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How to Fix your Credit Score

Personal Finance

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You just noticed that your credit score is not what you like. You’re not alone in this, as many Americans don’t have the credit score they desire. Improving your credit score will take time, so the faster you create a plan and address the issue, the faster your score will increase.

There are multiples ways to increase your score, but there is no faster way than paying your bills on time.

Checking Your Credit Score

To get the best understanding of your credit score, you need to check your credit report. Looking at your credit report will allow you to understand your situation and what lenders are looking at. Additionally, a lot of credit cards will now offer you free monthly reports. Chase’s credit journey is an example of this and allows you to monitor your credit score.

There are three credit reporting agencies you can get your report at, Equifax, Experian, and TransUnion. Only hard inquiries will affect your credit score. When you do a soft inquiry, such as checking your own score, this won’t affect your credit score.

Payment History

Your payment history is the most important metric in computing your credit score. When you are late or miss a payment, this will reduce your score. This negative information will remain on your credit report for up to 7 to 10 years.

Additionally, your score will take into account the size and your most recent debt. The bigger your debt and the more recent you’ve missed payments, then your score will be negatively impacted. It’s important that you bring your accounts up to the current balance and continue to pay on time going forward for positives impacts on your score.

Utilization Rate

The next factor that will impact your score in your credit utilization rate. Your utilization rate is the sum of all your outstanding debt divided by your total available credit limits. Higher credit utilization can negatively impact your score. Maxing out one credit card will hurt your credit score, but maxing out all your credit cards is much worse. The rule of thumb is to keep your credit utilization below 30%.

Number of Credit Cards

Your credit score also considers how many different accounts you have and how much is owed. If you have debt on a lot of your cards or some that are maxed out, it is beneficial to pay off some of the accounts. Once your balance is paid off, you should think about keeping the card open. Having a paid-off account will be positive since your utilization rate will decrease and the account will be in good standing.

Opening New Accounts

Opening new credit cards over a short period of time will negatively impact your score. Some issuers have a 5/24 rule. This rule means that you can’t be approved for a new credit card if you have opened five or more personal credit cards in the last 24 months. Before you take our a loan or open the new account, consider how this will affect your score. The more recent the inquiry on your credit, the greater the impact on your credit score.

Even though negative information will remain on your credit report for 7 – 10 years, don’t let this deter you from improving your credit score. The best thing you can do is to show good credit management going forward. As you pay bills on time, lower your balances and utilization, your credit score will improve.

Retire Early

Retire

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Early retirement does not mean to stop working forever, it just means you don’t have to work for money anymore because your investments cover your spending. Even though people are “retired” they are still doing things that are considered working. This work is a passion they’ve always had such as creating their own company (or growing it), writing books/blogs, etc. Maximizing how much money you’re making, how much money you are spending, and how much you are saving will affect when you can retire early.

Early Retirement Rule

To retire comfortably, you will need 25x – 30x of your annual expenses in retirement. To figure this out, you will need to create a mock retirement budget. Your budget is how much you think you will need to live on every month.

Once you’ve figured out your monthly budget, you will then need to compare it to what you currently have saved. This could be a big gap, but there’s no need to worry. As long as you are comfortable altering your current expenses or making adjustments to your retirement date, you can make it there in no time.

Ways to Increase Your Retirement Savings

Cut back on expenses

Cutting back on expenses is always the first place to look. This could be a wide variety of things from paying off debt early, bringing your lunch to work, downgrading your car to a basic model, etc.
If you just paid off your student loans or car payments, you could put these monthly payments into your retirement fund. You have been in the habit of paying them monthly, so you could continue the trend and put them in your retirement fund. You could also downgrade your car. I have never been once to splurge on a luxury car or top of the line car. A car is one of the few purchases that will lose value over its lifetime. As long as the car can get you to point A to point B and doesn’t require a lot of maintenance/repairs, then this can save you a lot of money on the monthly car and insurance payments.

Diversify your income.

