As aspects of our lives continue to move to digital spaces, it’s more important than ever to make sure you are taking the right steps to protect yourself. No matter the type of online account, your first line of defense is often your login password.
1. LONGER IS STRONGER
The longer and more complex you make your passwords, the stronger they’ll be in the long term. Short, simple passwords are often much easier for hackers to crack. Aim for at least 8-12 characters, and consider these other basic guidelines for how to create strong passwords:
Use a combination of upper and lower case letters, numbers and symbols.
Avoid easy, simple phrases like “Password123” and never use personal information (birth dates, pet names, etc.)
Random is better: pick a strange phrase and replace letters with numbers or symbols where you can. Have some fun with it!
2. CYCLE PASSWORDS OFTEN
Larger companies like Google and some financial institutions often prompt users to change their passwords after a certain period of time. A good rule of thumb is to rotate passwords at least every six months. It might feel like a chore to go through every single online account. But when you’re considering sensitive personal and financial information, what’s an extra 15 minutes twice a year to protect yourself?
3. NEVER USE THE SAME PASSWORD FOR MULTIPLE ACCOUNTS
We’ve all been guilty of it. You craft one really strong password and decide to use it for every account. Sure, it’s convenient and may help you save time during your day. But, in the event of a breach, it’s not just one account you have to worry about. By not taking the time to create multiple passwords, you’re leaving your entire digital identity at risk by the right hacker.
4. USE A PASSWORD MANAGER
With so many different passwords for each online account, it can be difficult trying to keep track of them all. However, you should never write your passwords down. Even if you think your home or office is safe, all it would take is for you to lose the slip of paper or notebook and suddenly all of your accounts are at risk. With an encrypted password manager you can house all of your passwords on a single, private and secure server. Just make sure to never forget the master password! And be sure to follow the same tips to make sure it is as strong as possible.
5. ENABLE TWO-FACTOR AUTHENTICATION
Some of your accounts may prompt you to enable two-factor authentication. It’s always tempting to click “remind me later” and put it off, but taking a few minutes can really go far in the long run. Two factor authentication adds an extra layer of protection, simply by verifying that you are who you say you are. Usually that comes in the form of a direct text message or email to confirm a login attempt. Again, it’s the simple, extra steps that can save you so much trouble.
“The goal behind teaching financial literacy is to help people develop a stronger understanding of basic financial concepts—that way, they can handle their money better…Financial literacy is the possession of skills that allows people to make smart decisions with their money.” Dave Ramsey
April 2021 is Financial Literacy Month – In 2004 Congress passed a resolution officially recognizing April as Financial Literacy Month to “raise public awareness about the importance of financial education in the United States and the serious consequences that may be associated with a lack of understanding about personal finances.”
— PracticalMoneySkills (@PracticalMoney) April 2, 2020
Financial Literacy. The goal of financial literacy is to help people develop a stronger understanding of basic financial concepts—that way, they can handle their money better. Especially when you consider a few realities about our country’s lack of financial literacy and about how the typical American handles money:
U.S. college students continue to struggle with massive debt. There’s also the uptick in adults living paycheck to paycheck.
Money management appears like it should be simple and easy…just spend less money each month than you make and save for the future.
It’s never too late (or too early) to learn good money management habits, or to start saving for the future, and investing for the long-term and to grow your money.
Money management and financial planning are not only for the wealthy; it’s available to every American.
Learning about money management and personal finance should be a lifelong endeavor that you’ve now begun!
A large number of Americans lack financial literacy. They believe financial success is doing things the same way that they have always done or planned to do is the recipe to success; for example, not preparing and planning for the future and only living in the moment.
Often times, your spending can take on a life of its own before you can take time to think about it. This is where many people get into trouble. It is not unusual to find someone who is working in an industry or job they may not like, simply because they need a paycheck and do not have a choice financially.
Lacking financial literacy is a significant enemy of financial progress and success. Since living paycheck to paycheck has become a significant way of life for most Americans, according to 2017 CareerBuilder Survey, which highlights:
An estimated 44% of Americans can’t cover a $400 emergency without going into debt.
56% of Americans have less than $10,000 in savings for their retirement.
78 percent of U.S. workers live paycheck to paycheck to make ends meet
Nearly one in 10 workers making $100,000+ live paycheck to paycheck
More than 1 in 4 workers do not set aside any savings each month
Nearly 3 in 4 workers say they are in debt today – more than half think they will always be
Financial literacy and knowledge has never been more relevant. The only person who will truly always be looking out for your best financial interest is you. Learning about money management and personal finance should be a lifelong endeavor.
It’s never too late (or too early) to learn good money management habits, or to start saving. Since, personal finance is not only for the rich! Read books and financial publications, watch the videos and follow closely emerging and trending issues and practices in finances. Also, work with a financial advisor.
Our schools don’t do the best job preparing us for handling all of the challenges of personal finance, so it’s up to you to figure it all out. As a nation, we must embed basic financial literacy into our education system.
Financial Literacy and understanding money are vital to planning for financial well-being and a life well lived. Financial literacy, when dealing with bills, tracking long and short term payments and how to develop a system for saving, paying for the dailies, etc. is incredibly important.
No. 1: Successful money management is about making sure your money is doing for you what you want it to. This means that before you can be successful with your money, you have to know what you want. To get control of your finances, you must understand your own personal expectations, goals, and values. According to a study by the University of Tennessee, less than 1 out of 20 Americans have clearly defined goals; the key to developing a practical spending plan. That means 19 out of 20 find it difficult to avoid debt and save for the things that really matter.
No. 2: Managing finances is an important part of living a balanced life. It helps you pay your bills, build strong credit, establish realistic goals, and plan for the future. Simply put, it’s the process of making sure you spend less than you earn and save for the future. Income and expenses often vary from month to month, so keep track of your spending and following a budget and financial plan are critical and not hard once you get the hang of it. Don’t focus on the numbers — focus on the outcome! And, at some time or another, everyone will confront a financial emergency. The decisions we take regarding your budget and financial plan can have lasting impact on you, now and far into the future. And, a critical part of that planning is emergency savings to help navigate turbulent times.
No. 3: As every personal finance course emphasizes, retirement savings in tax-advantaged retirement accounts are important but not enough. It is critical that we think about the future, but every household also needs emergency savings to help navigate turbulent times. We must identify ways to make these savings strategies simple, even automatic.
No. 4: Don’t make dramatic changes during periods of high market volatility and economic uncertainty. Instead, embrace a strategy of goal based money management, financial planning and investing. When your tempted to react dramatically to market volatility and economic uncertainty, ask yourself which one of your long-term goals is no longer a priority. Which goal or goals do you want to abandon in order to move assets from stocks to safer asset classes such as bonds or cash. The older you will thank the younger you for not panicking and sticking with your long-term goals.
Let’s each of us make sure that financial literacy becomes part of the curriculum in our education system. We should push for mandatory personal finance education in schools starting next year.
Visa and the National Football League (NFL) have teamed up to create Financial Football, a fast-paced, interactive game that engages students while teaching them personal finance skills.
Students of all ages can learn key concepts about saving and spending, budgeting and the wise use of credit in preparation for game play.
