Monitor Your Credit Report

We all know how important our credit score is. A good credit score leads to a lower interest rate on your mortgage and auto loans. A good credit score means you get approved for the premium credit cards (rewards cards). A good credit score leads to lower car insurance rates, and prospective employers can look at your credit score before deciding to hire you.

Most people know how to build a good credit score. The single most important factor is that you pay your bills on time. Keeping your credit accounts in good standing goes a long way in getting and keeping that high credit score. However, despite your good habits of keeping your accounts in good standing, one case of identity theft can derail your credit rating if it goes unnoticed. It would be awful to apply for a loan only to find out your credit rating has been trashed because someone stole your identity, opened a number of credit accounts, and then never paid on them. This actually happens a lot more often than you would think.

Regularly Monitor Your Credit Report
One way to help prevent this from happening, or at least catching it before it can do serious damage, is to regularly monitor your credit report. You can check this for free online at http://www.annualcreditreport.com. There are a number of other websites that claim to give you a free credit report, but then end up charging you a fee. Don’t fall for it. Also, keep in mind that this is only for your credit report, not your credit score.

By law, everyone in the United States is entitled to one free credit report from each of the major credit rating agencies (TransUnion, Experion, and Equifax). In other words, you can check your credit report three times every year. Personally, I check our (my wife’s plus mine) credit reports every January, May, and September (every four months). Your credit report will show all of your credit accounts and their status. It lets you know if your accounts are current or past due, and whether you’ve been late in paying on them. If anything on your report looks suspicious, they provide you with the steps you need to take to get your credit report corrected.

The Bottom Line
It’s easy to get caught up in all the daily responsibilities in life. We’re all really busy with work, family, and friends. But monitoring your credit report is an important thing to do. So get out your calendar (whether it’s a traditional paper calendar or on your smart phone) and set a reminder to look at your free report every four months. Don’t get caught unaware in the future when you go for a loan and find out that an identity thief trashed your credit.

When Looking For Expenses To Cut, Start With The Big Things

Today’s post is part of the “Family Financial Guidelines” series. Whether you’re going through a financial turnaround or are just wanting to stay on top of things, this series will give you the tools to get and keep your family’s finances on track.

Expense Control
No matter your financial situation (though especially when first starting your financial turnaround), an important part of successful personal finance is getting expenses under control. There are a lot of ways to do this, and you’ll generally hear two schools of thought:
1. Cut back on a lot of little things
2. Cut back on a couple big things

Looking at the Big Things
For today’s post, we’re going to concentrate on the big things. Cutting back on these will give you the most bang for the buck and can really go a long way in improving your financial situation. This isn’t to say that cutting back on the little things doesn’t make a difference. It does, and we’ll discuss that in the future.

First things first, what do I mean when I say “big” things? Well, for starters you should have a list of all your monthly expenses as well as regular expenses that aren’t necessarily paid every month (such as car insurance or life insurance premiums). Your list should be pretty long and include everything you spend money on. There is no set threshold of what things are “big” versus “little” but a general rule would be to treat at least the five largest items as “big”.

Housing
For most people, the item at the top of the list is going to be housing. This is also the item that is probably the most difficult to reduce, but it can be done. If you own your home and have a mortgage, what is your interest rate? If you’re paying 6% or higher, you should definitely look into refinancing the mortgage. We refinanced our mortgage last fall, going from a 6.5% rate down to 4.75%, and reduced our monthly mortgage payment by around $150.

If you rent a house or apartment, look into the possibility of moving to another property with lower rent. Of course you have to consider the safety of the neighborhood and quality of the schools (if you have children). Additionally, you can look into the possibility of getting a roommate (or two) to split the monthly payment.

Vehicles
Another big item for many people is their monthly car payment. If you bought a car more than a year ago, check with your local bank or credit union about refinancing the loan. Interest rates have come down significantly, and refinancing can help reduce your monthly payment. One other possibility is to sell your vehicle and buy a lower-priced used vehicle instead.

