Two Financial Paths in Life

Late last night, I stumbled upon a post on one of my favorite blogs to read, The post basically outlined how there is two ways to live financially; to spend freely and live for the now, and to live frugally and save large portions of your income. While I enjoyed how the author, G.E Miller, showed how our financial choices can equate to large amounts of money that we could be saving, I didn’t like how it essentially preached giving up all non-necessities in favor of saving every dime you can. However, I can completely understand the point of the article and hope that others do as well.

The point is that by optimizing your savings rate, you can not only save large sums of money and become financially secure, but also realize an American dream, EARLY RETIREMENT! The point made by G.E Miller, that if you could sustain-ably save 60% of your income each year, over 12 times more than the average American, you could retire decades earlier than your peers was eye-opening! Of course, this would be obviously true since you are vastly exceeding the savings rate of your peers, but just stating that fact impressed me. It made me think about how great something like that would be…


DOW AT 18,000!


Whether or not you are able to benefit from this spike in the market, it is still amazing to see the Dow so high and it will be interesting to see where it will go from here. What are your predictions for the market? Do you see it continuing to set all-time highs or settling down at a lower range such as 15-16,000? Let me know below in the comments! 


Why Personal Finance is important to me

As a child growing up, I thought about money and making money a lot. I was fascinated about how my parents earned money, how my dad ran his business, how my grandfather ran his, and how banks operated like the one my grandmother worked at. I was intrigued by money, by saving, and by investing. When I was real little money wasn’t an issue to me, I didn’t grow up wanting a better lifestyle. I was happy in our small home and playing pretend. Sure, I didn’t have all the gadgets, technology or toys that other kids had, but I had a brother and our combined imaginations kept us busy for weeks on end.

As I grew a little older, I became more aware of my family’s money situation. I would listen to my parents discuss money issues or decisions regarding my father’s logging business. Anyone that knows the Northeast’s logging industry, knows that anyone who owns a logging company isn’t on very stable financial ground, and we were no exception. My dad worked long hours and was really good at his job, but no matter how much he worked and how good he was, fate just had his business destined to fail. But, it was this failure that really began to open my eyes.

I had been saving every penny I ever came across from the minute I was five years old and began investing at age 11, when my nana bought me five shares of Coca-Cola. But, when my father’s business went under I really began to realize the importance of saving and investing. My father had never been one to save money and my mother liked to try, but bills always saw that money right back out in no time. So, when the business went under, we had no emergency fund to hold us over.

It was my parents’ tight financial situation and the choices and situations that followed, that really impressed on me that I needed to get my money straight. Of course it helped to that I was obsessed with becoming wealthy enough to retire early. Since then, I have devoured every text on personal finance, investing, budgeting, saving money, earning more money, and running a business that I can get my hands on. I have notebooks and notebooks full of scribbles where I planned out my financial future.

I now realize that while the best of plans may fail, the act of planning at least gets the ball rolling and headed in the right direction. While, I don’t wish what happened to my parents onto anyone else, I hope that everyone is able to come to the realization that I did before they ever leave high school. Going into college well aware of my financial situation and where I wanted to go and how I planned to get there was probably the best thing that could ever happen to me financially. I know am actively planning for my retirement, paying back my student loans, saving for a house, funding an emergency fund, saving for a wedding, and getting my girlfriend involved in our finances. The advantage of starting so early, is that I now have many extra years of compound interest on my savings and will benefit from starting my financial future out with good habits.

How have you or how did you start out your early adult years financially? What do you wish you would have done differently? What made you wake up and begin to worry about your financial future? Let me know below in the comments section!


How to Build Credit

Most of our lives we have heard our parents, relatives, and friends talk about the perils of debt, the issues with credit and the disasters financially it creates. But, credit is an important part of our lives. We are judged by our credit score quite often. Not only for car loans and home mortgages, but increasingly for employment and renting applications. Luckily, there is also easier and easier ways to stay on top of your credit score and ensure that those who look at you, see your good side.

Since credit can matter so much in our lives, it is important that we always keep it in mind and start early building a good credit history. The difference that a hundred points on your credit score can make on the total amount of interest you pay over your lifetime could determine whether you are able to retire on time or not. On a $100,000 30 year fixed rate loan, one percentage point of difference could save you roughly $21,000 of interest over the life of the loan! For many people, that’s equal to close to half their yearly salary saved just by being smart about credit!

Luckily, it can be pretty easy to build a good credit score (granted the more secure your financial situation, the easier it becomes). According to MyFICO, your credit score is derived from the following categories:

Payment History- 35%

Amounts owed- 30%

Length of credit history- 15%

New credit- 10%

Types of credit- 10%

First off, always pay your bills on time! Your payment history is a big part of who you are as a borrower and consumer, as it accounts for 35% of your score! For some bills, such as your phone or other utilities, try to automate your payments so that every month they are automatically withdrawn from your checking account. Just make sure to keep your checkbook balanced and that there is enough money to cover the bills, otherwise you will get hit by your bank with overdraft fees! As for other monthly obligations, such as your credit card, mortgage or auto loan, make sure to keep track of when each bill is due and be prepared to at least pay the minimum every month by the due date.

Secondly, the amount of debt that you have is important to monitor. Carrying more than 30% of your credit limit is often seen as a liability. As for a home loan, a good rule of thumb is to not exceed purchasing a home valued at over 2.5 times your annual salary.

