How Financially Literate Are You? 3 Things You Should Know About Your Money

Most of us received little guidance or instruction on how to handle money when we were growing up. That’s OK — we can learn now, a little bit at a time. Let’s start with the basics.

How do most of us learn how to use our money wisely and well? When we’re growing up, we’re given special instruction in important subjects — swimming, driving, sex — to arm us with info and keep us from harm.

Yet when it comes to managing our money — an activity that every one of us needs to do, every day — we receive surprisingly little preparation. We’re not taught much about it in school, because education systems leave it to us to learn from our families and friends. However, those people often don’t fill in the gaps because money can be such a loaded or taboo topic.

Natalie Torres-Haddad, who grew up in southern California, saw many people around her struggling with debt and financial instability. She was determined to be the exception, and she purchased her first rental property in her early 20s and earned an MPA in Finance & International Business. In the process, however, she became buried in debt. Only by teaching herself the basics of money — basics that she’d never learned — was she able to steady herself and her finances.

Today she leads workshops and sessions to prevent others from falling into the money pit. (She’s also the author of the self-published Financially Savvy in 20 Minutes ). She’s found that even among the college-educated people she meets, “the majority feel confused and overwhelmed about balancing their income and expenses,” she says. The stats show they’re not alone. A 2015 Ohio State University study reported nearly 70 percent of college graduates in the US say they don’t feel equipped to manage money and deal with their debt.

Not only must we get up to speed on the basics, we also need to start having honest conversations with each other about money, says Torres-Haddad. In the same way we’d tell family and friends that we’re cutting out refined sugar from our diets or practicing yoga to increase our flexibility, we should be open with them about the steps we’re taking to boost our financial health. That way, we can get advice and support. This transparency, she adds, can also make us less susceptible to peer pressure-related spending. How many of us have agreed to a pricey meal or weekend trip because we didn’t want to come clean about our money concerns?

Becoming financially literate does not require a huge time investment. Torres-Haddad believes we can start by dedicating 15 – 20 minutes a day to developing our skills and knowledge by learning new terms and resources. Just like attaining literacy in a foreign language, she says, “it’s an ongoing education.” Here are three things you need to know about your money.

1. Know How Much Money You’re Bringing in Every Month vs. How Much You’re Spending

Most of us can rattle off our salaries in our sleep, but could you do the same for your monthly after-tax income and where you’re spending your money every month? If you can’t, that’s normal. But now is the time to learn your actual take-home pay and your actual expenses (and not just ballpark figures or estimates).

For your income, look at your physical or online pay stubs, and start keeping a record of the after-tax amounts. If you’re a salaried employee, that number should be fairly steady; if you’re not, those numbers will vary.

For your monthly expenses, Torres-Haddad suggests writing down — whether it’s in a physical or online notebook — every single daily purchase (coffee, take-out, Uber, online shopping, etc) you make and every single ongoing payment you make through autopay or credit cards (Netflix, gym membership, car insurance, utilities, etc.).

If you’ve never done this before, you may find this uncomfortable — even painful — but it will force you to face up to your spending habits. It will also make these purchases visible. Often, our regular outlays (such as Netflix, Hulu, etc.) can go unnoticed or unquestioned, and our daily spends — especially if we pay by debit card so the funds are instantly drawn from our bank accounts — can go forgotten. Torres-Haddad calls the latter “runaway spending” — “when the little things that you thought cost only a few dollars actually cost much more” in the long run. Take a daily $5 green smoothie. By making them at home, you could save yourself a few hundred dollars in a month.

After you have a fundamental understanding of income and expenses, you can download an app to help you track these categories; see your bank account, credit-card and loan balances; and organize your purchases into buckets so you can identify areas where you might cut back. Two free apps to try are Mint or Charlie, says Torres-Haddad. But, she cautions, apps can be a little “out of sight, out of mind,” meaning if you need extra help to be aware of your spending, stick with the pen-and-pad (or fingers-and-keyboard) method a while longer.

