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Wealth Building Strategies Your Advisor Didn’t Share With You

Many people don’t know (and probably don’t care) that September is Life Insurance Awareness Month. It’s the one month out of the year that life insurance gets it’s time in the sun. To pump up this incredible product, I want to share some alternate uses for life insurance that many advisors never share with their clients.

1. The Roth Alternative

The “Roth” IRA was created back in 1997 and it was setup to provide an individual with tax-free money during their retirement years. Other employer-sponsored retirement plans (401k, 403b, 457b, etc.) also adopted the Roth feature. Currently, if you have an IRA or employer-sponsored retirement plan that has “Roth” in front of it, you’re telling the IRS to tax the money that’s currently being contributed into that account. And, if you follow a few simple rules, you can receive your distributions tax-free during retirement.

There were only two problems with the Roth IRA specifically: 1) if you earn too much money, you are not allowed to open one and 2) the contribution amounts are limited (2020 limits – $6,000 if you’re under age 50, $7,000 if you’re 50 and over). Income limits don’t apply to the employer-sponsored plans and the contributions limits are higher than an IRA but they still have a cap.

With these problems known, people began to search for another way to invest their money for retirement with the hopes of receiving tax-free money during their retirement years. The solution – a properly structured permanent life insurance policy.

2. Create Your Own “Bank”

For starters, you will not have to concern yourself with setting up a physical (or online) financial institution. Also, for the sake of keeping things simple, this strategy involves you utilizing a properly structured permanent life insurance policy. Here are the primary reasons people consider creating their own “bank” or what some call the “family bank”:

  1. The cash value usually earns a much better growth rate than any solution you would find at your financial institution (High-yield savings/checking or CD’s).
  2. The growth, as well as distributions you take, are not taxed as long as a small amount of death benefit stays in force until you pass away
  3. When you borrow money, your full cash value continues to grow inside the policy despite any loans you have against the policy

For each of the alternate uses of life insurance I’ve shared with you, I highly recommend that you speak with a financial advisor or insurance agent. These strategies are not typically shared with the general public. So, once you do connect with a financial advisor or agent, you will now be equipped with some good material to discuss at your next appointment.

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The #BuildWealth Challenge Results Are In

How did this #buildwealth challenge come about? Simple…I was trying to determine what financial areas were causing the most issues for people. Was it a lack of understanding of the complexities of the various insurance and investment related products? Or was it dealing with basic money management skills and credit. I set out to see if I could get 500 people (ended up with 510) to respond to my brief survey.

Please note that I am not an academic and this research project wasn’t as thorough as I would have liked. I didn’t capture any detailed demographic information (got plenty of feedback about that), however the respondents of this survey come from a variety of age ranges, ethnic backgrounds, educational backgrounds, professions, etc. Despite all of that, I think the results we very revealing about the relationship people have with money. I do have plans for future #buildwealth challenges and I will most certainly do a better job of capturing more detailed information.

Without further ado, let’s jump into the results!

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I know some may argue that they track their financial success some other way, but I felt strongly that someone’s net worth tells the “real” story. You can determine your personal net worth by using a simple formula, Assets – Liabilites = Net Worth. This formula can be found on an important financial document called a balance sheet. Please familiarize yourself with this document because it’s a great first step to getting your financial house in order. By its very nature, completing a balance sheet will require you to gather all of your financial information as it applies to what you own (assets) and what you owe (liabilities). Think of this (taking inventory) as the all important first step on the road to financial rockstar status.

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For starters, the fact that two people skipped this question is kind of crazy. I’m not really sure what to make of it. And, for the 9% who put “neither”, that intrigued me because it says a couple of things; 1) they don’t have the slightest clue about where their money goes on any given month or 2) they just don’t care about knowing where their money goes. The question is simple…who is control, you or your money? People feel like they are living check to check because they haven’t taken the time to do some form of a budget, which would provide some level of control. If the old school way of budgeting doesn’t work for you, try the 50/20/30 plan or some other budgeting method. The key is to figure out what method works for you and stick to it. Also, don’t be so hard on your self if you can’t master the budget right away. Keep in mind that you have to crawl before you can walk.