We’ve teamed up with @Visa to help you tackle the issue of financial literacy.
Pfizer said its coronavirus vaccine was 100% effective in preventing COVID-19 in children ages 12 to 15.
In participants aged 12-15 years old with or without prior evidence of SARS-CoV-2 infection, the Pfizer-BioNTech COVID-19 vaccine BNT162b2 demonstrated 100% efficacy and robust antibody responses. The results exceeded those reported in trial of vaccinated 16-25 year old participants in an earlier analysis, and was well tolerated, according to Pfizer. The trial enrolled 2,260 participants in the United States.
There were 18 confirmed COVID-19 infections observed in the placebo group and no confirmed infections in the group that received the vaccine, the company said. That resulted in a vaccine efficacy of 100%. The vaccine was also well-tolerated, with side effects generally consistent with those seen in adults.
Vaccinating children is crucial to ending the pandemic, public health officials and infectious disease experts say. Children make up around 20% of the U.S. population, according to government data. Between 70% and 85% of the U.S. population needs to be vaccinated against Covid to achieve herd immunity, experts say, and some adults may refuse to get the shots.
Pfizer CEO Albert Bourla said the company plans to submit the new vaccine data to the Food and Drug Administration and other regulators “as soon as possible,” with the hope that kids in the age group will be able to get vaccinated before the next school year.
All participants in the trial will continue to be monitored for long-term protection and safety for an additional two years after their second dose.
“Your credit is a lot like your health. To keep it in good condition, you want to take care of it, minimize risk, watch for warning signs, and make responsible decisions.” Capital One
Credit consists of information about your borrowing and repayment history. It is a record of how you, as a consumer, has paid credit accounts in the past, and is used as a guide to determine whether you are likely to pay future accounts on time.
Good credit histories generate good credit scores and are rewarded by lenders with lower rates and favorable terms; bad credit can cost you.
Good Credit Habits to Practice Daily
To keep your credit healthy, here are four regular habits to practice every day, according to Experian:
1. Pay Your Bills on Time
The most important thing you can do to maintain a good credit score is to pay your bills on time. Payment history accounts for the largest share of your FICO® Score. To make sure you don’t accidentally miss a payment deadline, consider setting up automatic monthly payments for at least your minimum amount due. You should also consider reviewing your balance and making payments throughout the month instead of waiting until your bill comes due. This can help you avoid interest and make certain you don’t miss you don’t miss a payment. Remember: Any payment made more than 30 days past the due date can stay on your credit report for seven years.
2. Keep Your Credit Utilization Low
Credit utilization measures your credit card balances against your credit limits. Here’s how this works: Add up the credit limits on all your credit card accounts to find your available credit. Next, add up all of your credit card balances. Divide your total balances by your total available credit and convert to a percentage to get your credit utilization ratio.
When it comes to credit scores, the lower your utilization, the better. As a general rule, keeping your utilization below 30% will prevent credit score harm; those with the highest credit scores tend to have credit utilization ratios in the low single-digit percentages.
3. Check Your Credit Score Regularly
It’s always handy to know where your credit score stands and how it has changed: It helps you understand what effect your actions have in your scores. Beyond this, checking your credit score regularly can help you detect any problems that might be brewing and reverse course if you’re getting off track. If you’re in the process of improving your credit, a rising score is great positive feedback.
Checking your credit report periodically is also a good idea. Not only will you spot any negative or inaccurate information that might crop up, but you can also make sure there aren’t any new accounts you haven’t applied for—those may be a sign of identity theft.
4. Apply for New Credit Only When Needed
Having multiple accounts and a mix of credit types is good for your credit score. It’s a signal to lenders that you have the know-how to manage different types of credit.
But too many recent credit applications can be a drag on your creditworthiness. Each time you apply for a loan or credit, the lender runs a request for your credit report known as a hard inquiry. Although one hard inquiry on its own might result in a minor and momentary dip in your credit score, many recent applications can affect your credit more noticeably. A constant stream of hard inquiries—or a recent flurry of them—may cause lenders to view you as more of a credit risk.
When you do apply for new credit, make sure you understand your creditworthiness, and only apply for credit when you think you have a high likelihood of being approved.
Good Habits and a Healthy Outlook
Developing these four basic habits can help you keep your credit in good shape. In addition, monitoring your credit can help you track your progress and keep your goals top of mind.
Your spending habits—including purchases made with credit cards, as well as payments for insurance, car loans, utilities and cell phone bills—are the blueprint for your credit history and can make or break your reputation as a borrower.
Paying bills on time and in full is key to good credit and makes it easier for you to secure a mortgage, car loan or private student loan in the future. Regardless of how long you’ve had good credit, missed payments put a black mark on your report. On the other hand, a good balance of credit with consistent and timely payments can boost your score and keep it healthy.
Paying late or defaulting on payments is a red flag for lenders. If you have poor credit history, you’ll likely be seen as a risk and may not get a loan or credit card, or may be given one with a higher interest rate. Negative information and late payments remain on your credit report for seven years from the date of the initial late payment. The effects of these black marks on your credit score will, however, lessen over time.
And, you can’t hide debt or bankruptcy. Having too many credit cards and credit card debt affects your credit. And, bankruptcy does not erase bad credit history. Although declaring bankruptcy frees you from paying back all or part of your debt, the delinquent accounts aren’t deleted from your credit report. Instead, they’re added to show they were included in bankruptcy and can remain on your report between 7 and 10 years.
Terms like “credit history,” “credit report” and “credit score” are important to understand. They are three critical and separate entities that are directly related to one another.
Credit History: an unofficial record of your debts and repayments. You need a history of responsible credit use to establish a solid credit history and credit score. If you don’t establish and maintain various types of credit accounts, your scores won’t be as good as someone with a long history of responsible credit use.
Credit Report: an official record of your credit history collected from sources like lenders, utility companies, landlords and collection agencies, and compiled by the three credit bureaus, Equifax®, Experian® and TransUnion®
Credit Score: a statistically calculated numeric value indicating your creditworthiness based on the information contained in your credit report. While there are several credit-scoring formulas, FICO® (the acronym for Fair Isaac Corporation, the company that provides this model to financial institutions) is the most widely recognized. Scores range from 300 to 850, with under 400 typically indicating very poor credit and above 670 demonstrating you’re a responsible borrower. It’s important to understand that your income has nothing to do with your credit score and isn’t even reported to the credit bureaus
Credit scores are available for lenders, landlords and others to use in assessing if you’re a good financial risk to take on. Ranges of scores are often translated into quality ratings, such as good, fair and poor.
The amount you have in savings doesn’t impact your credit score or show up on your credit report, but chances are, if you have good savings habits and other good financial habits, you probably have a good credit score.
The way you use credit can have a positive or negative impact on your credit (or FICO®) score. Each time you apply for credit, an inquiry is reported. Inquiries come in two forms: hard and soft. Both types of credit inquiries enable a third party, such as you or a lender, to view your credit report.