2. Know Your FICO Score and Your Other Credit Scores

While you don’t need to have a good credit score to be financially literate, you must know what it is. ( Note: Most of the information in this section applies to people living in the US.) In the US, FICO was the first company to offer a three-digit credit-risk score for lenders to use when deciding whether or not to approve a loan or line of credit, a credit limit, and an interest rate. There are three other national credit reporting bureaus — Experian, Equifax and Transunion — which also keep track of all your loans (student, auto, personal, etc.) and your balances and histories for all your credit cards (whether issued by banks, stores or businesses).

However, the FICO score is the one most frequently used when you apply for credit cards, mortgages and most types of loans; rent an apartment; or sign up for utilities. FICO scores range from 300 to 850; 670 and up is seen as a good score and 800 and up is excellent. While the FICO score is calculated with a proprietary algorithm, the primary factors that go into it are your repayment history (do you pay your credit-card bills on time? how late are you?), how much debt you’re carrying on cards and loans, how long you’ve successfully held a credit card or loan for; and whether you’ve managed to hold a mix of different kinds of credit.

Most banks and credit cards offer free access to your FICO score on their mobile apps and websites ( here’s a list of the ones that do). If you don’t use one of these companies, you can also find out how to access your score on FICO’s helpful FAQ, including a chart showing where your score falls between “Poor” and “Exceptional.”

Besides checking your FICO score every year, do an annual check of the reports issued by Experian, Equifax and Transunion. This is so you can verify that they’re correct, make sure no one has opened up a line of credit in your name, and see where you might improve. You are entitled to a free copy of a credit report from each bureau once a year. Beware: Many sites will charge you a fee, so use the federally approved and secure Annual Credit Report site.

If it’s your first time checking or you’re about to make a big purchase (such as a car or a home), Torres-Haddad suggests getting all three reports at once. After that, she recommends spacing them out throughout the year. That way, you can quickly catch any errors, fraud, identity theft or any other actions that could hurt your credit history. Mark your calendar so you know when you can request your next free credit report.

3. Know How Much Credit Card Debt You’re Carrying

Knowing how much credit-card debt you’re carrying — and how quickly it’s increasing due to interest — is critical to your financial literacy. Make a list (on paper or on a computer) of each of your credit cards, their current balances, and their current interest rate. Then, put them in order from highest interest rate to lowest.

In general, says Torres-Haddad, this should be how you should prioritize paying them off, paying as much as you can towards the card with the highest interest rate while paying the minimum on the other cards. Called the “ debt-snowball method,” this was popularized by money expert Dave Ramsey.

If you have any cards that offered a 0% APR as a promotion when you signed up, mark down the date on which the promotional rate expires because that’s when you can expect your debt to accumulate at a high interest rate (20% or more). Try to budget your monthly payments so that this card will have little to no balance when that expiration date arrives.

Believe it or not, having a credit card can be a great thing for a person’s FICO and credit scores — if you use it responsibly. Of course, carrying no debt on your cards is best. Otherwise, Torres-Haddad recommends using no more than 30 percent of your available credit limit. So if you have two credit cards with limits of $6K apiece, totalling $12K in available credit, make sure the total balances you’re carrying do not exceed $4K.

If you’ve managed to pay off a credit card, congratulations. But while you may be tempted to close it, Torres-Haddad advises against it. Why? Closing the account will shrink your total amount of available credit and cause your credit score to dip. Instead, delete the card number from any online shopping accounts, cancel any auto-pays billed to it, and freeze the card in ice. It may sound silly but it means that if you want to use it, you’ll be forced to wait for it to defrost — and forced to take a little time to think about your purchase.

When choosing a new credit card, look for ones that offer incentives — such as travel points or cash back — which could help you and your finances. Torres-Haddad recommends going to nerdwallet.com and bankrate.com to compare credit card offers.

Obviously, these three points represent just a small part of financial literacy. That’s why Torres-Haddad urges people to be patient and to learn gradually. Two books she recommends are Napoleon Hill’s Think and Grow Rich!  and Robert T. Kiyosaki’s Rich Dad, Poor Dad. For those who like to get information through listening, she suggests the “Popcorn Finance” and “Her Dinero Matters” podcasts.

When you can, supplement your research with an in-person workshop, adds Torres-Haddad. “Even going to one financial literacy workshop can have a life-changing effect,” she says. A good time to find free workshops is April, which is Financial Literacy Month in the US. One of the best investments you can make in your life is to educate yourself about money, says Torres-Haddad. “It can really give you a lot of peace of mind.”

