3 Numbers That Matter More Than Your Credit Score

June 22, 2016

While knowing your credit score and the elements that impact it is important to your overall financial well-being, I sometimes find that people are overly concerned about it at the peril of other more important financial measurements. Your credit score only really matters when you’re applying for a loan, certain types of insurance and increasingly, when applying for a job. If none of those things are on your horizon, then your score is more like your high school ACT scores – perhaps a point of pride, but pretty irrelevant for the time being. Here are three more important numbers you should be focused on instead:

Net Worth

What is it: Assets (bank accounts, investments, home, car – basically cash or anything you could turn into cash) minus liabilities (credit card balances, car loans, student loans, mortgages, 401k loans – anything you owe).

Ideal number: As high as possible.

Why it matters: Your net worth is the ultimate measure of your ability to weather financial storms and maintain financial choices in life. The higher your net worth, the more financial freedom you can afford. There are countless cases of people who were millionaires on the asset side but broke on the net worth side as cautionary tales of neglecting this important number. Many of these people suffered during the last recession when their debts were called.

How to track it: I calculate my net worth on a monthly basis using Google sheets at the same time I sit down to set up any bill payments for the month. Here’s a snapshot of what it looks like:

Net worth snapshot

One nice side effect of this is the fact that I’m checking on all of my accounts at least once a month, so I can also do a quick check for anything fishy.

Worth noting: I pay all my credit cards off each month, but I include them on this sheet because that’s money I still owe that is reflected in my checking account above. It’s the only way to have a truly clear picture of what I have. I keep things like my student loan and Mini Cooper loan on there both for historical accuracy as well as for the psychological thrill of seeing a big fat ZERO under old debts. It’s a little, “Yay me! Look how far you’ve come!” moment each month.

Retirement Readiness

What is it: The best way to measure whether you’re saving enough to retire comfortably when you want to, especially if you have many years to go until retirement.

Ideal number: On track to replace about 80% of your current income, unless you’re within 5 years of retirement (when you can be more specific about how much you’ll need each year).

Why it matters: Retirement, which really just means transitioning to living off your savings one day, is one financial goal that pretty much all of us share. Whenever anyone asks me what to do with extra money or if they can afford to take on an additional debt payment or savings goal, my first question is, “are you on track for retirement?” Even though it may be one of your longest-term goals, it should be in the top 3 in terms of priorities.

How to track it: There are countless calculators out there, but for people with a 401k or other workplace savings plan, I prefer this Retirement Estimator.

Worth noting: Many people who say they aren’t on track to retire have never run a calculator. Knowing is the first step!

Emergency Fund

What is it: A cash cushion in place to tap into in case of an unexpected loss of income due to job loss or extended illness or injury.

Ideal number: 3 months of expenses, minimum. For single income households or career fields that aren’t as certain, at least 6.

Why it matters: Life happens and when it does, having cash that’s easily accessible takes away much of the financial stress and allows you to focus your energy on finding a job, healing or adjusting to the new normal.

How to track it: If you’re starting from zero, start with a goal of setting three months of rent or mortgage aside. Then tack on three months of your next highest expense and so on until you have all essential expenses covered. Once you’re at three months, make sure you adjust for any changes such as a new home, new baby, etc.

Worth noting: It can be tempting to keep a credit card on hand instead of the cash or want to invest the cash for higher earnings, but resist. Should something happen, consider the probability that it could be due to an economic downturn when credit may not be as easily accessible and/or the stock market could be down. The best place for your emergency fund is in a high yield savings account.

These are the three numbers you want to focus on. Even if you’re not at the ideal numbers yet, you’ll be well on your way to financial freedom if you can find a way to track them on a consistent basis. And you just may find your credit score improving as well.