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Understanding the importance of credit is critical to living a decent life in this country and I was happy to see that over 60% of the respondents were in the good/great category. For the small percentage who stated they have “no idea” about their status, my hopes are that they at least excercise their rights by obtaining one free credit report (no score) from each of the three credit bureaus once a year. The interesting thing about credit is that you can screw it up, then clean it up, then screw it up again, then clean it up again. And you can repeat that for as long as you would like. But, once you clean up your credit, unless there are some unforeseen circumstances (i.e. job loss, divorce, becoming disabled) it should not be that hard to maintain a positive credit standing.

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This question wins the prize for “most skipped” and that wasn’t a big surprise. The way the question is phrased probably has something to do with it, as I didn’t specify what type of insurance. Plus, most people don’t truly understand why insurance is the cornerstone of their #buildwealth plan until something goes wrong. Let me ask a question. If you were going to build a house, where would you start? If your answer was anything other than the foundation, we need to talk! When it comes to building a home, a solid foundation sets the tone for the remainder of the house. In regards to your #buildwealth plan, not having a strong insurance foundation may jeopardize your saving, investment and retirement plans. If you were to get seriously sick or injured, your bills don’t stop just because you’re not working. Unless you have adequate savings, I seriously hope you have the proper amount of disability insurance. How about if your spouse/significant other (who happens to be the breadwinner) dies unexpectedly? Again, unless you have savings or some other assets that you can liquidate immediately, I seriously hope you have enough life insurance. I’ll stay away from medical insurance because I know everyone who has medical coverage is grateful. Clearly, the insurance conversation isn’t a fun one to have but hopefully I’ve shed some light on how insurance can affect your overall financial well being.

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There’s going to be a day when you don’t want to get up and go to work. When that day occurs, hopefully you have more than enough money to survive. Retirement, whether you’re just starting your career, a seasoned professional or your winding things down, should be on your radar. The younger you are, the more time you have, the older your are, the less. It’s scary to know that some people have worked 30 or 40 years and have nothing to show for it. Or they are in their early 70’s or even 80’s and they “have” to work because they can’t afford not too. Having your retirement plan in order is of the utmost importance. Back in the day, your employer typically took care of retirement planning for you, however, the responsibility now falls on your shoulders. Many companies have done away with pension plans (because they are expensive to manage) and the long-term viability of social security seems to be an issue, but I’m optimistic that our government will figure out how to make it last. There are some employers who don’t provide a retirement account, and that’s okay, because there are plenty of avenues for you to open one up on your own. There isn’t a good excuse as to why you shouldn’t have an account (be it with your employer or on your own) that’s dedicated to retirement. And if you are one of those people who is struggling with the question of “how much should I save for retirement”, the answer is simple…A LOT!

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Risk is another area that more of us need to discuss when thinking about our #buildwealth plans. Let’s get one thing clear, there is risk in every single type of account that exist. The big question when it comes to risk is how much can you tolerate? If you’ve ever worked with an investment professional or opened any type of investment account, you’ve taken a risk questionnaire. Some experts will say that if you’re young, you should be aggressive and if you’re older, you should be more conservative. And of course there is everyone else in between. The theory makes sense because if you’re young and you’re investing aggressively for the long-term, despite the ups and downs of the market, you will probably be satisfied with the growth in your account. Just search any historic data about the long-term performance of the stock market and you will understand. On the flip side, when you’re older, you may be relying on those funds to live, thus it’s all about preservation. You might not be able to live comfortable if a major dip in the market occurs and your account balance is cut in half. Managing risk will ALWAYS be a work in progress for everyone. Life will cause you to think differently about risk. When you’re young and single, you make different choices in relation to someone who is older and has a family. When you’re salary is $150,000/year, you’re investment decisions are different from someone who is earning $80,000/year. When you are an educated investor, you’ll tend to make more riskier investments as opposed to a novice investor. I could go on with examples, but you get the point. Be mindful of the risk that you’re taking and make sure you are the one that’s driving your decisions on risk and not your emotions or some outside influence.