By: Erin McReynolds

Source: How Financially Literate Are You? 3 Things You Should Know About Your Money

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How To Follow The 50-30-20 Budgeting Strategy

This story is part of CNBC Make It’s One-Minute Money Hacks series, which provides easy, straightforward tips and tricks to help you understand your finances and take control of your money.

Managing your finances and setting a monthly budget can be challenging. But if you’re overwhelmed with where to start, the 50-30-20 strategy can simplify the process. The plan divides your income into three broad categories: necessities, wants, and savings and investments. Here’s a closer look at each.

50% of your paycheck should go toward things you need

This category includes all of your essential costs, such as rent, mortgage payments, food, utilities, health insurance, debt payments and car payments. If your necessary expenses take up more than half of your income, you may need to cut costs or dip into your wants fund.

20% of your paycheck should go toward savings and investments

This category includes liquid savings, like an emergency fund; retirement savings, such as a 401(k) or Roth IRA; and any other investments, such as a brokerage account. Experts typically recommend aiming to have enough cash in your emergency fund to cover between three and six months worth of living expenses.

Some also suggest building up your emergency savings first, then concentrating on long-term investments. And if you have access to a 401(k) account through your employer, it can be a great way to save a portion of your income pre-tax.

30% of your paycheck should go toward things you want

This final category includes anything that isn’t considered an essential cost, such as travel, subscriptions, dining out, shopping and fun. This category can also include luxury upgrades: If you purchase a nicer car instead of a less expensive one, for example, that dips into your wants category.

There isn’t a one-size-fits-all approach to money management, but the 50-30-20 plan can be a good place to start if you’re new to budgeting and are wondering how to divide up your income.

Nadine El-Bawab

By: Nadine El-Bawab / @nadineelbawab

Source: How to follow the 50-30-20 budgeting strategy

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Critics:

While that may not be realistic, there are some simple things you can do right now to improve your money situation. Try these five steps for successfully managing your personal finances. Another bonus? If you stick to these five tips, your financial problems may start to diminish, and you can start reaping the rewards of lower debt, saving for the future, and a solid credit score.

Take some time to write specific, long-term financial goals. You may want to take a month-long trip to Europe, buy an investment property, or retire early. All of these goals will affect how you plan your finances. For example, your goal to retire early is dependent on how well you save your money now. Other goals, including home ownership, starting a family, moving, or changing careers, will all be affected by how you manage your finances.

Once you have written down your financial goals, prioritize them. This organizational process ensures that you are paying the most attention to the ones that are of the highest importance to you. You can also list them in the order you want to achieve them, but a long-term goal like saving for retirement requires you to work towards it while also working on your other goals.

Below are some tips on how to get clear on your financial goals:

  • Set long-term goals like getting out of debt, buying a home, or retiring early. These goals are separate from your short-term goals such as saving for a nice date night.
  • Set short-term goals, like following a budget, decreasing your spending, paying down, or not using your credit cards.
  • Prioritize your goals to help you create a financial plan.

Contents:

Meet the middle-aged millennial: Homeowner, debt-burdened and turning 40

This simple money hack could help you boost your retirement savings by $20,000 or more

Making a few easy changes could help you save money on your next grocery bill

Buying a new car? Here’s how to figure out what you can afford

Remove these 7 things from your resume ‘ASAP,’ says CEO who has read more than 1,000 resumes this year

In 1999, Warren Buffett was asked what you should do to get as rich as him—his advice still applies today

Want to be better at small talk? An ex-FBI agent reveals the method he uses to get people to open up

Self-made billionaire Thomas Tull on becoming rich, and how Warren Buffett changed his thinking

Do You Get Your Money’s Worth From Buying An Annuity?

Coin Stacks And Chart Graphs On A Chessboard

Once upon a time, in the (somewhat mythical) past of traditional defined benefit pensions, your employer protected you from the risk of outliving your money in retirement, by acting, more or less, as an insurance company providing an annuity. With that benefit receding into the past, many experts have been hoping that Americans with 401(k) plans would avail themselves of annuities on their own, to give themselves the same sort of protection, and, indeed, the SECURE Act of 2019 made it easier for those plans to offer their participants an annuity choice, and, when surveyed, 73% of those participants said they would “consider” an annuity at retirement.