The Top 5 Mistakes People Make When Paying Off Debt

June 01, 2016

As someone who has dug myself out of credit card debt a couple times, discussing the best way to get out of debt isn’t just some academic exercise. It’s sharing what worked for me, considering the fact that nobody’s perfect. However, in the process of working with people who are struggling with credit card debt, I’ve noticed some common mistakes they make that if avoided, could really accelerate the arrival of their Debt-Free Day. Here are five ways people mess up their debt pay-off plans:

1. Neglecting to address the root cause of the debt first. Most credit card debt stories start one of three ways:

  1. A job loss that doesn’t lead to any spending cuts
  2. An accumulation of unexpected expenses like vet bills, travel for family emergencies, car repairs, etc
  3. Reimbursable work expenses that come in after the bill is due and aren’t applied against the balance

Before you can really implement a debt reduction plan, you have to first address the reason you got into debt in the first place. This is typically a lack of an emergency fund compounded by living beyond one’s means.

First, you have to find a way to make sure you’re spending less than you make each pay period, while also setting aside an amount each month to build up that emergency fund. This might require temporarily canceling services like cable, taking a break from dining out or even selling a lesser-used car. Then find a way to stay within your means using something like the No-Tracking Budget.

2. Continuing to use cards while paying them off. I have seen so many people try this, thinking they would just pay off the new charges each month plus an added amount toward the old balance. It’s often driven by a desire to earn credit card rewards like airline miles or cash back. I don’t care what kind of record keeping system you try, this never works, and the resulting extra interest far exceeds any rewards you earn. You have to stop using credit cards in order to pay them off. No way around it.

3. Using low interest promo offers to pay off old cards, then running up the new card. When done correctly, using cards with promo balance transfer offers can be a great way to expedite your debt pay-off plan. Where it goes completely off track is when people either continue to use the card that was paid off or when they use the new card for purchases, thinking they might as well take advantage of the low promo rate. (See point number 2. If you really want to get out of debt, you have to stop using debt in order to get there.) Then use the Debt Blaster calculator to make your plan.

4. Worrying too much about their credit score. There are multiple factors that affect your credit score, but carrying a balance on your credit card is not required to boost your score. It’s the ratio of your balance to limit and the timeliness of your payments that matters. Besides, your credit score really only matters when you’re trying to borrow money and sometimes when applying for a new job. When working on a debt pay-off plan, the primary number you should be focused on is the total balance of your debt (and making it go down), which will naturally improve your credit score.

5. Making payments willy nilly. When little windfalls occur such as tax refunds, work bonuses or even income from a side gig, it’s a great idea to direct that money toward paying down debt. But I often see people just randomly throwing this extra money at balances without looking at the overall picture. When you find yourself with unexpected extra cash, first make sure that you have a little safety net in place to help in times of unexpected extra expenses. Once you have the safety net in place, go back to your Debt Blaster calculator and see where the payment will have the most impact on your pay-off timeline. That’s what the “New Lump Sum” field is for.

Above all, the most successful debt pay-off plans start with an actual plan. Figure out how much you can afford to pay each month toward the debt, then treat that lump sum amount like a fixed bill until all the debt is gone. Once you’ve paid it all off, you’ll already have a nice amount that you can direct toward saving for other goals.

What Climbing Mt. Everest Can Teach Us About Budgeting

May 31, 2016

Budget – the word can strike fear in the bravest soul. A budget for some is like climbing Mount Everest. Many have tried, many have perished, and the ones who get to the top are never the same again. As I was watching a documentary about Mt. Everest, the similarities between the ones who made it to the top and lived to tell about it and the ones who did not or perished are striking similar to those that successfully use a budget and those that have struggled to stick to a budget:

Unrealistic Expectations. Some of the failed climbers set unrealistic expectations about their own physical health, mental stamina and timeline to climb the mountain. Likewise, I have found one of the reasons why people fail to stick to a budget is that they create an unrealistic one. Look, you eventually are going to buy clothes and eat out. Even if it is not that often, put a dollar amount in the category. If are not sure where to start, look at your spending for last year, divide that number by 12 and use that number as your starting point for your monthly budget.

Not planning for the unexpected. Many climbers did not have a plan for how they would handle sudden changes in weather. Like the climbers, many people do not buffer what I called the “expected unexpected events.” We all know at some point our cars will need repairs and we will need to call a plumber. We just do not know when these things will happen. If you don’t  know how much to save, consider reviewing your bank account for car maintenance and home repair transactions for last year, dividing it by 12 and using that number as a starting point.