On the other hand, a good balance of credit with consistent and timely payments can boost your score and keep it healthy. Although credit is easy to use, you may hurt your score if you use a high percentage of the credit available to you. Here is how to keep your utilization rate low:
Use your credit cards wisely. Don’t use them to purchase more than you can pay off each month. Instead, set aside money each month to use for these purchases to pay your bill in full. For larger, more expensive purchases, save in advance so you can pay off the balance right away, thus avoiding high interest rates. “Used wisely, credit is an important tool in your financial toolbox,” explains Stefan Ross, vice president of credit card products at Fidelity. “Using credit cards in the right way can help you build wealth and get better loan terms.”
Control spending. It’s easy to spend $20 here and $40 there without thinking too much about it, which is how trouble starts. Keep track of your spending by reviewing your payment history online or saving receipts for one or two months to see where you can cut back.
Pay more than just the minimum. If you have credit card debt, paying just the minimum may cost you additional money. Paying the minimum may cover the interest only, which may be high for credit cards. You could spend years and thousands more than is necessary to pay it off, so increasing your payments may allow you to get rid of this debt faster.
Five factors determine your credit score: payment history, amount you owe, length of credit history, new credit and forms of credit.
Payment history. Although this is only one piece of your credit picture, it’s one of the most important. However, a good overall credit picture can outweigh one or two late payments.
Amounts owed. Owing money isn’t an automatic blot on your credit score. In fact, a healthy balance and timely payments can actually improve your credit score. However, if you’re using a high percentage of your available credit (which is called your credit utilization ratio or balance-to-limit ratio), it can indicate you’re overextended and a potential risk. Aim to keep your balances across all accounts below 30 percent of your available credit.
Length of credit history. A longer credit history generally will increase your scores, depending on how the rest of the credit report looks. Accounts paid as agreed remain on file for up to 10 years from the date of last activity.
New credit. Opening numerous accounts at one time can be detrimental to your score, especially if your credit history is short. That is because new accounts will lower your average account age.
Types of credit in use. Generally, your credit mix is more important if your credit report does
Source: myFICO.com.
The two most important factors on a credit report that make up the majority of your FICO score are your debt-to-available credit ratio, or credit utilization, and your payment history. So keeping your debt level low and making on-time payments help make you more attractive to lenders.the amounts you owe and your payment history.
A good general rule of thumb is your spending no more than one-third of your income on credit repayment—including mortgages, credit cards, and loans (e.g., car loans, student loans, and lines of credit) and track your spending to make sure that you’re staying within your budget. A budget outlines all of your income and your monthly expenses. This will help you map how much you have available to spend, and how much debt you can you can afford to take on and repay.
“If you don’t have the money to pay for an item now, you probably won’t have it after the credit-card bill arrives,” says Robin Holland, senior vice president for customer service operations at credit reporting agency Equifax. “We need to be wise about the use of credit. If you can’t pay for an item in a reasonable amount of time, you shouldn’t be charging it.”
Many people treat and think of a credit card as free money. Instead, you should think of a credit card as an unsecured personal loan from the bank that allows you to buy goods and services now and pay later. A wise consumer pays the balance in full each payment cycle and effectively uses the bank’s money interest free for about a month.
“Credit is a financial tool, debt is the financial problem.”
“Real wealth is not about money. Real wealth is: not having to go to meetings, not having to spend time with jerks, not being locked into status games, not feeling like you have to say ‘yes,’ not worrying about others claiming your time and energy. Real wealth is about freedom.” James Clear
Financial freedom is about taking ownership of your finances. You have a dependable cashflow that allows you to live the life you want. You aren’t worrying about how you’ll pay your bills or sudden expenses. And you aren’t burdened with a pile of debt.
Financial freedom and wealth can mean many things to many people. But a cornerstone of your personal financial freedom is your ability to financially support yourself and your family now and in the future. Thus, financial freedom has to be personal. So, dream big and get specific about your goals.
Consequently, money and accumulating wealth aren’t everything and they won’t make you happy and financially free on their own. Money is a tool that, depending on how we use it, can bring much joy to your lives or it can bring destruction, according to Jim Rohn. You need to be aware of all the possibilities it offers as well as the pitfalls.
Some of the most amazing things have been done because people had the financial resources to fund them—businesses have been built, schools started and philanthropic charities founded that have accomplished much good. On the other hand, friendships have been ruined, illicit gains profited and lives destroyed—all over money.
If you had the financial resources you needed to take control of and improve your life, how would you live your life? Reaching this kind of financial freedom is a respectable and admirable goal, but first you must understand what that really means to you.
What does financial freedom look like. According to Dave Ramsey, it can looks something like:
Freedom to choose a career or venture you love without worrying about money
Freedom to take an international trip or a bucket list vacation every year without it straining your budget
Freedom to purchase or pay cash for a new luxury sports utility vehicle or beach residence
Freedom to respond to the needs of others with outrageous generosity
Freedom to retire a whole decade early from a job and career that no longer provides enjoyment and reward
When you have financial freedom, you have options. You don’t have to wonder if your bank account can handle replacing your hot water heater or buying groceries for a someone who just lost her job.
Real financial freedom isn’t just about getting out of debt, doing what you want or reaching an specific amount. It is about the number of days you can survive without you earning income from your hours of labor, and still maintaining your standard of living. According to Forbes, the levels of financial freedom are:
Not Living Paycheck to Paycheck. The first level of financial freedom is building up an emergency …
Enough Money to Quit your Job (for a bit) Financial freedom is all about making work an option. …
Enough to be Financially Happy and still Save. This is a bit more about enjoying your life and having …
Freedom of Time. What many people desire is more flexibility with their schedules. Freedom of time …
Living below your means is a key step in financial freedom. Even some of the wealthiest people in the world started out by living below their means, that is, not having a new car, not having the biggest house or condo in the best neighborhood, and cooking at home a lot more than eating out. It’s a time-honored millionaire secret. Living below your means isn’t a permanent state; it’s intended to allow you to put more money aside into savings or into investments that will make you more money.
There are important actions that serve as building blocks for your financial freedom and economic well-being:
Understand Where You’re At–You can’t achieve financial freedom without knowing your starting point. Looking at how much debt you have, how much savings you have, and how much money you need is an important first step.
Look at Money Positively–You deserve to achieve financial freedom. And, money is simply a tool that helps you buy the things you need and live the life you want. To experience financial freedom, you have to accept money as a tool that helps you achieve your dreams, fuel your energy, and live a stress-free life you can enjoy.
Write Down Your Goals–To achieved financial freedom, it must be tied it to an emotional goal. Make sure your goal is tied to a specific number that you want to hit. Believe it or not, you’ll start working towards those goals without even realizing it. Knowing exactly what you want to achieve makes achieving financial freedom a million times easier.
Track Your Spending–An important step toward financial freedom is tracking your spending. You can use a tool like Mint, which will let you know how much money you’re spending, which categories you’ve overspent in, how much money is in all of your accounts, and how much debt you have.
Pay Yourself First–“Pay yourself first” means putting a specific amount of money in your savings account before paying anything else, such as bills. And the act of paying yourself first has helped countless people inch closer to achieving financial freedom. By paying yourself first, you guarantee that you’re always putting money aside to invest in yourself.