Cell Phone
Did you know that the average household with a family cell phone plan including data and texting pays around $150 a month? There are multiple ways to cut this down. First, monitor your cell phone bill for a few months and see if you’re actually using all the minutes included in your plan. If you signed up for a 1,000 minute plan, but only use an average of 600 minutes you are over paying for service. Contacting your wireless carrier and switching to a plan with fewer minutes can easily save you $20 or more a month.

Another thing to consider is your monthly data plan. The average data plan now costs more than $30 a month. While you’re monitoring your monthly bill for how many minutes you use, you should also check how much data you use. If you aren’t using much of your plan’s data, you should really consider dropping the service. However, keep in mind that dropping the data plan will limit your phone choices, as most of today’s smartphones are only available if you sign up for a data plan.

Finally, consider using a pre-paid or no-contract cell phone plan. This way you can make sure you’re only paying for what you actually use, and there will be no large early termination fee if you decide to cancel or switch carriers.

Groceries
One final “big” item for most people is the monthly grocery bill. We all have to eat, we have to do laundry, and we have to shower, brush our teeth, etc. But there are many ways of reducing the cost of all these things. For food purchases, use your weekly grocery store flyers to plan a week’s worth of meals around the items that are on sale. This will help you stretch your grocery dollars and can also help encourage you to try new foods. Buying store brand products and using coupons for name-brand products can also put a big dent in your grocery bill.

There are also many other tried and true methods to help lower the cost at the grocery store. Always make a list beforehand of what you need, and stick to the list once you’re at the store. This helps to avoid purchasing unnecessary items. And it’s true when they say not to go shopping on an empty stomach. Everything in the store looks so good when you’re hungry, and you end up buying more.

The Bottom Line
By first focusing on cutting your largest expenses, you can really get a good start to getting your personal finances under control.

Keep The “Personal” In Personal Finance

Personal finance sounds so simple, doesn’t it? I am an accountant by profession. I enjoy working with numbers, tracking progress, and working in spreadsheets. From that standpoint, personal finance is mostly made up of simple arithmetic. I know that I bring home a certain amount and that so much goes toward non-discretionary monthly bills (the must-have’s), so much goes toward discretionary monthly bills (the nice-to-have’s), so much goes toward groceries and other monthly spending, so much goes toward retirement savings, etc. I can do the math. I can see where the money is going. I can see the slow but steady progress of our finances improving. But there is a lot more to personal finance than math and numbers. There is a reason the first word in personal finance is “personal”.

Beyond The Numbers
When I make spending decisions, is it really about the math? To an extent, yes; but not really.

I know that when my mortgage payment is made that I need to subtract that payment from our checking account balance. I know that more than half of the mortgage payment is going to interest, taxes, and insurance, with a small portion going to pay down the principal. But what I think about most is that making that mortgage payment gives my family a place to live. It gives us someplace to call home.

I know that a portion of every paycheck I receive is deducted and put into my 401k. I know that by making these contributions consistently over my working years the balance will grow significantly by the time I reach retirement. My wife still laughs when I tell her that we’ll have a nest egg well above $1 million by then, based on maintaining my current contribution levels. I know the math behind it: how the sum of my contributions, the employer match, and compound interest over 40 years can really add up. But what I think about most is that making those contributions will give my wife and me a future where we aren’t relying on Social Security for our retirement years (if it even exists by then). I think about a future that is secure, where we can focus on things like spending time with our friends and family without worrying about running out of money.

Last night I went to the Dairy Queen drive-thru and bought my wife and I each a blizzard. From a purely financial (math) aspect, was this the best use of our money? No. Technically I could have put that money toward one of our loans or put it in savings. But we really enjoyed sitting at home eating our blizzards while our little boy was sleeping. It was one of those once-every-once-in-a-while treats that make life a bit more enjoyable.