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50/20/30 Plan

The budget is the quintessential piece of any financial game plan, however, it tends to be a huge challenge for most people. Some people have even done away with using the b-word because of its negative connotation. Why is it so negative? Well, anytime you hear the word budget in the news, it’s because the government can’t balance it and some item needs to be eliminated.

You never hear the word “budget” and something positive come out of it. This is the exact reason why the average person has such a hard time doing a budget. They are constantly witnessing a group of people (the government) struggle to make sure they can spend money appropriately on a regular basis. Then they look at themselves in the mirror and figure they pretty much don’t stand a chance against the abominable budget.

What’s the solution? For starters, people need to begin to use spending plan instead of budget. Spending plan sounds so much friendlier. Plus, we all love to spend money, so why not focus more on our spending habits as opposed to cutting things out of our lives. A simple paradigm shift is the answer.

All spending plans are not created equally and you must find one that fits your personality. The 50/20/30 plan is a simple spending plan that most people might actually like doing on a regular basis. Here’s how it works: Once you get your paycheck, no more than 50% of it should be spent on essentials…your rent or mortgage/food/transportation/utilities. 20% should be applied to financial obligations…savings, retirement, insurances, investments, paying off debt. 30% is allocated to your lifestyle…so whatever else you want to spend your money on, it’s up to you!

The 50/20/30 plan is a basic framework and its simplicity is the reason you might stick to it. Plus the fact that you’re free to spend 30% of your money on whatever you want, should make you a bit happier about doing a spending plan each month.

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The Key To College Planning

During a recent workshop with a group of women (all who had children), an array of financial topics were covered during the session, however, the biggest concern, next to retirement, was college planning. Some in the room felt overwhelmed because they didn’t know how they were going to be able to afford to send their child/children to the school of their choosing. The sad reality, most people will continue to rely on student loans, which continue to plague many people late into their working years and some even into retirement.

A post-secondary education can be extremely valuable, but many people amass huge amounts of debt just to obtain a college degree. Is it really worth it? Some are fortunate enough to have parents who got the “memo” about starting early. Please note, when it comes to saving/investing for any financial goal, time is the key component.

How exactly do you make college planning easy? There’s an old saying that it takes a village to raise a child and we have completely forgotten about that. If parents could remember that old saying, they wouldn’t fret so much about college planning. The ladies in that room mentioned that they just didn’t have the extra money to start a college plan. I shared a simple story (a true story) to put the women at ease. The story was about a young mother (my really good friend), who took it upon herself to put everyone on notice that the “village” was going to help fund her daughter’s college fund. She did it by way of a Christmas card. She laid it out plain as day in the letter that if people wanted to give Christmas gifts for her daughter, please send gifts of money or mail a check to fund her 529 college savings account. The account number and address was listed right there in the letter. My friend took it upon herself to coach/train the “village” to give gifts of money and not silly gifts she will outgrow or break. Side note, my friend’s daughter was 1 years old and clearly she understood that money (the compounding effect) grows the best over a long period of time.

As a parent, starting some type of account for college is all that you need to do. There are many vehicles that can be utilized to save for college, the most popular being the 529 savings plan and Coverdell educational savings accounts (ESA). Some even utilize their Roth IRA’s or life insurance. No matter which option you choose, make sure to consult with your financial planner/adviser to determine which vehicle(s) suit you best. Opening that account is usually the biggest hurdle, which you must overcome. Once an account has been established, keep reminding people that your child/children need money for school. This method sounds simple but it will be challenging if you allow your pride to get in the way. Swallow that pride and put the “village” on notice!

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All IRA’s Are Not Created Equally

The individual retirement account (known as the IRA) was created to allow people to stash away money for retirement on a tax favorable basis. There are a variety of IRA’s, some are specifically for individuals and others which serve business owners. There are numerous financial institutions, from banks to mutual fund companies to brokerage firms that will allow you to open such an account. Most people might not be aware of this but there is a huge difference between a bank IRA and a brokerage IRA.