At the same time, though, Americans distrust annuities — in part because traditional deferred annuities had high fees and expenses and only made sense in an era predating IRAs and 401(k)s, when they were attractive solely due to the limited tax-advantaged options for retirement savings. But that’s not the only reason — annuities, quite frankly, aren’t cheap.

How do you quantify the value of an annuity? In one respect, it’s subjective and personal: do you judge yourself to be in good health, or does family history and your list of medications say that you’ll be one of those with the early deaths that longer-lived annuity-purchasers are counting on? Do you want to be sure you can maintain your standard of living throughout your retirement, or do you figure that you won’t really care one way or another if you have to cut down expenses once you’re among the “old-old”?

But measuring the value of annuities, generally speaking, does tell us whether consumers are getting a fair deal from their purchases, and here, a recent working paper by two economists, James Poterba and Adam Solomon, “Discount Rates, Mortality Projections, and Money’s Worth Calculations for US Individual Annuities,” lends some insight.

Here’s some good news: using the costs of actual annuities available for consumers to purchase in June 2020, and comparing them to bond rates which were similar to the investment portfolios those insurance companies hold, the authors calculated “money’s worth ratios” that show that, for annuities purchased immediately at retirement, the value of the annuities was between 92% – 94% (give-or-take, depending on type) of its cost. That means that the value of the insurance protection is a comparatively modest 6 – 8% of the total investment.

But there’s a catch — or, rather, two of them.

In the first place, the authors calculate their ratios based on a standard mortality table for annuity purchasers — which makes sense if the goal is to judge the “fairness” of an annuity for the healthy retirees most likely to purchase one. But this doesn’t tell us whether an annuity is a smart purchase for someone who thinks of themselves as being in comparatively poorer health, or with a spottier family health history, and folks in these categories would benefit considerably from analysis that’s targeted at them, that evaluates, realistically, whether annuities are the right call and whether their prediction of their life expectancy is likely to be right or wrong.

In the second place, the 92% – 94% money’s worth calculation is based on the typical investment portfolio of insurance companies, approximated by the returns of BBB-rated bonds. This measures whether the annuity is “fair” or not, in that “moral” sense of whether the perception that the company is “cheating” is customers is real (it’s not).

But these interest rates are very low. The authors, in addition to their calculations of “money’s worth,” back into the implied discount rate from the annuity costs themselves. For men aged 65, that interest rate is 2.16%; for women aged 65, 2.18%.

Now, imagine that you compare this annuity to an alternative plan of investing your money in the stock market, earning 7% annual returns, and believing you can predict your death date (or not really caring if you fall short or end up with leftover money for heirs).

The cost of the protection offered by the annuity, the guarantee that you will never run out of money, and that you will not suffer from a market crash, is very expensive indeed — when you compare apples to oranges in this manner, the money’s worth ratio is, according to my very rough estimates, more like 60%, meaning that about 40% of your cash is spent to purchase the “insurance protection” of the annuity.

And, again, that’s not because insurance companies are cheating anyone; that’s solely because of the wide gap between corporate bond rates and expected returns when investing in the stock market— a gap which was particularly wide in the summer of 2020 when this study was competed, but remains nearly as wide now.

As it stands, Moody’s Baa rates are in the 3% range; in the 2000s, they were in the 6% range, and in the 1990s, from 7% – 9%. Although this drop in bond rates is good news for American homebuyers because this marches in tandem with mortgage rates, it makes it far harder for retirees to manage their finances in ways that protect them from the risks that they face in their retirement.

Perhaps interest rates in general, and bond rates specifically, will increase as we leave our current economic challenges, but there’s no certainty, and as long as this gap between bond rates and expected stock market returns remains so substantial, retirees will be challenged to find any sort of safe investment that makes sense for them. Which means that what seems like a great benefit for Americans looking to borrow money — for mortgages, car loans, credit cards — can pit the elderly against the young in a generational “us vs. them” contest.

As always, you’re invited to comment at JaneTheActuary.com!

Follow me on Twitter. Check out my website.