When it comes to length of credit history, this is normally a category that many young adults will struggle in. No matter what this deck will be stacked against you. While you might have a perfect payment history and keep a low balance, your credit score will still suffer since your credit and payment histories are short and thus you are seen as risky. While I have perfect scores in all other categories, my length of credit history drags me down. However, a good way to get going on this is to get a credit card at a young age and be smart with its use. If you use a credit card to your advantage, you can not only reap rewards but also bolster your financial future. By using your credit card ritually each month for only one small purchase and then immediately paying it off in full, you are avoiding interest, perhaps getting credit card rewards, starting your credit history and maintaining a responsible credit account. As you age and begin getting other cards and credit accounts, make sure not to close that first account, even if it has the worst interest rate. This is because as your longest running account, it has the most history in it and by keeping it open you are able to show how long you have been a loyal and responsible client.

Ten percent of your FICO score is derived from how often new credit lines are sought out. If you have applied for many credit cards, auto loans or mortgages in a short period of time, this will pop up as a red flag showing that you may be desperate or underwater on your expenses and bills. By spreading out your requests for new credit lines, you will appear as being more stable and responsible, then if you tried to open up many lines at once.

Last but not least is the different types of credit that have open. This mainly pertains to open and closed accounts. Open accounts involve  the ability to continually borrow more up to your credit limit. This types of accounts are mainly credit cards, which can be paid off and then borrowed against again. Closed accounts are things such as auto loans or mortgages, that have a specific start and end of the payment schedule, with a set monetary amount, and a fairly standard monthly payment. These can also be referred to as installment loans. By having different types of credit open, it shows the ability to responsibly manage all major types of credit.

All in all, it is important to just remember to be responsible. Pay off your credit cards each month in full, always pay on time, don’t seek out too many credit lines at once, and keep your oldest credit cards open. I will talk more about credit in other posts, but since it is my birthday and I just got a bunch more personal finance books to read, so I am going to retire to my studies!


Automating your Financial Future and Security (Pay Yourself First!)

If you Google something like how to become wealthy, or how to build wealth through passive income, you are going to find articles and blogs that list off steps to becoming rich. I have read and scoured through many of these blogs and articles in search of a way to get rich without really trying. Sure, some of them tout up different ways that you can get extremely rich and others talk about how live an ultra frugal lifestyle is the best way to become wealthy. I disagree!

Many of us have the desire to have more money so that we may enjoy the many different pleasures that we can afford. As our wealth grows, so does our desire to use our money for our own enjoyment. We purchase luxury cars, we buy vacation homes on a lake front, we buy designer suits, we buy a big boat, and we take family vacations to Europe. What good is money to us if we can’t use it?! The truth is, it isn’t! Many frugal living blogs talk about how limiting consumption has been the most rewarding part of their lifestyle and that accumulating wealth has just allowed them to retire early and enjoy the free things in life. Of course, we can all thorough enjoy that kind of lifestyle but at some point there is normally something we find that costs money that we want. The point is that to keep ourselves sane while we budget and try to control our spending, we have to indulge ourselves a little bit. If giving up your $5 a day coffee and investing the money instead is your plan, but you really enjoy your morning coffee, find a way to do both! Perhaps, brewing your own coffee at home costs you only $1 a day, so you are still able to sock away $4 a day! Or maybe, you indulge only on Monday mornings when it is especially hard to drag yourself into work but skip it the rest of the week. Either way, you need to make sure that you aren’t giving up everything that you enjoy to chase the all-mighty dollar. Remember your sanity and your health are priceless and no amount of riches will make up for regretting how you lived your life. Of course, I am not advocating irrational spending either!

THE REAL SECRET TO BUILDING WEALTH- isn’t even a secret. It is the most boring piece of information or advice you will ever receive. JUST AUTOMATE IT. Yes I said it, just automate it. Put your savings and investing first. Track your spending and your income, create a budget and allocate a portion to savings and a portion to invest for your retirement. Then, make it automatic! Each pay period have your desired portion of income deducted and moved to chosen investments and savings. But, make sure that your deductions occur BEFORE you can see that money! If you never see it in your checking account you will never miss it!

Say for example that you take home $800 per week AFTER taxes and get paid each Wednesday morning:

– Have all $800 of your paycheck direct deposited into your checking account

– Then have your automatic transfer of $50 to your savings account occur that afternoon

– Have the brokerage firm that handles your IRA (individual retirement account) automatically be credited with $50 a week from your checking account on each Wednesday afternoon as well.

– then subtract the $300 each week to pay for your monthly fixed expenses

-the rest ($400) is what is left for discretionary expenses (or expenses that can be cut back on if necessary!)

This way, you can be sure that you will at least save your set amount each pay period since you will be forced to go without that money. It also helps to limit the amount you spend since the money available to you to be spent on discretionary expenses such as entertainment, is smaller than it otherwise would have been. The BONUS is, that if you happen to spend even less than what you allocated, you can save even MORE!

This strategy is by far the easiest and most efficient way to build wealth. Just by paying yourself first, you are forcing yourself to make decisions to save yourself money and setting aside a certain amount of money each pay period! If you like the idea of not having to think about saving and investing, take it another step further by investing in mutual funds and index funds!

While mutual funds generally have higher fees as they tend to be more actively managed, they can also be quite diversified and thus less risky then individual stocks. Index funds tend to be the least expensive investments and are passively managed as they are tied to a specific benchmark such as the S & P 500. By tying your investments into mutual funds or index funds you are reducing risk and avoiding the difficulty of having to pick out individual investments for yourself. Generally these two types of investments tend to involve the “buy-and-hold” strategy as they often gain value over time. So, plug your savings into these funds and kick back and wait as your money grows for you!