Bank IRA’s are a great place to put your retirement dollars if you are looking for safety and security. Such accounts are going to utilize certificate of deposits (CD’s) or other safe options like money market funds to invest your dollars. You can be assured that having your money here, you will not lose a cent. Plus having your funds placed there allows them to be protected by the Federal Deposit Insurance Corporation (FDIC). Some banks may offer riskier options, like mutual funds (which are not covered by the FDIC), but primarily the safe options are what you will typically see. This doesn’t seem like a big deal on the surface, however, playing it too safe with your retirement dollars could hurt you in the long run. Banking solutions by their very nature are low-yielding, thus this will subject you to purchasing power (your dollar today won’t be worth much in the future) risk over time due to inflation. IRA’s were designed with the intent of being utilized as a long-term financial instrument, which means it isn’t wise to use CD’s or money markets (which are more geared towards short-term goals) to fund your retirement.  A bank IRA makes perfect sense if you are within a couple of years of retirement because you can’t afford to be too risky simply due to the fact that you don’t have enough time to make up any losses. Or, if you just don’t have the appetite to really take any substantial risk with your money, this option is also appropriate.

The brokerage IRA enables you to purchase securities… stocks, bonds, mutual funds, exchange-traded funds (ETF’s), etc. However, by purchasing securities you are adding more risk to the equation. Unlike the bank IRA, you could lose some of your initial investment and you will see your account balance fluctuate over time. This usually scares people but have you ever thought about your retirement account in this manner… what if retirement is 10/20/30 years away, and the market is down and as a result, so is your account balance. If you’re not at retirement age, meaning you have absolutely no need for these funds, then you have only “lost” on paper. Why exactly are you worried? Most people don’t have a good response to that, thus we need to change the way we think about short-term news in relation to our long-term accounts.

No one individual has control over the stock market, but over the long-haul, having money in the stock market can be extremely rewarding for your brokerage IRA. The neat thing about the brokerage IRA is that you are able to invest in a money market type of fund, along with the other riskier solutions. The one thing you want to avoid is having a brokerage IRA open and ONLY having money market funds within it. This happens quite often because people will rollover funds from an old 401k or 403b and the money will just sit in a money market fund (which is the default), not being invested. Or, they will open a brokerage IRA, fund it, and never make a decision on what to invest in. Take full advantage of all your options within the brokerage IRA.

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Conflicting Priorities

Setting up and sticking to a financial game plan is hard for most individuals. Adding a child to the mix, makes it even more challenging. Parents have tough decisions to make every single day of their lives and one of the biggest financial decisions they must make is deciding how they want (if they have the desire) to fund their children’s college education. In addition to college planning, most parents also need to make sure they are properly planning for retirement. So, which one is more important?

College is not getting any cheaper and with the continual increases in tuition and fees, parents need to seriously consider the various options they have access to for college planning. The most popular vehicle today is the 529 college savings plan. Aside from the 529 plan, parents can also utilize a Coverdell Education Savings account, UTMA/UGMA, Life Insurance, IRA’s or U.S. savings bonds. Each of these solutions has pros and cons, so be sure to consult with your financial advisor about which option makes the most sense for your situation. If none of these options has ever crossed your mind, there are other methods of funding a college education which most of you are familiar with… loans, grants, and scholarships. With grants and scholarships, the money is just given to you, but loans you must pay back. If you can outright avoid loans, please do, but they are a great source of funding and sometimes they end up being the only option.