Yes, I’m a nerd, and an actuary to boot. Armed with an M.A. in medieval history and the F.S.A. actuarial credential, with 20 years of experience at a major benefits consulting firm, and having blogged as “Jane the Actuary” since 2013, I enjoy reading and writing about retirement issues, including retirement income adequacy, reform proposals and international comparisons.

Source: Do You Get Your Money’s Worth From Buying An Annuity?

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Critics:

An annuity is a series of payments made at equal intervals.[1] Examples of annuities are regular deposits to a savings account, monthly home mortgage payments, monthly insurance payments and pension payments. Annuities can be classified by the frequency of payment dates. The payments (deposits) may be made weekly, monthly, quarterly, yearly, or at any other regular interval of time. Annuities may be calculated by mathematical functions known as “annuity functions”.

An annuity which provides for payments for the remainder of a person’s lifetime is a life annuity.

Variability of payments

  • Fixed annuities – These are annuities with fixed payments. If provided by an insurance company, the company guarantees a fixed return on the initial investment. Fixed annuities are not regulated by the Securities and Exchange Commission.
  • Variable annuities – Registered products that are regulated by the SEC in the United States of America. They allow direct investment into various funds that are specially created for Variable annuities. Typically, the insurance company guarantees a certain death benefit or lifetime withdrawal benefits.
  • Equity-indexed annuities – Annuities with payments linked to an index. Typically, the minimum payment will be 0% and the maximum will be predetermined. The performance of an index determines whether the minimum, the maximum or something in between is credited to the customer.

See also

References

  • Kellison, Stephen G. (1970). The Theory of Interest. Homewood, Illinois: Richard D. Irwin, Inc. p. 45
  • Lasher, William (2008). Practical financial management. Mason, Ohio: Thomson South-Western. p. 230. ISBN 0-324-42262-8..
  1. Jordan, Bradford D.; Ross, Stephen David; Westerfield, Randolph (2000). Fundamentals of corporate finance. Boston: Irwin/McGraw-Hill. p. 175. ISBN 0-07-231289-0.
  • Samuel A. Broverman (2010). Mathematics of Investment and Credit, 5th Edition. ACTEX Academic Series. ACTEX Publications. ISBN 978-1-56698-767-7.
  • Stephen Kellison (2008). Theory of Interest, 3rd Edition. McGraw-Hill/Irwin. ISBN 978-0-07-338244-9.

Plastic Powers On, Setting Payments Record In 2019, Raising Fears For Cash

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Figures released today provide further evidence of the UK’s rapid transition to a cashless society, with debit and credit cards accounting for over half (51%) of all payments for the first time in 2019.

According to UK Finance, the trade body for financial institutions, debit cards were the most-used method with 17 billion payments, of which 7 billion were contactless. An estimated 98% of the adult population has a debit card.

Credit card use rose 7% in 2019 to 3.3 billion payments, of which 1.3 billion were contactless.

Cards over cash

The coronavirus pandemic has accelerated the use of cards, with many retailers declining cash or stating they prefer contactless payments for hygiene reasons. The limit for contactless payments was raised from £30 to £45 in April to allow this method to be used more often.

While cash payments fell by 15% to 9.3 billion in 2019, it was still the second most frequently used method, representing 23% of all payments in 2019.

So-called remote banking also increased in popularity in 2019, following a well-established trend. UK Finance says over 80% of adults used online banking, mobile banking or telephone banking in 2019 compared to 60% in 2009.

Consumers made over one billion remote banking payments in 2019, the first year this has happened. Across all age groups, 72% use online banking and 50% use mobile banking.

Disadvantaged groups

Concerns have been raised that the flight towards plastic-based payments and the reduction in physical bank branches could disadvantage sections of society that still rely heavily on cash.

John Crossley, head of money at Compare the Market, the price comparison site, said: “The ‘cash is king’ mantra is clearly a thing of the past. Debit cards overtook cash in 2017 to become the most frequently used payment method in the UK. By 2028 cash is expected to account for just 9% of all payments.

“In the rush to ditch notes and coins for plastic cards, it is important the banking sector caters for those who rely on cash for everyday living, including paying bills. Cash remains a lifeline for some elderly and vulnerable people, and it is important cash remains accessible for those who wish to continue using it.”