Having additional income can help you achieve a certain financial goal or reduce your financial stress. This can be range from becoming a mystery shopper, completing surveys online (Etsy or eBay), becoming an Uber or Doordash driver, renting out a room in your house, etc. Generating multiple streams of income is the foundation of setting yourself up for financial freedom. While creating the extra income will take time, the payoff can be huge and will set the foundation blocks for excellent money management. Idea’s for multiple income streams.

Set monthly and annual savings goals.

With your goals, make sure you have a plan for your money. This plan is a good way to monitor your progress. My favorite way to hold yourself accountable is to start a personal diary. In this diary, you can write down the goals you would like to achieve and your daily progress. This is a good way to hold yourself accountable for your plan.

Also, understanding the basics of investing, only saving a few dollars every month will grow with compound interest. Creating a monthly saving or investment strategy can be very simple. This can be as simple as saving any amount that you can afford from your monthly paycheck and putting it into an online savings account or a retirement fund like a Roth 401K. By doing this, you can take advantage of dollar-cost averaging to reduce the price volatility in your portfolio.

Don’t look at these strategies and pick one. When monitoring your progress to your goal, look, and see if you can do a combination of them. You could find out that one option or a combination of the strategies will better suit your needs. These factors can dramatically change your retirement idea. Even though you may have to make some sacrifices, these sacrifices can lead to financial freedom.

What To Do With Your Second Stimulus Check

Personal Finance

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What To Do With Your Second Stimulus Check

Under the newly passed COVID-10 stimulus bill, millions of Americans will receive a second stimulus check. The second payment will be $600 per person (may increase to $2,000 per person) plus an additional $600 per child. To a lot of Americans, they will need to use this check to make up for lost income so they can eat and have a house to live in. If you are one of the fortunate Americans to still be employed and not in financial distress, you have options on what to use your check on.

Due to the current dining and travel restrictions, it will be very hard to waste your check on eating out or a vacation. Instead of wasting the money on something you don’t need, it would be wise to invest or save the money.

Save For Retirement

Putting the money away for retirement is a smart move. You have until tax day (April 15, 2021) to invest in an IRA or Roth IRA for 2020. 2020’s maximum contribution is $6,000 for the year or $7,000 if you’re 50 or older. If you have gotten behind on retirement savings this year, you could put the check in your IRA. There are plenty of funds out there like an index fund or some of my favorite, target retirement date funds. Target date funds will invest in a mix of equity and bonds and slowly move towards more bond exposure (less risky) the closer you get to retirement.

Paying Off Debt

Looking to pay off your higher interest rate debt, most likely your credit card debt can potentially remove a bill from your monthly expenses. Paying off your debt, especially your high-interest rate debt, is giving you a good rate of return.

Increase Your Emergency Fund

Even though you may still be employed, you may not feel comfortable about your situation. The pandemic is not over yet and you could still experience a loss in income. It is best to have three to six months of living expenses saved. It is smart to save your emergency fund in a high-yield savings account that offers no minimum balance or fees.

Donate It

If you still have a stable and steady income and your finances are all in order, you could consider donating the money. You can donate the money to people who need it more and would be able to deduct a portion of your donations from your 2020 (or 2021) tax returns. Even if you claim standard deductions, you can still deduct a new “above the line’ dedication in 2020 and 2021 for up to $300 in cash donations.

Save For Education

Maybe you plan on going back to college or have kids. You can contribute to a 529 college savings plan that will allow the money to grow tax-free. Additionally, the withdrawals are also tax-free if they are used for qualifying education expenses. Lastly, your state may give you a tax deduction or tax credit if you contribute to its plan.

Support Small, Local Businesses

A lot of local businesses are struggling right now. You could buy gifts or gift cards from a business you will use in the future. Buying gift cards or gifts right now will provide the business with much need cash to weather the COVID-19 shutdown. Additionally, when the pandemic is all said and done, you can treat yourself to something nice.

You don’t have to pick one of these options. You can do a mix of the bunch or use it on something else you may need. Your financial situation is different than every other American and you should use the money to meet your needs.