Retirement is on the mind of every working adult and when that day comes, hopefully you are financially prepared. If you’re employer offers a retirement account (like a 401K), you should be utilizing it. If you’re employer doesn’t offer such a benefit or you are the business owner, then it’s up to you to take care of your retirement program. Depending on where you work, your company may still offer a pension plan, which means the company is putting money into an account on your behalf to be utilized during retirement. Pension plans are slowly becoming a thing of the past because they are extremely expensive to keep in force, thus companies are putting more of the responsibility on the individual to take care of their retirement needs. In addition to those retirement options, the government will provide some assistance via social security. Social security, by itself, will not be able to fully support you during your retirement years, thus you need to make sure to take full advantage of your retirement benefits through your employer if offered. If those retirement benefits are not in place, then you should pick up the phone or send an email to your financial advisor and get to work.

Have you figured out which one is more important? Your answer should have been retirement and here’s why. With retirement, if you don’t setup a plan and stick to it, there are no loans, grants or scholarships to bail you out. At that point, you only have two choices: (1) retire with less money or (2) work longer. Most people probably don’t like either one of those choices but unfortunately that is going to be a reality for many people. College planning is a huge priority for many parents, but there will always be loans, grants and scholarships available. Such options don’t exist when it comes to retirement, so if you are a parent and you are trying to figure out which one to focus on, choose retirement.

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Investing Made Easy

Some people have learned to make investing a bit easier by utilizing a popular investing technique called dollar cost averaging. How exactly does it work? You buy a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. In essence, you’re buying more shares of that investment when prices are low, and fewer shares are bought when prices are high.

Dollar cost averaging doesn’t guarantee you against losses and it helps to make sure you’re investing on a regular basis. Investing regularly is a great strategy to implement because it takes the guessing out of investing. So many people try to “time” the market and while you may have success in the short run, most who try to time the market end up losing more in the end. However, successful day-traders or active investors may argue the contrary. But, most of us don’t have the discipline, nor time, to constantly watch the market and place trades.

Many of us have been doing dollar cost averaging for years and didn’t even realize it. Are you participating in your company’s 401k/403b/457b plan? If so, then you’re dollar cost averaging. The money that’s being applied to your retirement account is being placed into your designated investment allocation each pay period. Aside from retirement, dollar cost averaging is a great tool for the novice investor. Someone who is just starting their investment program may not be willing to drop $5,000 into an investment, but if they have saved $5,000 and want to start investing, maybe they do a monthly contribution of $200-$300/month.

Happy investing!!

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How Can A Financial Planner Help Me?

Having a conversation about financial matters is a struggle for most people. We all understand that it’s imperative to have your financial house in order, however, most people typically don’t. The fear that you face around this issue will never subside until you decide to take action. You either need to do-it-yourself (which most won’t commit to doing) or enlist the aid of a financial planner.

Financial planners don’t get a ton of fanfare, but they should. The issue stems from the fact that people don’t understand the value that a financial planner can provide. People don’t understand that a financial planner may be the solution to all of their money woes. People don’t understand that a financial planner needs to be cherished just like your barber or hair stylist. Wait…like your barber or hair stylist? Yes!! When you need your hair done for an event or before you go on a trip, you will move mountains to get that appointment. Or if your person doesn’t do appointments, you will wait as long as it takes. Why?? Because looking good is non-negotiable!! However, when it comes to financial matters, you’re okay with NOT taking immediate action and continuing a life of financial misery. There isn’t a sense of urgency when it comes to interacting with a financial planner, nor is there typically an immediate (there are exceptions) outcome received. Thus, people tend to shy away from meeting with a financial planner or they constantly reschedule their appointment.

Now that we’ve addressed the psychology behind why people avoid financial planners, let’s move on and take a look at what you need to consider when you are ready to find your go to person. For starters, whoever you decide on, you actually need to like them. It doesn’t make much sense to do business with someone that you don’t like. Next, it’s recommended that you should interview 2-3 candidates before making your decision. Before finishing that first meeting (which is typically the free consultation that most will offer) you should know exactly how they get paid and what they are capable of doing for you.

Here’s a menu (of sorts) that you should consider when walking into that first meeting. A financial planner usually works in one of 3 ways:

Transactional-based business (Needs Analysis):

Think of this level as the basic package. You need a solution and this planner can sell it to you. The planner will capture the necessary information as it applies to your need, conduct an analysis and will conclude with recommending a solution(s). It doesn’t require much follow up after the transaction is complete. The planner will be in touch at a minimum annually to do a review or may be in touch periodically for service related matters. The planner earns a commission on the solution that is sold.