Spend Less and Save More–By spending less and saving more, two things work in your favor. One, you’ll have more money to put aside for your financial freedom. Two, you’ll learn that you actually need a lot less stuff to survive, which also helps you put aside more money.
Buy Experiences Not Things–Life’s short. It’s not about hoarding all your cash, you’re allowed to enjoy life while you’re alive. Ultimately, the things that’ll help you live a more fulfilled life will be the experiences you have, not the stuff you own. Life is made up of moments. The best ones come from quality time spent with friends and family. And, don’t spend money you don’t have to pretend that you have money.
Pay Off Debt–Paying off a debt lifts a massive weight off your shoulders. After paying off your debt, it will leave you with more money to save and invest. There are two main methods of paying off debt: snowball and avalanche. Snowball is when you pay off the smallest debt first. Avalanche is when you pay off the debt with the highest interest rate.
Create Additional Sources of Income–Some experts recommend having seven streams of income. If you have a 9 to 5 job, congratulations, you have one, only six more to go! Now, you can look at your sources of income in two ways: active income (trading time for money) or passive income (money that can keep coming in, even while you sleep). If you only trade your time for money, you’re limited by the hours of the day. And remember: you don’t need to start with seven streams, you can build up to it over time.
Invest in Your Future–The last financial freedom tip is an important one. What if the unexpected happens? Will you be prepared for it? It’s important to set aside money for rainy days, retirement, and to help ensure your family doesn’t drown paying for your debts, and taxes if you die. Save money for an emergency fund. The emergency fund is only for unplanned emergencies like a tree crashing onto your house, a car accident you need to pay for out of pocket, or a visit to the hospital. By setting aside money for rainy days and retirement, you’ll be less likely to end up back to where you are now: wishing for financial freedom.
There is freedom in not having to worry about paying your bills, taking care of your family or planning for unexpected expenses. But most Americans don’t have an unlimited supply of money. That doesn’t mean you can’t enjoy financial freedom–you just need to plan and think carefully about how best to use, grow and safeguard the wealth you have.
Good financial practices and habits can be learned, and small regular steps can move you along your path to financial freedom. The good news is that every step you take can help build long-term wealth for you and your family.
According to federal government website “mymoney.gov”, making the most of your money starts with five building blocks for managing and growing your money. The “MyMoney Five” are:
Earn – Make the most of what you earn by understanding your pay and benefits.
Save and Invest – It’s never too early to start saving for future goals such as a house or retirement, and even small amounts can add up.
Protect – Take precautions about your financial situation, accumulate emergency savings, and make sure you have the right insurance.
Spend – Be sure you are getting a good value, especially with big purchases, by shopping around and comparing prices and products.
Borrow – Borrowing money can enable some essential purchases and help build credit, but interest costs can be expensive. Remember that if you borrow too much, you will have a large debt to repay.
It is important to ensure your own financial freedom. So, it is up to you to take charge of and responsibility for ensuring your financial freedom. Financial freedom can help you take ownership of your finances and, more importantly, your life. It’s about living within your means, being a bit frugal, and making sure that money is spent on things you really need like food, shelter, and even vacations (relaxation is important too, you know). By following the financial freedom tips, you’ll inch closer to achieving the financial freedom you deserve.
6 Steps to Financial Freedom
1. Start early🗓️ 2. Focus on growing your Income💰 3. Save as much as possible 4. Manage your expenses💸 5. Don't fall into debt😣 6. Invest, invest invest📈
No matter how young 🧒 or old 🧓🏻 this will put you on the path to financial freedom 🙌
Finance and investing are guided by people’s behaviors. Morgan Housel, author of The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
Talking about money is one of the most important skills to being a fiscally responsible and literate person. However, 44% of Americans surveyed would rather discuss death, religion or politics than talk about personal finance with a loved one.
Why? Two major reasons are embarrassment and fear of conflict, even though the consequences can be grave: 50% of first marriages end in divorce, and financial conflict is often a key contributor. Additionally, in our society it is considered rude to discuss money and wealth.
The reason so few people build wealth is because they fail to adopt smart financial habits that lead to wealth, according to Morgan Housel, author of The Psychology of Money. The smart financial habit formula for how to build wealth is to take action with enough consistency to achieve the goal. The formula is:
The distinguishing characteristic of people who achieve wealth is that they manage their money well and they have good money habits. The people who build wealth don’t necessarily earn the most. They aren’t the smartest. They don’t have any special training. They just have good money habits.
Daily habits are important because:
A daily habit of frugality saves small amounts every day that compound and grow over long periods of time to become substantial wealth.
“Doing well with money has a little to do with how smart you are and a lot to do with how you behave.”
“You can build wealth without a high income, but have no chance of building wealth without a high savings rate.”
“Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.” This soft skill and behavior are called the Psychology of Money.
“Physics isn’t controversial. It’s guided by laws. Finance is different. It’s guided by people’s behaviors.“
“There is a saying that an injustice to one is an injustice to all. No one is truly equal and free until everyone is equal and free. When a society allows anyone to be treated as less than equal and therefore less than fully human, we not only rob those people of their full humanity, we also become complicit in their mistreatment. Sometimes people think they can look the other way as long as ‘their group’ isn’t harmed. But that is an illusion because we are all connected by our humanity, and as history has proven over and over again, harsh and autocratic power will inevitably spread like cancer to maintain itself…”
As an investor, your general investing objectives are to grow your money and invest for the long-term.
Investing can seem challenging since there’s an overwhelming amount of investing information, choice of investment accounts, and strategies out there. Plus, the markets fluctuate and are volatile, and the idea of potentially losing money can create stress, fear and uncertainty.
The lesson for the investor: The fears you feel when you think about starting investing or during periods of market volatility are very similar to those many seasoned feel after decades of investing. The doubts. Negative thoughts. The fear and uncertainty that lead us to think about giving up. The encouragement you get from focusing on the future and your long-term goals. And the satisfaction of crossing goals of financial freedom that you thought were all but impossible.
Investing in stocks is an excellent way to grow wealth. For long-term investors, stocks are a good investment even during periods of market volatility — a stock market downturn simply means that many stocks are on sale. And for long-term investors, time tends to reward their behavior, though research has shown that it is as difficult to practice as it is uncommon.
Most investors never hold stocks long enough to benefit from the fact that the market rises over the long-term. Investors typically buy too late and sell too early. They routinely “greed in” and “panic out” of stocks. They hold stocks for just a few years — or worse, a few months — rather than carefully curating and diversifying a portfolio of stocks for the long-term, typically over decades.
By learning more about the process of investing in stocks, understanding the financial markets, and knowing what securities you are investing in— you can gain more confidence and understanding that you are on the right path, according to SoFi.
Investing your hard earned money
Historically, the return on stock investments has outpaced other asset classes like bonds and real estate, making them a powerful tool for those looking to grow their wealth over the long-term.
The average interest rate on a savings account at the top five U.S. banks this year was 0.08%, while the average return on the S&P 500 from 1950 through 2009 was 7%. So, what does this mean for your money? If you had $10,000 today and put it in a savings account with an interest rate of 1% (some banks have rates this high), you would have $11,046 in 10 years. If instead you took that money and invested it, earning an average annual return of 7% and compounding annually, you would have $19,672 in that same time period!