Investment Strategies

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Before you start investing, it’s always good to understand your financial situation first. The best investment strategy will be the one that will meet your financial goals and create wealth while keeping you comfortable with your level of risk that allows you to sleep at night.

I do all my investing myself because I know how to control my emotions with investing. For most investors, people make poor investment decisions because they get emotional. If you think this is you, then you should look at working with a financial advisor. Financial advisors will help you control your emotions so you can generate solid returns.

Key Rules of Thumb

Don’t invest in things you don’t understand.
Have long-term investing strategies (Over 10+ years). Invest in stocks, ETFs, mutual funds, REITs, etc. The longer the investment horizon, the more you can invest in stocks.
Short-term investing strategies. Don’t put most of the funds in equities. Put it in bond funds and CDs. 60% bonds, 40% equities.
Never invest in a product or instrument from someone you just met.
Getting double-digit returns is very hard. If someone promises you this, they are full of themselves. If a return higher than the average market rate, between 6% – 10%, then it’s too good to be true. No one can guarantee a certain return and over 90% of investors don’t beat the stock market return.
There is no secret from the super-wealthy. If anyone is offering you this product, ignore it. They are taking advantage of you.

Invest in what you Understand

If you don’t understand a company’ business model or how it makes money, then why are you investing in it? Unless you understand the company’s products, market, and competition, then you have a high chance you won’t understand what you’re investing in and the risks associated. This is not an investment strategy but will serve to your advantage when buying stocks.

Dollar-Cost Averaging

Dollar-cost averaging is when the total about you invest is purchased over a set period to reduce the price volatility In your portfolio. A good example is you invest $100 every month, no matter the price. The table below breaks down the dollar cost averaging over a year.

Growth Investing

Growth investing is a strategy that focuses on capital appreciation. The investor buys stocks that have the potential to increase over time, ie a $50 stock will be worth $500 in 5 years. Investors in growth stock believe the company is still expanding and growing its market share. Typically growth stocks do not pay dividends since they use the excess cash to reinvest in its business.

Value Investing

Most of the world’s famous investors are value investors. Value investing is a strategy that focuses on that are undervalued in the market today, ie a $50 stock that should be worth $75 today. Investors in value stocks believe the company is being valued lower than its current growth trends. A lot of value stocks tend to pay a dividend since they are mature, well-established companies.

Income Investing

Income investing focuses on generating a constant, steady stream income. Income investments can come in a few forms such as stocks that pay dividends, bonds, or REITs. All three of these investments pay out cash consistently for the trade-off of minimal growth.

Social Responsible Investing

Environmental, Social, and Governance (ESG) investing fosses in sustainable investing. This type of investing seeks to generate positive returns while positively impacting society and the environment. This can encompass investing in renewable energy companies and avoid fossil fuels, or companies that do business in certain counties, or business that lack the proper diversification within its management team.

Diversify

There is no simple route in picking an investing strategy. Ultimately, you should end up diversify the type of investments in your portfolio as this can help you manage your risk and reduce the volatility of your portfolio. The investment strategy that is best for you is the one that will meet your personal and financial goals while keeping you comfortable and stress-free.

Paying Off Debt

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Knowing how much debt you should pay off, is not an easy task. Tackling your total debt may seem like a scary task, but I’m here to offer some simple strategies that can help. The two most common approaches are the ladder approach and the snowball approach.

Ladder Approach

With the ladder approach, your focus is to pay off your highest-interest debt and work your way down to your lowest interest rate.

The key to this strategy is to make your monthly budget to make sure you can meet the minimum monthly payment on all your debt. Once you have everything budgeted, you need to budget extra money aside to put towards your highest interest debt. Once the highest interest debt is repaid, you will target the next largest interest rate debt and continue to move down.

With the ladder approach, you will get out of debt fast by going after the most expensive debt first. While this will get you out of debt faster, you may not feel accomplished because it could take some time until you pay off a debt balance since your largest debt balance tends to have the highest interest rate. Due to this, you may grow tired and feel unaccomplished since you won’t see a debt obligation reach zero for some time.