It got me thinking. Focusing on the math is not the key to successful personal finance. It certainly is an important component of personal finance, don’t get me wrong. The numbers do matter, and you can’t ignore them. But if that’s all you think about, you’re leaving the “personal” out of personal finance.

Lessons Learned: My First Vehicle Purchase

Every Friday I post about one of the lessons I’ve learned so far in life, both financial and about life in general. We’ve all learned valuable lessons along life’s journey, sometimes the easy way and sometimes the hard way. Hopefully someone will read what I learned and avoid having to learn the same thing the hard way. Check back every Friday for a new lesson learned.

My First Car Purchase
I wasn’t really involved too much in the purchase of my first car. This was back in 2002 during my senior year of high school. My dad and I had been looking for used cars, test drove a few, etc. One day after school I went to a car lot and was checking out the cars and saw one that fit the bill. It was a nice little car (a 1994 Geo Prizm), and the price was in the budget my parents set. The actual purchase was handled by my dad, which included coming to a deal with the sales person and all the back office “stuff”.

Two years later I was rear-ended, and my car was totaled. The insurance company gave me a roughly $2,000 check, and suddenly I needed another vehicle. So, I looked online at various car lots and visited a few of those lots. I found a pretty sharp looking 1997 Dodge Avenger. It was a real sporty car, a red, two-door coupe with a sticker price of $7,500. I came back again with my dad to complete the purchase and set up the financing. This was going to be my first real loan, so I needed my dad to co-sign on the loan. I was working part-time and would handle the payments. The thing I remember most is that we didn’t really negotiate with the car salesman. I remember my dad asked the guy how low he could go on it, and the guy said, “I can go down to $7,000 if you buy it tonight.” So, that’s what we did.

When I look back on this, it almost makes me laugh. I ask myself, “What were we thinking?” But the truth is that I had no clue how to go about buying a car, and that is a huge problem that people face. Since that car purchase, I’ve learned a lot about how to buy a car. My next two vehicle purchases were much better, and I felt much more in control of the whole situation. The reason for this is simple: I’ve read up on how to go about buying a car.

Tips for Buying a Used Car
View Listings Online: Get online and browse what cars are out there, both at car lots and from individuals. This gives you the advantage of being able to go to a car lot and know the exact cars they have and a lot of times what the sticker price is.

Research Vehicle Values: While you’re on the internet browsing through used car inventories, check the estimated value of the vehicle. Three good sources are Kelly Blue Book (www.kbb.com), Edmunds (www.edmunds.com), and NADA (www.nada.com). You’d be amazed at how high the sticker price is on most cars compared to the true value.

Arrange Financing First: Before you go to a car lot to purchase a car, call your bank or credit union, and see what kind of financing is available to you. This gives you an idea of what your interest rate and loan payment will be. Additionally, you can use this as a bargaining chip. Most car dealers get a kickback when they arrange financing through the dealer. If you already have financing arranged, a lot of times the dealer will work to get you a lower rate if you finance through them. For example, we bought a vehicle a few months ago, and I knew the rate I could get at my bank. I told the dealer this, and they offered a slightly lower rate. I played the loyalty card and said the rate they offered wasn’t low enough to get me to use a financial institution other than my regular bank. The dealer then offered me an even lower rate, which I took.

Be Willing to Walk: Don’t be afraid to walk off the car lot without buying the car. If the dealer won’t come down to the price you’re targeting, simply tell them that you’re not interested in the car at the price they’re asking. Give them your phone number and tell them to give you a call if they change their mind. If you’ve looked online and researched what the value of the car should be, more than likely the dealer will call you back within a few days and come down to your price.

Act Like You’re in Charge: Whatever you do, do not just walk into a car lot and say, “What kind of cars do you have for $x,xxx?” This lets the dealer know exactly how much you’re going to spend, and they can steer you toward cars that have a sticker price around that amount. Despite what they may say, the car salesperson is not on your side. Hold your cards close to your chest.