Next year is a fresh slate—we all get a “do over,” and this time we think we can all do better. What’s your financial goal for #2021? Share the emoji version of your goal in the comments. pic.twitter.com/d0LIFwNtfi
Everyone should have these two, what SoFi calls “bookend goals”, as their primary short-term and primary long-term goals:
Create an emergency fund and
Save for retirement
Getting started investing is simple.
Investing in stocks will allow your money to grow and outpace inflation over the long-term.
Investing is not just for the wealthy; it’s for anyone who wants to achieve their financial goals and achieve financial security. And your focus should be on the opportunities and rewards of achieving financial goals.
It’s important to understand your goals. Selecting an investment strategy depends on your goal amount (how much you want to save) and the time horizon (when you’d like to use that money).
Before you invest, you should make a list of all of your accounts (bank, investments, retirement, credit cards, other debt) and their interest rates. Know and calculate your personal net worth. And, know your cash flow. How much do you make after taxes? How much do you spend?
First goal: Emergency Fund
Your emergency fund is a cash account that you can easily access should an emergency arise—for example, if you face an unexpected health cost. This fund should be 6 -12 times the amount you spend monthly, depending on how risk-averse you are.
For example, if you’re unable to work, you may be comfortable with having three months saved. You want to keep your emergency fund money “liquid,” or available to access as soon as you need it. With that said, many savings accounts only pay you 0.01% interest on cash balances. This doesn’t keep pace with inflation, so you’re essentially losing money. Instead, you might consider opting for a high-yield savings account that earns 1% interest or more.
Ultimate goal: Retirement
Retirement should be your highest priority and your largest financial goal. Even if it feels very far away, it’s important to start saving early, diligently and purposely. You may share the same priority and retirement goals as many retirees, such as:
Essential Living Expenses
Reserves in an emergency fund to cover unexpected expenses
The stuff that brings joy, emotional well-being, and provides purpose like vacations and spending time with others
Leaving a legacy for your family, a charity, or something else
Remaining financially independent and understanding ways to ensure there is enough money to last a lifetime is of great importance to retirees.
Let’s say you and your partner will need $6,000 per month in retirement income (in today’s dollars). If you start saving at 40, you would need to save $46,000 per year to be on track for retirement at 67. However, if you start saving at 30, you need to save $32,000 per year. (Note: This assumes you’ll both receive Social Security.) This illustrates the importance of starting early and giving your money time to work for you.
Need to catch up? It’s never too late! You may need to save more or be more aggressive, but the most important step is to start saving (and investing) as soon as possible.
Investing should be for long-term goals
If you’re investing for a far-off goal, like retirement, you should be invested primarily in stocks or stock mutual funds and ETFs.
This is an important lesson for the investor: When you think about investing, you usually feel that you know exactly what you are looking for. In your mind, you have defined the plan that will lead to success and you begin to execute it hoping to be able to fulfill it to the letter. The truth is, it rarely happens. The path of the investor is full of surprises, of unintended consequences that you did not appreciate, of outcomes that you did not expect to face. Let yourself be surprised by them, live them and just like the best investors do, dare to take the first step that could take you to achieve financial freedom in retirement.
To start investing for retirement, most financial experts and institutions advise you to invest in an employer-sponsored tax deferred retirement plans. There are several investing options for longer-term goals like retirement and college, according to Navy Federal Credit Union. Here are a few you may consider:
As part of your employee benefits package, you may be offered a retirement plan such as a 401(k), 403(b), or 457 plan, Thrift Savings Plan (TSP), or pension. Your contributions to an employee-sponsored plan aren’t taxed until they’re withdrawn in retirement, and your contributions may even be partially matched by your employer.
Individual retirement accounts (IRAs): IRAs can operate standalone or in addition to an employer-sponsored plan. Depending on the type of IRA you have, you’ll either pay taxes when you contribute (as with a Roth IRA) or when you withdraw (as with a traditional IRA). A Roth retirement account that allows individuals to pay taxes on contributions to the plan at the time they are made, but when funds are withdrawn during retirement, they are tax-free.
529 college savings plans: 529 plans allow you to make large contributions, some with limits beyond $300,000, with withdrawals used for qualified K-12 and college expenses free from federal income taxes. These plans are a great way to save no matter your level of income or timeline for your or your child’s academic career.
Coverdell education savings accountA trust account designed to help fund educational expenses for individuals under age 18. The maximum yearly contribution is $2,000.
(ESA): ESAs let you save for school with a greater variety of investment options than 529 plans. If your gross income is under $110,000 (or $220,000 on a joint return), you can set aside up to $2,000 a year for college or K-12 expenses.
Brokerage accounts: Brokerage accounts allow you to purchase and sell investments, including stocks, bonds and mutual funds, through a brokerage firm. These investments aren’t insured and are subject to taxation, but you may be able to earn more in returns than with other savings vehicles, and you can use the money for any purpose, such as for retirement.
And, do not be too conservative or risk adverse with your investments. The most successful investors have done little more than stick with stock market basics. That generally means using a low cost S&P 500 index fund for the majority of your portfolio and choosing individual stocks only if you believe in the company’s potential for long-term growth.
Your Tolerance for Risk
“Practice patience in stock investing and give your investments a chance to grow into mighty oaks.”
Learning to invest means learning to weigh potential returns against risk, according to TD Ameritrade. Basically, no investment is absolutely safe, and there’s also no guarantee that an investment will work out in your favor.
Furthermore, the risk of losing money can be daunting and upsetting to typical retail investors. This is why it’s important for you to know your risk tolerance level. When it comes to your choice of assets, it’s important to understand that some securities are riskier than others. This holds true for both equity and debt securities (i.e., “stocks and bonds”).
Consequently, the best thing to do after you start investing in stocks, ETFs or mutual funds may be the hardest: Don’t look at them. It’s good to avoid the habit of compulsively checking how your stocks are doing several times a day, every day. Instead, stay focused on your values and long-term goals. and periodically check your investments.
Additionally, the toughest thing in stock investing is to do nothing. That’s right, nothing! Once you buy a stock and watch it move up, down and all around for a few weeks, there is an urge to take action.
Most investors lack patience, which is a shame, because almost every successful investor you’ll ever meet or read about has an abundance of patience. You should wait for the right time to buy. And, being patient means you are the best prepared when opportunities emerge.
Many times, the stocks you purchase don’t move much in price for many weeks after your initial purchase. But if you have the patience to stick with those stocks, a few can turn out to be huge winners. And in the end, those big winners are what make all the difference.
“The two greatest obstacles to accumulating wealth are debt (spending more than you earn) and taxes. By reducing your tax obligations and staying out of debt, you will be able to accelerate your journey to financial security.”
Taxes represent a major reduction in your income, which means you will have less money available to save, invest, and pay off debt. The myriad of taxes imposed by federal, state and local governments stand as the greatest obstacles of accumulating personal wealth. As a result, understanding how taxes impact your ability to build wealth and implementing strategies through financial planning to minimize your tax burden are essential actions.