Snowball Approach

If you are someone that likes to meet small goals and want to continue to feel accomplished, then the snowball approach could be better. With the snowball approach, your focus is to pay off your lowest debt balance and work your way up to your highest balance. This strategy can help people more accomplished as you are reaching small goals you’ve set aside.

Similar to the ladder approach, the key to this strategy is to make your monthly budget to make sure you can meet the minimum monthly payment on all your debt. Once you have everything budgeted, you need to budget extra money aside to put towards your smallest debt. Once the smallest debt is repaid, you will target the next smallest debt and continue to move up.

With this approach, you still want to keep an eye on your highest balance debt and see if there are opportunities to lower the interest rate in the meantime. Additionally, you may be able to transfer credit card debt to a lower-rate credit card.

While the ladder approach may get your debt paid off faster, the snowball approach will help feel successful. Paying off debt the lowest debt and having fewer bills will help you feel more confident and reduce the stress in your daily life.

It is important to note that no matter the strategy, you have to make note of the sacrifices you are making. If you quit early, making the minimum payment will take years to pay off and all the money you were going to save won’t matter anymore.

Make sure to always track your progress through a spreadsheet or budgeting app. This will give you the psychological benefit of watching your debt shrink. Also, it never hurts to throw in a few rewards for yourself when you meet certain milestones to keep you on track.

Budgeting 101

Personal Finance

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How much money you should budget as part of your income is always up for debate. The popular 50/30/20 rule that was developed by Senator Elizabeth Warren says you should spend 50% of your income on essentials like your mortgage payment, rent, utility bills. 30% should be spent on discretionary spending like dining, shopping, entertainment. Lastly, 20% is for financial goals like paying off debt and saving for retirement.

Saving 20%

The 20% savings is not as simple or easy for some people, it is good to target if you can save this much. The 20% rule was established to easily set you up to have a shot at having financial independence before you get too old.

The 20% does seem high for most people, so It’s good to save at least 10% for retirement and this gives people an easier number to work with. Another rule of thumb is to save at least 25x your annual gross salary to achieve true financial independence.

What does financial independence mean? This means that you can sustain your current lifestyle or one you have chosen from your current investments. To judge this, it is good to use the common 4% rule, which says that you can withdraw 4% of your investments every year and this will meet your yearly spending indefinitely.

Even though these are common rules, you don’t need to stress about saving this much if you can’t. Saving something is better than saving nothing. A good way to start is to start small, at 1% of your income. If this doesn’t hurt or cause your stress, then you can continue to increase this by 1% point. If you reach a point where you’re saving a lot and you’re stress, then you should scale back a little on your savings. This is a process that you get comfortable with over time.

It’s always good to have the 20% goal in your mind and it will keep you disciplined. It is also a good strategy to increase your savings when you get a raise or when you pay off your entire debt. Paying off debt is essentially savings in reverse and can use that additional income to put towards savings.

Making a Budget

The first time you make a budget and see where all your money is going, it opens your eyes to your spending habits. A lot of your spending is due to mindless spending that you are not aware of.

Your budget does not need to complex. It can be very simple as making a grocery list so you don’t impulse buy or having all your travel expenses budgeted out.

With your budget, make sure you have a plan for your money. This plan is a good way to monitor your progress. My favorite way to hold yourself accountable is to start a personal diary. In this diary, you can write down the goals you would like to achieve and your daily progress. This is a good way to hold yourself accountable to your plan.

The most important lesson from this is to always save and no amount is too small. How much to save varies from person to person, but always have a plan and set a goal and a date to attain that goal.

How Income Taxes Work

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Some people believe that if they earn more money, they pay more in taxes and will have less money than if they would have earned less. After reading this article, you will soon find out that this is not true. Depending on your individual situation, taxes can be very complex and it may make sense to avoid a certain tax bracket if possible.

The United States has a progressive tax system, which can be complex and confusing. Depending on your income, different amounts are taxed at different rates. As a result of this, you will pay a lower percentage of taxes than your current tax bracket.