Not changing your plan. Successfully climbing Mt. Everest means making adjustments to your plan since your route may change or the terrain might take a climber longer than expected. As our lives change, the budget needs to be adjusted. Where I live in Georgia, my gas bill is higher in the winter and my electricity skyrockets in the summer. Also in the summer, I have to account for summer camp expenses. Review and adjust your budget to account for the highs and lows of your expenses throughout the year.

Of course, sticking to a budget is a lot easier than climate Mt. Everest. We can still learn a lot from it though. Making these adjustments can help you experience the “high” of financial wellness.

 

 

5 Songs That Could Ruin Your Finances

April 13, 2016

I love how music can pump you up, calm you down, soothe a broken heart, bring back old memories and generally set the tone in any situation. Ever notice yourself singing along while grocery shopping? That’s not on accident. Those songs are strategically selected to make you stay longer and buy more.

There are lots of great songs out there that have positive money messages (here are 5), but there are also plenty that send the wrong idea to listeners. At the risk of sounding like a boring fuddy duddy, I came up with some financial guidance to help solve these artists’ money blues. Try not to make these mistakes with your money:

Last Friday Night – Katy Perry: There are plenty of things mentioned in this song that moms everywhere wouldn’t approve of, but the part about maxing out your credit cards is what gets me. First of all, you don’t have to max out your cards to have fun and second, you definitely won’t be doing it all again next Friday without some serious financial discipline during the week to pay down the balance. Just in case, here’s our Debt Blaster calculator to help reign in that debt, Katy.

Time Of Our Lives – Pitbull: I actually understand what it’s like to take a look at your bank account balance and know that there’s not enough in there to cover upcoming bills. What I’m not a fan of is going out to “get up in this club” and blowing what money you do have when you know your rent is going to be late. If Pitbull just used the No-Tracking Budget to make sure he has enough set aside to cover bills, I bet he could pay his rent on time AND still have a good time.

Mo Money Mo Problems – Notorious BIG: I said this phrase to a friend in jest once, and he shot back with, “I bet the panhandler down the street would disagree.” That really made me think. It’s true that lottery winners and other people who strike it rich tend to have people coming out of the woodwork asking for money, and the whole idea is that we wouldn’t have these problems if we didn’t have money, but let’s not confuse that with thinking if you didn’t have money, you would have fewer problems. They’d just be different problems.

One of my favorite bits of wisdom to share is that if we all threw our problems in a big pile and could pick any ones we wanted, we’d all take our own back. Remember that the next time you get stressed about your finances (even if it IS a lack of having enough) and remember that it could always be worse. Shift your focus to what you DO have and you just might be surprised at how you begin to see more of those good things in your life.

If I Had A Million Dollars – Barenaked Ladies: So if you actually had a million dollars, you probably shouldn’t buy a llama or an emu. Here are some things you could do though: pay off debt, establish your emergency fund, max out your 401(k), or do something fun and then save the rest for the future. DON’T quit your job unless you’re pretty close to retiring already.

Just Got Paid – ‘N SYNC: One thing I could conclude about this is that Friday night is a bad night for your finances! Seriously though, I know plenty of people who celebrate “Paycheck Friday” with a “treat yo’self!” attitude and then spend the rest of the week complaining that they’re broke. It’s fine to cut loose and celebrate the weekend. Just make sure you’re putting something aside for the future, paying your bills and saving for budget-breaking expenses before blowing the rest on Friday night.

What about you? What are your favorite money songs? Share them with me on our Facebook page or email me and I’ll include them in a future post.

 

 

Why You Need Emergency Cash Reserves

March 18, 2016

Recently, Financial Finesse was fortunate enough to hire Steve White – a bright and handsome gentleman from Texas. If you doubt the handsome part, just ask him…he’ll tell you! Steve shared his view with me of why an emergency fund is critical for your life, and it sounded like something I should share with you. Continue reading “Why You Need Emergency Cash Reserves”

Do You Need Financial Earthquake Insurance?

March 07, 2016

Think of a financial shock that could totally knock you off your feet. That’s a financial earthquake. Unemployment, an illness, divorce, the death of a spouse, the loss of a home or a business – a financial earthquake is unexpected, unpleasant and unwelcome.   Continue reading “Do You Need Financial Earthquake Insurance?”