In fact, when every tax is tallied – federal, state and local income tax (corporate and individual); property tax; Social Security tax; sales tax; excise tax; and others – Americans spend at least 29.2 percent or often much more (over sixty percent in some municipal jurisdictions) of their annual income in taxes and fees each year.
There are many different kinds of taxes, most of which fall into a few basic categories: taxes on income, taxes on property, and taxes on goods and services. There are strategies that can help you reduce the amount you pay each year, depending on your particular financial situation.
Taxes are one of life’s certainties. Tax planning and strategies are a few of the top ways retirees can boost their cash flow and portfolio returns in retirement.
Income from salary is subject to significant federal and state income taxes, thus, as your income increases, income taxes become greater as well. The United States federal government levies tax on its citizens and residents on their worldwide income. Non-resident aliens are taxed on their US-source income and income effectively connected with a US trade or business (with certain exceptions). For individuals, the top income tax rate for 2021 is 37%, except for long-term capital gains and qualified dividends (discussed below).
Surprisingly, U.S. taxpayers enjoy relatively low tax rates compared to other Developed Countries. It might seem like the U.S. Treasury takes a large chunk of your gross income every time you file a tax return, but the U.S. is actually on the lower end of the scale compared to other developed countries.
According to a 2020 analysis from the Organisation for Economic Co-operation and Development (OECD), U.S. tax revenues are 24.5% of its gross domestic product (GDP). That’s well below the average of 33.8% for the other 35 OECD-member countries.
Most states, and a number of municipal authorities, impose income taxes on individuals working or residing within their jurisdictions. Most of the 50 states impose some personal income tax, with the exception of seven: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, which have no state income tax. New Hampshire and Tennessee (until 1 January 2021) tax only dividend and interest income. Several states impose an income tax at rates that exceed 10%.
Tax obligations are a big consideration in many financial decisions, including retirement accounts, tax-advantaged investments like municipal bonds, and renting versus buying a house. These financial decisions are so important that knowing basic tax information is critical.
Income tax system
As with any progressive income tax system, U.S. taxpayers with higher incomes pay higher income tax rates. The result: half of U.S. taxpayers pay 97 percent of all income taxes.
The top 1 percent of earners alone pay over one-third of Federal income taxes.
Income taxes are only part of the story. Payroll taxes, sales taxes, and excise taxes are all regressive, meaning lower-income individuals contribute a greater share of their total income towards these taxes than do higher-income individuals. Yet, it turns out the U.S. federal tax system remains very progressive. Meaning, Americans with the highest incomes pay the largest share of all federal taxes.
Your long-term investing strategy could be impacted in a big way by taxes, so you may want to figure out the best strategies for investing to help maximize your gain and minimize your tax burden.
Smart tax investing
Making smart tax decisions can have a big impact on the amount of money you can have and spend in retirement.
Investing and withdrawing retirement funds in a tax-efficient way is among the top ways retirees can boost their returns and cash flow in retirement, according to an analysis published by researchers at Morningstar.
The best kind of long-range financial planning , which includes tax avoidance strategies, can help you today, according to Fideltiy Investments, possibly helps you out much more in the future, and leaves you in a better position than if you hadn’t planned at all.
Taxes are something every American pays, pays and pays at some point in their lives – they’re inevitable. Taxes represent and significant levy on your ability to accumulate wealth and take advantage of the miracle of compound interest.
Total effective tax rate
The working and middle class pay a higher tax rates than the richest people in America. For the working classes in America, tax rates increased steadily over the last several decades, according to Emmanuel Saez and Gabriel Zucman, economists at the University of California, Berkeley. The working and middle classes — the 50 to 90 percent of Americans with the lowest incomes — pay higher tax rates than billionaires.
When one considers all the taxes that Americans pay, such as state and local taxes, which account for a third of all taxes paid by Americans and are in general highly regressive, the total effective tax rate, which is the total amount of taxes paid as a percentage of income, the working and middle class pay an high percentage of their earned income in taxes than the wealthy.
While tax rates for 99% of taxpayers are progressive, the tax rates for increased levels of income in the top 1% actually decline, according to figures compiled from IRS.
The effective rate for the top 1% is 22.83%, while the rates for the top 0.1%, 0.01%, and 0.001% fall to 21.67%, 19.53%, and 17.60%, respectively. In other words, a household earning $250,000 (the 1% threshold) pays a higher rate than a household earning more than $30 million per year (0.01% threshold).
The Regressive American Tax System
How combined federal, state and local taxes fall on American adults, by income percentile. Three regressive taxes, consumption, payroll and residential property, account for most of the burden on the working and middle classes :
Source: NYT
When all taxes paid to the federal, state and local governments: the federal income tax, of course, but also state income taxes, myriad sales and excise taxes, the corporate income tax, business and residential property taxes and payroll taxes. In the end, all taxes are paid by people. The corporate tax, for example, is paid by shareholders, because it reduces the amount of profit they can receive in dividends or reinvest in their companies.
Here is a non-complete list of the different taxes and fees levied by federal, state, and local governments that Americans pay.
Income Taxes (federal, state and local – An income tax is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. tax system is known as a “progressive” system because it uses marginal tax rates instead of a single tax rate. The more you earn, the more of a percentage you’ll pay on your top dollars. Individual income taxes are the largest source of tax revenue in the U.S. You do not want to make financial moves just because you think a tax change is coming, but instead you should do so because it helps you toward your overall goals. Before making a decision, always consult with a tax advisor.
Capital Gain Taxes – In the United States, a tax is levied on all income generated from a taxpayer’s capital gains, which are profits from the sale of an asset that was purchased at a lower price. The most common capital gains are created from the sale of stocks, bonds, and property. You may be tempted to realize long term gains on highly appreciated stock you want to hold for the long term, and then buy it back later at a higher cost basis. Don’t let the tax tail wag the investment dog,” says David Peterson. “You should be buying and selling based on your view of the long-term value of the assets, not based on the tax consequences.”
Social Security – All taxes levied by the government to plan for a taxpayer’s retirement could be considered retirement taxes. In the United States, we pay into a social security system that provides income to retired workers from the general fund. Our tax is regressive as we all pay the same rate up to a specific cap. Then all income above the cap is not taxed.
Sales Taxes – Consumption taxes, also known as sales taxes, are levied at the point of purchase for specific goods and services. It is usually a percentage determined by the levels of government charging the tax. Due to individual state and local taxes, the exact rate you pay will vary widely by location.
Real Estate / Property Taxes – Property taxes are imposed on property by reason of its ownership. They are usually paid on real estate, but can also be paid on personal property, such as boats, automobiles, recreational vehicles, and other business inventories. It is based upon a jurisdiction’s assessment of the worth of a property based on its condition, location and market value, and/or changes to the amounts apportioned to various recipients of the tax.
Estate Taxes – The inheritance tax, also known the “death tax”, is a tax that arises from the death of a taxpayer and is imposed on the transfer of property upon the death of the owner. It was created to prevent the perpetuation of tax-free wealth within the country’s most affluent families. Once you give money away or fund an irrevocable trust, you can’t control it, so be sure that it’s what you desire. You want to stress test your plan to make sure you have the assets and income you need for your own retirement. With all financial planning, it’s important to make sure to think and plan for the long term. It can help to consult with a financial planner and a tax professional for support in assessing your own future needs and setting the right course, even if taxes do rise.