Additional Tips
What are some of your strategies for buying a used car?

Spend Less Than You Earn

Today’s post starts off the “Family Financial Guidelines” series. Whether you’re going through a financial turnaround or are just wanting to stay on top of things, this series will give you the tools to get and keep your family’s finances on track.

A lot of people look for shortcuts and easy ways to turn their financial situation around. It sure would be great to find one small, easy fix that would completely transform your situation, and if I found such a fix I would be sure to write a book about it and make a bunch of money from it. But what if I told you that there is such a fix, and that it has been around as long as money itself?

The Basic Principle of Family Finances
There is a common denominator in virtually every situation where a major financial turnaround is necessary. Like I mentioned yesterday, a lot of these turnarounds start when you reach a point where you’re tired of the collection agencies calling, the constant juggling of bills, the paycheck-to-paycheck lifestyle, the stress of knowing that the next unexpected bill (car repair, appliance replacement, medical bill, etc.) will put you over the edge and you want to make it all stop. The fix for this is to spend less than you earn.

This simple concept is the cornerstone of successful personal finance. Spending less than you earn results in a number of positive benefits:

You can eliminate debt: Every month that you spend less than you earn, you can take that difference and pay down your high-interest debt.
You can build savings: Just like paying down debt, you can take a portion of the difference and put it in a savings account for future emergencies.
You can lower your general stress level: This is a big one. When you know that your monthly spending is consistently lower than your monthly income, you can sleep a lot better at night knowing that you’re financial situation is improving each and every month.

Two Sides of the Coin
There are two parts to this concept, both of which are important. You can work to both spend less and to earn more.

Spend Less: The fastest way to start spending less than you earn is to find things you regularly spend money on that you can cut back on. This does not mean you necessarily have to cut out all non-essential spending. What it means is that you need to review everything you regularly spend money on and decide what things you can cut back on, what things you can find a less expensive alternative for, and what things you can cut out altogether.

– Shop around for lower auto and homeowners insurance rates.
– Eat out one less meal per week.
– Switch to a basic cable or satellite package, or cut it out altogether and sign up for Netflix streaming.
– Cut out a few coupons from the Sunday newspaper.
– Install a programmable thermostat and CFL light bulbs in your house.

Earn More: Typically the “earn more” approach takes longer than the “spend less approach”, but it is definitely worth working toward. Ideally, you can find ways to both spend less and earn more. And as an important note, “earn more” doesn’t only relate to your job.

– Go through the clutter in your home or apartment and sell unused items on Ebay, Craigslist, or have a yard sale.
– Do your best while at work. Go the extra mile to master complicated tasks and responsibilities.
– Take on a part-time job, or start a small side business to earn some supplemental income.
– Learn a new skill or further your education

The Bottom Line
There is no magic fix to turn around your financial situation. However, spending less than you earn is the closest thing.

Baby Steps

Our little boy has been working on walking. He has this little walking toy that looks something like a lawnmower. He’ll stand up and walk with that thing all over the place. But recently, he’s been getting braver about taking steps on his own without holding on to anything. It’s really something to watch. My wife and I make sure to clap our hands and offer praise while he’s taking his steps. We both know it’s only a matter of time now before he will be running all around the house and in the yard. Our dog (and my wife) will get no rest once he becomes fully mobile.

Watching him gradually learn to walk is really an amazing thing to see. His steps right now aren’t very big, and he’s pretty cautious about taking them. Without holding on to anything, he knows that he can fall down pretty easily. But the more steps he takes, the more confident he becomes in taking the next steps.

Life is full of similar situations, even as adults. Any time you start making big changes, it can be a scary thing. You know that you really want to be able to do something, but it’s a challenge to figure out exactly how to do it and really get the hang of it.

For example, maybe you’ve reached the point where you realize your financial situation has got to change. You’re tired of the collection agencies calling, the constant juggling of bills, the paycheck-to-paycheck lifestyle, the stress of knowing that the next unexpected bill (car repair, appliance replacement, medical bill, etc.) will put you over the edge and you want to make it all stop.