Risk of alienation

Matt Phillips of Diebold Nixdorf, which designs and manufacturers ATMs, said: “We’re seeing questions around whether the pandemic will propel the UK into being a fully cashless society, but this by no means spells the end for cash.

“We expect usage to pick up again when restrictions ease and eventually lift. Cash is essential in our economy and removing it risks alienating thousands of the country’s most vulnerable households.”

Mr Phillips says there is an appetite across the banking sector to reduce reliance on cash, in part due to the costs of delivering cash services to remote communities. But he says there is a way to balance these challenges: “If banks collaborated more, pooled their resources and accelerated the adoption of cash recycling – where money deposited by customers is automatically verified, sorted and re-used within the ATM – it would bring down their costs and sustain accessibility to cash.”

Stephen Jones of UK Finance acknowledged the potential problems associated with the disappearance of cash: “We are fully aware that not all customers are digitally-enabled, which is why we’re working flat-out to ensure people have access to cash and that everyday banking services remain available to help the country through these difficult times.”

Shopping with cash

Consumer lobby group Which? says vulnerable people risk being left with no way to pay for essential products and services as the coronavirus crisis further accelerates the UK’s shift to a cashless society. It wants government action to ensure the cash system does not collapse.

Looking at behaviors in the pandemic, Which? found that 51% of those shopping for someone else had been paid in cash, highlighting the challenge a cashless society presents for those who are not yet ready or able to make digital payments.

The Which? research also highlighted that one in 10 people have been refused by shops when trying to pay for items with cash in recent weeks. A quarter of those were left unable to purchase the item in question on at least one occasion as they had no alternative means of payment.

In its March Budget, the government said it would introduced legal protections to ensure continued access to cash for as long as people need it.

Which? argues the pandemic means the government’s pledge risks becoming obsolete if current trends continue to go unchallenged. An estimated 10,500 free-to-use cash machines have been removed or replaced with fee-charging machines since 2017.

Link, which manages the UK’s largest cashpoint network, says approximately £1 billion is still being withdrawn from ATMs every week, but the long term trend is one of accelerating decline. It says the current level of cash usage is currently at a level that was not expected for another five years.

Notemachine, an ATM operator, says cash withdrawals have reduced by 45% since the introduction of the lockdown – although it notes the average value withdrawn has increased by 13 per cent.

Support for retailers

In addition to long-term support for cash, Which? wants the government to act urgently to ensure people can continue to use cash to pay for essential goods and services during the pandemic. This would include supporting retailers to accept cash and offering guidance on how to handle banknotes and coins safely.

Gareth Shaw at Which? said: “It’s vital that the already fragile cash system is not left to collapse completely as the UK’s shift to a cashless society accelerates.

“The government must urgently press ahead with the legislation it has already committed to before it becomes obsolete, as failure to do so risks excluding millions of people from engaging in the economy.”


Figures from the Bank of England show that people in the UK repaid £7.4 billion of consumer credit in April, double the repayment in March, which itself was a record.

Some £5 billion of repayments were on credit cards, with £2.4 billion of other loans also repaid in April.

According to James Fairclough at AA Financial Services, 85% of UK adults have spent less during the lockdown, with savings achieved on holidays, eating out, shopping and buying petrol: “Coronavirus is impacting our livelihoods, family wellbeing and the economy at large. There are doubts over when the restrictions will be lifted and, for many, what the impact may be on job security.

“Given this economic uncertainty, it is understandable that many people are planning to use any surplus money they accumulate from reduced spending in lockdown to top up rainy day savings, or clear debts.”

I am the UK editor for Forbes Advisor. I have been writing about all aspects of household finance for over 30 years, aiming to provide information that will help readers make good choices with their money. The financial world can be complex and challenging, so I’m always striving to make it as accessible, manageable and rewarding as possible.