Business Taxes – Also known as corporate taxes, business taxes are direct taxes levied on the profits of businesses. However, expenses that are deemed necessary to the business can often be deducted to lower the amount of profits subject to tax, some business opt for the eis scheme option that helps them raise capital in a faster way.
Payroll Taxes – The U.S. government mandates that employers subtract payroll taxes from their workers’ paychecks each pay period, and then match the sums deducted. These payments are called FICA taxes because they are authorized by the Federal Insurance Contribution Act. Total FICA taxes on individual workers are 7.65 percent of income; 6.2 percent goes to fund the nation’s Social Security system, while 1.45 percent goes to Medicare. Self-employed individuals are liable for the entire 15.3 percent, although one half of that amount can be taken as an above-the-line business deduction on a person’s income tax return.
Excise Taxes – Any tax that is based on the value of the product being taxed is considered an excise tax. They are based on the quantity of the product. Common examples include those levied on alcohol, gasoline, and cigarettes.
Gift Taxes – A gift tax is a one that is levied on the transfer of a property by one taxpayer to another while receiving either nothing or something with a less than equal value in return. Selling something at less than its full value, or making an interest-free or reduced interest loan, may qualify as giving a gift.
Tariffs – An import or export tariff is paid when someone moves any good through a political border. Typically, it is used to “encourage” local businesses and “discourage” the purchase of foreign goods, as it increases the price for the foreign goods.
Highway and Bridge Tolls – Tolls are charged to drivers who cross through designated bridges, tunnels, and even some roads. They’re usually always paid in fixed amounts each time you drive pass through the restricted area. Tolls are frequently used to fund state projects, but can also be used for privately funded projects.
User Fees – They are taxes that are assessed by federal, state, and local governments on a wide variety of services, including airline tickets, rental cars, utilities, hotel rooms, licenses, financial transactions, business licenses, building permits and many others. Depending upon where someone lives, a cellphone, for example, may have as many as six separate user taxes, running up the monthly bill by as much as 20 percent.
Community Development District – Self-imposed assessments and fees by developers for the financing and management of new residential communities.
Tax avoidance strategies
Investors can maximize their tax savings by holding certain investments and funds in the appropriate type of account. This is called “asset location,” which boosts an investor’s after-tax rate of return.
For example, investors should generally consider holding stocks and stock funds in taxable accounts. These investments are more “tax-efficient” — meaning most of their return is from capital gains taxed at a rate that’s less than ordinary income.
Investors should generally hold dividend stocks, bonds and bond funds in retirement accounts. These investments are less tax-efficient, since most of their returns are dividends taxed as ordinary income.
Sequencing withdrawals
Sequencing withdrawals efficiently from different piles of savings can lead to a lower tax bill in the long run.
The prevailing wisdom is to pull money from taxable accounts first. Then, retirees can draw down tax-deferred 401(k) accounts and IRAs. Roth accounts should generally be tapped last.
“That’s a pretty good rule for the vast majority of people out there,” Blanchett said.
Taxes are secondary consideration to net return
Taxes are an important component of many decisions, but don’t let it get in the way of focusing on the take home return. It is financially better to get a 10% return and pay 20% in taxes for a net 8% return than to simply get a 7% tax-free return.
However, there are instances in which investors (and their advisors) can be more strategic. It requires paying attention to the marginal income tax rates.
At some point, you’ll have to pay taxes on gains you earn in the stock market. If you plan to sell anything that year and realize gains, a bad market day can provide a nice opportunity to reduce your tax bill. If you have investments you plan to shed anyway, sell them on down days to realize the loss. Then at tax time, those losses can be used to balance out your investment gains and lower the bill you’ll have to pay to Uncle Sam.
In investing, where you put your investments—meaning the type of account you choose—can make a major difference in how much you can earn, after tax, over time. That’s because different investments are subject to different tax rules, and different types of accounts have different tax treatment. Sorting your investments into different accounts—a strategy often called active asset location—has the potential to help lower your overall tax bill.
3 main types of investing accounts
Many investors have several different types of accounts that can be aligned with specific investing goals. Some are subject to taxes every year, while others have tax advantages. Here are the 3 main investment account categories:
Taxable accounts such as traditional brokerage accounts hold securities (stocks, bonds, mutual funds, ETFs) that are taxed when you earn dividends or interest, or you realize capital gains by selling investments that went up in value.
Tax-deferred accounts like traditional 401(k)s, 403(b)s and IRAs allow payment of taxes to be delayed until money is withdrawn, when it is taxed as ordinary income.
Tax-exempt accounts like Roth IRAs, Roth 401(k)s, and Roth 403(b)s require income taxes to be paid on all contributions up front, but then allow the investor to avoid further taxation (as long as the rules are followed). Fully tax-exempt accounts such as health savings accounts (HSAs), allow you to make pretax or deductible contributions, earnings, or withdrawals, if used for qualified health expenses.
Ideally you will first maximize your tax-deferred options such as your 401k and IRA first, since these investments can grow tax free from capital gains and dividends. Once you maximize these, continue investing in your brokerage account or real estate. Simply put, there is no tax on wealth. The more you invest, the more you will reduce your tax bill to your net worth.
While many things can drain your net worth, the most insidious are debt and taxes. By reducing both, you will be able to achieve financial freedom far faster.
By using strategies that reduce income taxes, you’ll be able to keep more of your income, rather than turning it over to the tax authorities. One method is to invest as much of your cash as possible which minimizes your taxes to your net worth.
The easiest and best way to shield your income from taxes is retirement plans. Instead of surrendering, tax advisors recommend implementing proven tax strategies to reduce the burden. Maximize your after tax deductions such as your 401k and IRA, and then invest the rest in stocks, ETFs, and real estate.
You must protect your wealth from destructive forces, such as debt, taxes and inflation, which all can erode wealth. Add to these another wealth destroyer: overspending.
Americans are drowning in debt. Before COVID-19, Americans were merely treading water in dangerous seas. But once the economy turned ugly, jobs went away and nest eggs cracked, those with the most debt, sunk, according to the Bill “No Pay” Fay the founder of Debt.org. Many people were forced into insolvency or foreclosure, unable to pay their obligations or provide for their families.
Today, debt is almost a fact of life for most Americans. When you owe money to someone, you are in debt. Owing money is not always bad. Debt allows you to buy homes and cars, send our kids to college, and have things in the present that we can pay for in the future and nearly everyone has at least one credit card. Indeed, capitalism essentially was built on the extension of credit and the ensuing debt it creates. But credit’s convenience can easily lead to spending more than you earn or budget. And, debt becomes bad and financial bondage when you owe money you cannot pay back.
Debt is rampant
“Most American’s spending habits are based on the amount of available credit they have, not on their cash flow (income) or checking account balance”
According to the New York Federal Reserve, consumer debt was approaching $14-trillion in the second quarter of 2019. This includes mortgages ($9.14-trillion), auto loans ($1.65-trillion), student loans ($1.44-trillion), and credit card loans ($829-billion). It was the 24th consecutive quarter for an increase.