Breaking Down Taxes

Each level of your income is taxed at a different rate. Below is the current IRS tax brackets for your 2020 taxes.

Tax Rate	Single Filer	Married/Jointly Filing
10%	$9,875 or less	$19,750 or less
12%	$9,875.01 - $40,125	$19,750.01 - $80,250
22%	$40,125.01 - $85,525	$80,250.01 - $171,050
24%	$85,525.01 - $163,300	$171,050.01 - $326,600
32%	$163,300.01 - $207,350	$326,600.01 - $414,700
35%	$207,350.01 - $518,400	$414,700.01 - $622,050
37%	Over $518,400	Over $622,050

Source: IRS

How the Progressive Tax System Works

Let’s assume Greg makes $85,525 a year. As a single filer, Greg is in the 22% tax bracket. This does not mean Greg will pay 22% on all his income. Instead, Greg pays 10% on his first $9,875, 12% on the amounts from $9,875 – $40,125 and 22% on amounts above $40,125. While Greg’s marginal tax rate is 22%, his effective tax rate is 17% of his taxable income.

Tax Bracket	Taxable Income	Tax Rate	Taxes Paid
$9,875 or less	$9,875	10%	$987.50
$9,875.01 - $40,125	$30,250	12%	$3,630.0
$40,125.01 - $85,525	$45,400	22%	$9,988.0
		Total Taxes	$14,605.50

Lauren marries Greg and now their combined annual income is $414,700. As a married filer, they are in the 32% tax bracket. While their marginal tax rate is 32%, their effective tax rate is 23% of their combined taxable income.

Tax Bracket	Taxable Income	Tax Rate	Taxes Paid
$19,750 or less	$19,750	10%	$1,975
$19,750.01 - $80,250	$60,500	12%	$7,260
$80,250.01 - $171,050	$90,800	22%	$19,976
$171,050.01 - $326,600	$155,550	24%	$37,332
$326,600.01 - $414,700	$88,100	32%	$28,192
		Total Taxes	$94,735

Use the Tax Code

Using the tax code can further reduce your tax liability if you are able to make certain deductions such as interest on student debt, interest on your mortgage, charitable contributions, retirement plan contributions, etc.

Knowing your income tax bracket and state will help you calculate how much you will save in taxes, assuming you itemize your deductions.

Always remember that your marginal tax rate only applies to a portion of your income, and your effective tax rate is the actual rate you pay.

Losing Track of your Goal

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When you are saving for a major goal, you must start as soon as you can. It doesn’t matter if you can only set aside a small portion, if you can save and invest wisely, you will hit your goal in no time. The more you can add, the faster you will reach your goal as your savings or investments compound over time.

As time passes, it’s smart to monitor your progress with periodic check-ins. It’s always good to know your progress since you need to see if you are on track or are falling short of your goals. My favorite way to hold yourself accountable is to start a personal diary. In this diary, you can write down the goals you would like to achieve and your daily progress. This is a good way to hold yourself accountable to your plan.

Falling Short

You check-in and you noticed that you’re falling behind on your goals. When you notice you are off track, there is no need to stress about as long as you have time. For small goals, you should have at least five years and longer for bigger goals such as retirement. Due to these check-ins, you can easily adjust your habits.

If time is not on your side, then you can use these four techniques to get you back on target.

Increase your time horizon by giving yourself more time

Look at current goals you or expenses you have planned over the next few years and see what you can postpone. Let’s say you have a major vacation coming up, maybe you can downsize this vacation to a cheaper place. This decision will allow you to accumulate money over the near term.

Decrease the size of your goal.

Maybe you check in a little too late on your goal and it will be hard to meet it. A good example would be saving for a house. While you may not get your dream house, you could find a smaller, more affordable house that will make you happy.

Increase your investments or savings.

Even though this may seem like the hard option, you can set aside extra money so you can achieve your goal. Additionally, you can look at increasing your exposure to stocks. Be careful of increasing your exposure to stocks. Even though this will increase your potential upside, this also increases your potential downside risk. I would only recommend this strategy if you have a long time horizon to weather the volatility with stocks. Lastly, if you increase your exposure to stocks, you need to be comfortable with seeing sharp losses without selling it.