Managed money (Wealth Management):

This can be considered the “I’m in it with my client” level. You are entrusting the planner to manage a certain amount of money for you. The services at this level may involve the following as it relates to your money: 1) how your portfolio is allocated amongst the different asset classes 2) managing risk within the portfolio 3) enhancing (growing) your portfolio and 4) tax planning. You will probably meet with your planner on a quarterly basis to review your account. The planner will charge a quarterly fee based on the solution chosen and the account size. A fee-based relationship requires the planner to act in the best interest of the client because their compensation is tied directly to performance. Good performance, better pay, poor performance, less pay.

Comprehensive Financial Planning:

This level is like the deluxe service at the car wash. The planner is going to assist you with an in-depth analysis of some or all of the following areas: Net Worth and Cash Flow, Investment Planning & Allocation, Risk Management, Retirement Planning, Income Tax Planning and Estate Planning. At this level you will meet as necessary to help ensure that you understand your financial plan. At a minimum, you will conduct an annual review of your plan. Compensation at this level is two-fold. First, there will be an agreed upon fee for the financial planning service. Second, a commission and/or fees will be earned by the planner if you decide to purchase any solution(s) to implement your financial plan. Some people choose to only have the planner produce their financial plan, pay the fee and opt to implement a solution(s) with another planner.

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Credit Should Have Been Explained This Way

Credit is really, really important. Don’t agree? Take a look at the United States National Debt figures. This country wasn’t built on paying for things with cash. Yes, our government hasn’t done the greatest job with managing debt over the years and that inability to effectively manage it has had a lasting impression on individuals when it comes to managing their personal credit.

For starters, most people have serious trouble defining credit. If someone were to ask you what credit is, would you be able to rattle off a simple definition? If not, don’t worry, credit can be summed up with this acronym, O.P.M. (Other People’s Money). Simple right? Now, depending on what source you reference, you may see a definition similar to this; credit is the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future. But why is something that’s so fundamental to our country’s existence such a misunderstood concept?

The Urban Financial Services Coalition (San Francisco Bay Area chapter) was hosting a workshop on understanding the importance of credit. During the Q&A portion, a young man wanted to make a comment about how he learned about credit. He stated that his story was simple and one that should be shared with everyone. The young man’s story starts off with him being in college and his mailbox was full of credit card offers. He knew that establishing credit was really important, but didn’t know the first thing about it. Up to this point, he only heard things like how credit was bad and that you should avoid it all cost. Note: for those of you who believe that, please consider changing your opinion. The young man decided that he needed to seek counsel as it applied to getting this credit card and he reached out to someone who he knew was really good with money…his mother. Note: when seeking financial advice, please consider a professional or at minimum, someone who is actually good with money.

During this brief 10-minute conversation with his mother, the young man learned how to ensure that his credit would always remain stellar. His first question to his mother dealt with which card should he select and from which financial institution. He had offers from both banks and credit unions. His mother simply said pick the card that you think looks the coolest. Why on earth would she say that? Well, the mother knew that any financial institution sending such mail wouldn’t be offering a college student any great credit card deals. It would be their basic student card, which probably wouldn’t have an annual fee. And for applying, they would probably get a t-shirt or some other tchotchke.

The young man didn’t think picking a card was that easy and expressed to his mother that he “heard” that he should be concerned about the interest rate prior to applying for a credit card. The mother gave him a great lesson about interest that all should take heed. The interest rate will never apply to you if you pay off your bill in full each month. In case you missed it, it’s worth repeating. THE INTEREST RATE ON A CREDIT CARD WILL NEVER APPLY TO YOU IF YOU PAY OFF YOUR BALANCE IN FULL EACH MONTH.