Living without debt these days is next to impossible. Debt falls into two categories: good debt and bad debt. It’s good to know that all debt (or money owed) isn’t created equal, and it’s even better to know the difference, according to Navy Federal Credit Union. Before buying anything on credit, it’s a good idea to determine whether you’re accruing good debt or bad debt.
Good Debt:
Good debts are those that create value and can be seen as an investment. Think mortgages, loans for college education or business loans. School loans and mortgages often have lower interest rates than other kinds of debt. Student loans can increase your ability to command a larger income. An ideal situation in a home loan is that the property increases in value over the course of the loan term, an increase that could offset the interest paid on your loan.
Bad Debt:
Bad debt comes into play when you purchase items that quickly decrease in value and don’t generate income. Bad debt often carries a high interest rate—think store credit cards and payday loans or cash advance loans. The rule of thumb for avoiding bad debt is: If you can’t afford it, don’t buy it. Every month that you make a partial payment on a high-interest loan, that item loses value while the price you paid for it increases.
When it comes to your credit history, well-managed debt can actually help improve your credit score. When purchasing on credit, know what you’re getting into and take on only as much debt as you can afford to pay off.
For many, using credit is a normal part of handling their finances. For others, using credit can lead to uncontrolled spending, anxiety, and even bankruptcy. It’s important to recognize your own spending and savings habits so you remain in control.
Knowing when and where not to use credit –and what type of credit to use –can help you avoid getting in over your head. Borrowing for higher education is probably a good idea as it should result in a higher earned income later. Charging extravagant vacations, and for expensive dinners and gifts that you really can’t afford is not a good idea.
Installment credit and credit cards
“Your biggest enemies are your bills. The more you owe, the more you stress. The more you stress over bills, the more difficult it is to focus on your goals. More importantly, if you set your monthly income requirements too high, you eliminate a significant number of opportunities.” Mark Cuban
There are two major types of household debt: installment and revolving credit.
Installment debt is paid off in a specified period of time with predetermined periodic payments. Conventional mortgages are the best example.
Revolving credit is a line of credit that is instantly available, usually through credit cards. As you pay down your debt in a revolving line of credit, the minimum payment is also reduced, which can extend your payoff period and the interest you pay.
Installment debt is excellent for big-ticket purchases like a home mortgage and should be accounted for in your monthly budget. Compared with credit cards, interest rates for installment debt are usually relatively low.
According to statistics collected by the Federal Reserve and other government data, credit card debt is the third highest source of household debt behind mortgages and student loans, with an average owed of $15,863.
The modern-day credit card — which entered the culture in the late 1950s — has meant far greater buying power for U.S. consumers, but also financial disaster for many individuals and families.
Consider these statistics about credit cards in America :
More than 189 million Americans have credit cards.
The average credit card holder has at least four cards.
Credit cards are a convenient way to buy virtually anything at any time, but you need to use them intelligently and be aware of the interest costs. And, you might not realize it, but every time you use your credit card, you’re essentially taking out a loan. The purchases you put on your card are bought with your line of credit, and you’re responsible for paying your credit card company back for whatever you buy. When used responsibly, a credit card can be a great tool for building credit history; used incorrectly, it can lead to debt.
Credit cards can offer the temptation to overspend, but you can curb that urge by using these tips to be smart about your spending:
Budget. Budget. Budget. Keep track of your finances with an up-to-date budget that accurately reflects your income and output. Knowing your finances is a huge step in knowing how much you can afford.
Borrow only as much as you repay. A good rule of thumb is to not tie up more than one-third of your income in debt, including mortgage, credit cards and installment loans. Borrow only as much as you can pay back in a reasonable time, while staying on top of the daily necessities.
Pay bills in full and on time. Don’t overextend your funds. Be mindful of when your credit card bills are due and make a concerted effort to pay them off in full each month.
Check your credit report regularly. By keeping an eye on your credit report, you can monitor your status and whether there are mistakes that could negatively affect your score. You can check your credit report for free on an annual basis at
Remember that you have to pay back every charge you make. In a nutshell – don’t charge things you can’t afford. Try to pay your entire balance each month to avoid finance charges and be sure to make the payments on time to avoid late payment fees.
Credit is a powerful tool. It’s convenient and especially useful in emergencies. But it’s also easy to let it get out of hand. Why should you be concerned? https://t.co/dnUBxv0Cyd
Assessing your financial situation helps you to manage your debt efficiently. And with respect to wealth destroyers — taxes, inflation debt and overspending — the last two can have the most destructive effect on your wealth if not kept in check. They are the forces over which you can manage and have the most control.
Keeping Debt Manageable
Compounding interest can be a powerful tool to have in your arsenal. It can be very beneficial in accumulating wealth and in creating large sums of money over time if wielded correctly. But unfortunately, debt has a best friend forever (BFF) and it is the darker side to compounding interest – compounding debt.
When you get into debt, it’s you that incurs interest on what you owe. And if you don’t have a solid repayment plan, that can easily spiral out of control. If you’re stuck in the vicious circle of compounding debt, it’s important to quickly get out as fast as you can. The less you owe the less interest you incur so pay as much as you can as often as you can.
The simplest way to maintain a manageable amount of debt is to ensure you never owe more than you can pay, but simple isn’t always easy. Follow these tips from Navy Federal Credit Union to better manage your debt:
Know how much you owe. Make a list of all of your debts. Include the debt total, monthly payment, interest rate and due date. Track your progress by updating the list regularly as you make payments. As the old adage goes, you can’t manage what you don’t measure.
Pay your bills on time each month. Set up automatic payments so you don’t miss payments and incur late fees. Determine which bills are due first and pay them in order. Pay more than the minimum on each bill if you’re able. Paying the minimum on high-interest debt usually doesn’t help you make real progress, but if that is all you can pay, it does keep debt from growing.
Pay off the high-interest debts first. High-interest debt costs you the most, so you’ll want to immediately wipe it out. The faster you pay these debts off, the less interest you’ll pay. The thinking behind this solution is that if you let the debt with the highest interest rate sit for a long time, it will cost you a bundle in interest payments so attack it immediately. Waiting to pay off high-interest debt likely will cost you thousands of dollars and increase the amount of time you spend in debt.
Start an emergency fund. That way, should an unexpected expense come up, you won’t have to add to your debt to pay it.
Eliminate Your Debt Before You Invest
“If you’ve got $25,000, $50,000, $100,000, you’re better off paying off any debt you have because that’s a guaranteed return.” Mark Cuban
Bottomline about paying off debt is that you must be committed to the process. It’s likely you didn’t incur the debt overnight and it’s even more likely you won’t get out of debt overnight. A study published in the Journal of Marketing Research says that the act of closing accounts after they’re paid off, regardless of size, is a better predictor of whether you’ll get out of debt in the long run.
“Credit is a financial tool, debt is a financial problem.”
As aspects of our lives continue to move to digital spaces, it’s more important than ever to make sure you are taking the right steps to protect yourself. No matter the type of online account, your first line of defense is often your login password.