The only way to do this is by taking baby steps. It’s a scary thing, because the journey you’re about to start is a lot like going from crawling to walking. You’ll have setbacks where you fall on your rear end. You’ll have times where it seems like you can move faster by going back to crawling. But you know that your life will be better once you learn how to move away from your old way of doing things to the new way.

Over the next few weeks, I’m going to post a series of “Family Financial Guidelines” to help those of you that are trying to move from the “crawling” stage to the “walking” stage. Stay tuned…

Success Factors

There was an interesting article at CNN Money this morning that talked about the income disparity between households in the top 20% and households in the bottom 20% between two 10-year time periods (1976 to 1986 and 1996 to 2006). Basically, the household income of the top 20% has grown pretty steadily while the household income of the bottom 20% has barely moved. The article also mentioned that there is less mobility between income levels. In other words the rich tend to stay rich, and the poor tend to stay poor. This kind of article always interests me because I grew up in a pretty poor family. I don’t think we were in the bottom 20%, but I’d put us as “working class”. Things were always really tight, especially with raising four children on my dad’s modest income.

With this being an election year (don’t worry, I’m not going to delve into anything political here), you hear a lot about the income gap. The term “class warfare” gets thrown in every now and then as if there is some kind of ongoing battle between the rich and poor. Personally, I don’t get into all that. For the most part, I like to believe that people can work hard and make a better life for themselves.

However, I do understand that there are a lot of things beyond our control that really can have a profound impact on our situation. One of the best books I’ve read in a while has been Outliers by Malcolm Gladwell. In this book, he writes about what makes successful people successful. A large portion of success is driven by a person’s work ethic and innate abilities. But another large portion of success is determined by random chance.

My Success Factors
There are a number of things over the years that I believe have greatly contributed to my rise from working to middle class (and hopefully beyond):

Household Dynamics: I was raised in a “traditional” home with a married mother and father. They had (and still have) a healthy marriage, and there was always that degree of stability in the home. We had very limited money, and I learned to manage my money carefully once I got a job.

Emphasis on Reading: My parents took us to the library every week, so we learned from a very early age that reading was an important part of life. Reading encourages thought and develops language and literary skills that are essential in life.

Innate Intelligence: I never had to work too hard in school to get good grades. I could listen to the teacher and do my homework, and the material would just “click” for me. This was particularly useful in high school and college because it allowed me to work a part-time job in the evenings without interfering with doing my schoolwork. Important note: I still had to do my schoolwork, but I was able to spend less time on it and get better grades than a lot of my classmates.

Work Ethic: I was always a hard worker in just about anything. Whether it was my schoolwork (I still had to do it, even though I mentioned before that it came easy), household chores, yard work, or my part-time jobs, I always made sure that I did my best. I’ve always been internally motivated to do well. I’m pretty competitive like that. This has helped me in many ways. My college accounting professor thought very highly of my work and provided a great reference that got me an interview that led to my current job. Important note: My professor’s reference got me the interview, but I had to perform well at the interview to land the job.

College Affordability: I live in a state (Indiana) that offered a lot of state grants based on a combination of need and academic achievement. Since I graduated near the top of my class with an Indiana Academic Honors Diploma and came from a pretty poor family with four children, I was able to attend a private four-year college and graduate with minimal student loan debt. Important Note: I still had to do the work in college, but I was able to afford to go due to all the state financial aid.

The Bottom Line
To a large extent, I am a firm believer that hard work is the most important thing to a successful life. I wouldn’t have been able to get where I am today without having the work ethic to make it happen. But I also know that I’ve been pretty lucky as well. My hard work paired with a few “lucky” breaks is the key to the progress that I’ve made. The key is to take advantage of those chance events when they happen, but realize that oftentimes it’s your hard work that helps lead to those lucky breaks.