Reader Challenge: Go out and survey 10 people. Ask the question: What is the biggest thing for you to consider when shopping for a new credit card? Chances are, 8 or 9 out of the 10 people who you ask will say the interest rate is THE most important thing. The sad thing is, if the interest rate is their top concern, then they have already lost. What they are telling you is that they don’t manage money well and are okay with overspending/living above their means and as a result paying their financial institution more money than they deserve.

Next, the young man asked his mother how he should use his brand new credit card. She said make a few small purchases each month and pay off the balance in full when you receive your statement. She informed him that his credit limit would probably be pretty low (it was $200) since he was new to credit, plus the fact that he was a college student. And unless it was a real emergency, he should NEVER get close to that $200 limit. She reminded him that spending on a credit card is like getting a 30-day, interest free loan. If you don’t pay off your balance in full, that dreadful interest will most certainly kick it. She went on further to explain, that as a result of him sticking to this simple process, the financial institution would probably raise his limit. She warned him that just because they raise his limit, doesn’t mean he should go spend more. He should stick to his simple plan on making a few small purchases each month and pay off the balance in full, no matter how high is limit may become.

As a result of that conversation with his mother, the young man never had issues with credit. Of course, his mother didn’t share with him all the moving parts when it comes to credit; like there being 3 credit bureaus, the credit score and how all 3 bureaus report it different, how your credit score is calculated, why checking your credit report from all 3 bureaus each year is extremely important, etc. The biggest thing the mother did for this young man was keeping it super simple. Many of us tend to complicate financial matters and it causes a ton of stress in our lives. This young man has always viewed credit in a positive light, primarily because his credit was indeed stellar, he actually learned how it worked and adopted a great habit early on. It also helped that the person he received the advice from was a great steward of credit.

Not all of us will be fortunate enough to have parents who understand credit and how the game works. Just imagine, what if everyone had someone break down credit prior to getting their first credit card, like this mother did for her son. Debt (credit card debt specifically) probably wouldn’t be much of an issue.

debit card

Is The Debit Card Becoming Obsolete?

We are all familiar with what happens when you go into the bank and meet with one of the bankers. They want to make sure you’re taking full advantage of your banking relationship. One thing they will all be sure to mention is their latest and greatest credit card offer for which you’ve been pre-approved or they state that the credit card you have isn’t their best one. Either way, you didn’t go into the bank that day to get a new credit card. Has your banker ever challenged you to rethink the reason you use your debit card?

Your debit card has a few benefits, it enables you to buy goods/services, helps you avoid having a ton of cash on hand (safety), withdraw money from the ATM, and serve as identification if you’re doing a transaction at the teller window. Those benefits are not that compelling which is what this banker was expressing during a recent conversation. This is when the “ah-ha” moment occurred… why do we consistently use our debit cards to make purchases, which gives us no benefit whatsoever, when we could be receiving cash back, travel rewards, points to buy stuff, etc.

Now, some of you may be thinking that it’s silly to use a credit card when you already have the money to pay for something. That makes perfect sense, but have you ever thought about it from the other side. Since you do have the money already (and I’m assuming you do), why not take advantage of the benefits and pay off the full balance at the end of the billing cycle. Now, you won’t be worried about carrying a balance which may be subject to an interest charge and you will have reaped the benefits (rewards) of using the credit card. Keep in mind, such a strategy will not work if you are not a responsible financial steward. Utilizing such a strategy will also require you having a steady income, which will allow you to make that payment each month. Not making that payment and incurring that interest charge is what the bank wants you to do. Let’s make sure to stay in control and use what the bank is offering to your advantage.

You still might not be convinced about this credit card idea and it’s simply because most people don’t challenge the status quo. We’ve been programmed to think a certain way for so long, that it’s hard to change. But think about how much money you spend each year on food, both dining out and groceries, gas and entertainment. Wouldn’t it be nice to get something in return for all of that spending you’re already doing? The banks know this is where you’re spending your money, thus they offer these credit cards. All you should do is figure out which rewards suit you best and utilize that credit card to your advantage.