Don’t look at these strategies and pick one. When monitoring your progress to your goals, look, and see if you can do a combination of them. You could find out that one option or a combination of the strategies will better suit your needs. Getting back on track depends on your situation.

Ways to Build Your Emergency Fund

Personal Finance

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An emergency fund is a fund you have set aside to assist with any financial hardship life may throw your way. When life throws these unexpected events your way, these can be very stressful and costly. Saving a small amount in an emergency fund can go a long way in an emergency event. Here are a few ways to save additional money:

Tax Refunds

If you are expecting a tax refund, then you can put this to use towards your advantage. There are a variety of options including debt repayment, investing, house fixtures, etc. If you don’t have an emergency fund or have used some of it, this is a good option to put some of your refunds towards your emergency fund. Putting your refund towards your emergency will help you make smart financial decisions when you are stressed. If this contribution does not cover 3 – 6 months of expenses, put yourself on a plan to contribute $50 every two weeks or more if you can afford to. Holding yourself accountable to this plan will go a long way to set you up for financial freedom.

Cut Expenses

Make a budget to see where all your money is going, it opens your eyes to your spending habits. A lot of your spending is due to mindless spending that you are not aware of. Your budget does not need to complex. It can be very simple as making a grocery list so you don’t impulse buy or having all your travel expenses budgeted out. This is can be as simple as cutting out expenses like daily lunches, eating out on weekends, or daily coffees. You can substitute these expenses by bringing lunch to work, making coffee at home before you leave for work, etc. Reducing these expenses can help you contribute to your emergency fund. These reductions don’t have to be permanent. Having your emergency fund set up should be your top priority.

Secondary Income

There are hundreds of ways that you can create a secondary income through a side hustle. This can be as simple as selling items around the house online, becoming a mystery shopper, Uber driver, etc. Here are some ideas to help you create additional income.

While investing is important to growing wealth, always remember that your emergency fund is your safety net to mitigate any life events that require major financial commitments. Once your emergency fund is set up, you will be well prepared to handle the unexpected twists life throws at you and can live life how you want.

Value of Compounding Interest

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Before I go into explaining compounding interest, I want you to think about this:

If someone were to approach you today and give you a choice, what would you choose: receive a penny today that will double every day for a month, or $1 million today?

A lot of people get caught up in the initial amounts of $1,000,000 or $0.01. With investments, there are two types of interest, simple interest, and compound interest. We will focus on compound interest since simple interest is rarely ever applied today. Compound interest means that you will earn interest on your interest and is the reason why so many investors are successful and build long-term wealth.

Compounding on Investments

Let’s assume you invest $100,000 at a 5% interest rate compounded annually. After your first year, $5,000 is added to your account. During your second year of the investment, your 5% interest is calculated on your new investment balance of $105,000. As a result, you would receive a $5,250 interest payment that is added to your investment for a new balance of $110,250. After 30 years, this initial $100,000 investment would turn into $432,194, resulting in a 332% gain on your investment.

Initial Investment	Value In 1-Year	Value In 5-Years	Value In 10-Years	Value In 30-Years
$100,000	$105,000	$127,628	$162,889	$432,194

As you can see from this, the power of compounding interest is very powerful. If you picked the single penny and double it every day, at the end of the 30 days, the penny grows to $5,368,709.12. It is important to note that time can greatly affect the value. If you take the same options, but change the doubling to only 27 days, you will only end up with $671,088.64.

This same growth applies to investments too. Starting at different ages with vastly reduce your compounding growth. Let’s assume at 20 years old, you start saving $100 a month and grows at 5% each year. Assuming you retire at age 67, this would grow to roughly $224,430. Assuming you start at 30, this drops substantially to roughly $128,051 and roughly $68,883 if you started at 40.

The key take away from this is that you want to start investing and saving as early and often as possible. While the 5% returns may get you a modest return today, earning 5% throughout your life will set you up for huge returns later in life and as you approach retirement.