Source: https://www.forbes.com

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Here’s Why Dan Believes Only Idiots Use Debit Cards And Why Credit Cards Are Better. If You Want To Reach Financial Success So You Don’t Have To Worry About Money, Click Here To Get Your Best High-Income Skill: http://creditcards.danlok.link You’re probably wondering, “Should I use debit cards or credit cards to maximize my financial potential?” Well, in this video, Dan Lok is going to be straightforward with you as to why he believes only idiots use debit cards, and why credit cards are better. If you liked this video and want to see more like this one, hit the “like” button and comment below. 👇 SUBSCRIBE TO DAN’S YOUTUBE CHANNEL NOW 👇 https://www.youtube.com/danlok?sub_co…

5 Personal-Finance Mistakes That Kill Promising Companies

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For most people, personal- mistakes affect only themselves. For entrepreneurs, a personal-finance slip-up can have far-reaching consequences. People who get into tight financial spots while running their businesses must make difficult choices about which bills to pay, which opportunities to let go and which partners to leave.

Founders of startups are no strangers to running lean, but that’s no reason to add to the pile. Good personal-finance habits set entrepreneurs up for success by empowering them to focus their energies on the growth of their companies. Bad habits take their attention away from their businesses and hinder their ability to expand.

Don’t let your focus on your company lead you to neglect your own affairs. Watch out for these common personal-finance mistakes, and take proactive measures to keep your life (and your startup’s growth) on track.

Letting your score slip

No matter how far off the grid you try to run, your credit score follows you. , personal loans, and even insurance premiums all depend at least partially on your credit score. Fail to pay attention to yours, and you could quickly find yourself paying exorbitant interest rates — if you qualify for credit at all.

Take time to familiarize yourself with the different aspects that contribute to your credit score. According to Chime, there’s more than one model that can be used to determine your score, but overall, total credit usage, balances and available credit are most influential. Understand the contributors to your credit score so you can take advance measures to keep your numbers high.

Carrying high-interest debt

Not all debt is bad debt, but some debts can become nightmares if you aren’t careful. Student loans tend to have reasonable rates, even though high balances can make them look intimidating. Payday loans and credit card balances carry much higher interest rates than comparable lines of credit. According to WalletHub, the average credit card interest rate hovers around 19 percent; Debt.org reports that payday loans charge several times that, sometimes as high as 500 percent.

Take inventory of all your outstanding debts, along with their interest rates. Then, start paying the minimum amount on all but the debt with the highest rate, pouring as much toward that bill as you can. When you finish paying that one, rinse and repeat the process.

Not building an

carries substantial risk, even for people on solid financial footing. Go in without a backup plan, and you could find yourself wondering how to pay rent tomorrow. An emergency fund insulates you from short-term problems and gives you wiggle room when you have to wait a while between income sources.

Vanguard recommends keeping an emergency fund to cover three to six months worth of essential expenses. Depending on your personal situation, you may need more or less. Someone with a working spouse and a modest living situation may not need more than a month of backup, while a single person living in an expensive apartment should keep several months of funding in reserve.

Failing to separate your accounts

You’ve probably heard stories about successful founders who poured their life savings into their companies and came out on top. Many entrepreneurs fund their companies from their own accounts, and that’s a perfectly healthy way to start a company. However, if you start depositing funds from your customers’s orders in the same account you use to pay your electricity bill, you invite massive financial (and legal) headaches into your life.

Even if you’re a solopreneur doing freelance work, make the effort to open and maintain a separate account for your business. Instead of taking funds directly from your company coffers, recommends paying yourself a salary. When you cap your income, you can get a better understanding of where your business stands and build up savings to grow and invest.

Allowing accounts to go to collections

Don’t like to look at your bank accounts until absolutely necessary? Throw away bills without opening them? You’re not alone. Avoiding the reality of bills and budgeting can reduce stress in the short term, but the longer you avoid looking, the worse the situation becomes. Bury your head in the sand long enough, and a bill that you could have easily managed could move to a collection agency.

Not only does a bill in collection severely harm your credit score, but it can also lead to massive stress as debt collectors begin hounding you for payment. Schedule a time on your calendar once a week to go through your mail and check on your online accounts. That 30 minutes of financial upkeep per week could save you and your business thousands in the long run.

Better personal finance means better business finance, and better business finance means a smoother ride to the top. You deserve to focus on your company’s growth, so don’t complicate the matter with missed bills and poor credit. Take some time to get your affairs in order, then devote your energies to your company, confident in the knowledge that you’re on the right track.

Rashan Dixon

By

Source: https://www.entrepreneur.com

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