often be very unpredictable. It was the Greek Philosopher Heraclitus who said, “Change is the only constant in life.” Sometimes change is good and sometimes it isn’t, but regardless, we have to plan for the unexpected. [bctt tweet=”Being unorganized with your finances is like playing Russian Roulette. ” username=”moneyspeakeasy”]

One of the lessons learned from the 2008 Great Recession was the people that were impacted the most were folks who carried high levels of debt and lived above their means. That’s not a judgment on them personally, but we need to ask ourselves if we have recession-proofed our finances. The following questions can help you assess your readiness:

Do you have 3-6 months living expenses in an emergency fund?

Do you have more than one source of income?

Do you have a written budget and track your spending?

Do you have life and disability insurance?

Do you have revolving credit card debt?

3. Depending on Government is a Losing Strategy

One of the truly negative impacts of having a divided country and a divided government is that even topics of general consensus may not get accomplished. There are serious financial issues, such as the cost of higher education, the cost of healthcare, student loan debt, social security, increasing wages and tax reform that can have dramatic effects on our finances, both positive and negative.

We believe the best plan of action is to treat your finances as if you will not get any assistance from the government and if you do, it will be a bonus. If you are under the age of 50, you should have no expectation that you’ll receive any social security benefits in retirement. If you have student loans, you should have no expectation that the government will help reduce the cost or forgive any portion of it, unless you are in a loan forgiveness program, have it in writing and understand the nuances.

The point is that our government is not a nimble organization, even when there is a consensus. Big changes can often take years, if not decades. Therefore government assistance should not be an important part of any financial planning.

4. Your Money, Your Values

Finally, if you want to know what someone truly values, you may listen to their words, you may even look into their actions, but one of the most revealing aspects of a person’s values is their spending. As they say, follow the money! We may vote for a Presidential candidate every four years, but we vote daily with our financial resources. [bctt tweet=”The more we control of our finances, the more resources we can direct toward causes we value.” username=”moneyspeakeasy”] For example, if a company decided to move a factory overseas or company funded organizations that were contrary to your values, an organized voter base could decide they were no longer willing to purchase products from that company and impact that decision. Just as many Americans believe that every vote counts, your dollars and purchase decisions count. Make sure your bank statement reflects what you value most.

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.