Why You Need a Plan B

February 26, 2016

I woke up one morning recently and scrolled through my emails on my phone before getting out of bed. I was shocked to see that one of my coworkers was involved in a hit and run accident. A car came barreling through an intersection, hit her car and drove away. She was injured in the accident and was, a day later, more upset that her workout routine was disrupted than being in a pretty major accident. Continue reading “Why You Need a Plan B”

The Five Biggest Myths About Saving Money?

December 10, 2015

When one of my colleagues recently sent me an article titled “The Five Biggest Myths About Saving Money, According to a Millennial,” I was intrigued. After all, it can be fun to bust myths, especially about something as important as saving money, and hearing a Millennial perspective is interesting, both because I might be one myself (I was born in 1979 and Millennials are sometimes described as being born in the late 70s and other times in the early 80s so maybe I’m actually something called an Xennial) and because they (or we) are the future. The article features the views of Ethan Bloch, the 30-yr old founder of Digit, an online financial company. Here are the “myths” about saving that Bloch aims to correct: Continue reading “The Five Biggest Myths About Saving Money?”

Finding Some Good In My Worst Financial Decisions

October 26, 2015

Have you ever made some really dumb mistakes with your money? Perhaps your rational brain was screaming “No!” at the time but your emotional brain won the battle.Well, even though I may be a professional financial planner tasked with leading others to smart financial decision-making, I’ve had some major money missteps along this journey called life too. This week is the first in a series of blog posts about a few of my biggest blunders and how I tried to turn those mistakes into some good old fashioned life lessons. (Unfortunately, some life lessons can be quite expensive.) Continue reading “Finding Some Good In My Worst Financial Decisions”

4 Financial Ground Rules For Everyone

September 23, 2015

Figuring out how to prioritize the various things you could do with your money is one of the key quandaries of individual financial planning. Should you use extra money to pay off your car loan, boost college savings for your toddler or finally take that trip to Australia? There are countless options, depending on your individual values and goals. But before working toward any of those goals, there are four aspects of your finances that should be in place, no exceptions: Continue reading “4 Financial Ground Rules For Everyone”

3 Under-Rated Retirement Accounts

September 03, 2015

One of the most common questions we get is how to prioritize funding different types of retirement accounts.In an ideal world, we would max them all out but most of us need to figure out which ones should take priority. I recently read this article that attempts to answer that question. While I generally agree with the points, there are three things that this article and many similar articles I’ve read tend to underestimate: Continue reading “3 Under-Rated Retirement Accounts”

Managing Your Pension In A 401k World

July 15, 2015

Lately there’s been a lot of criticism of 401k plans in the news and some of it is very valid. A 401k that is poorly designed and/or poorly managed can leave people in a bad place when they want to retire, but traditional pensions aren’t a perfect solution either. Don’t get me wrong. If you have a pension that is a GREAT benefit to have. You just can’t assume that everything will work out as planned. Continue reading “Managing Your Pension In A 401k World”

Money For Grown Ups

July 10, 2015

In a conversation with another financial planner here at Financial Finesse, the subject of having college–age children elicited laughter as well as groans. Cynthia Meyer and I shared some stories about our past “adventures” in finance and some mistakes we made along the way. She was inspired enough to write this blog post: Continue reading “Money For Grown Ups”

Financial Lessons From The Game Of Thrones Season Finale

June 19, 2015

My apologies if you haven’t watched the Game of Thrones season finale yet. But if you haven’t and you’re a fan, exactly what are you waiting for??? I’ll take a few liberties with the show’s broader themes and hopefully won’t spoil anything that you haven’t already heard or watched. Continue reading “Financial Lessons From The Game Of Thrones Season Finale”

4 Financial Planning Tips For Irregular Income Earners

June 17, 2015

Both my wife and I earn irregular income as freelance writers. Our yearly income can vary significantly depending on what type of projects, contracts, or gigs we land. Many of our friends in Los Angeles earn their living in a similar fashion in fields like editing, sound design, acting, post-production, or line producing. Salespeople, farmers, contractors, small business owners, and artists will all recognize the challenges of financial planning while earning variable income. Continue reading “4 Financial Planning Tips For Irregular Income Earners”

Your Financial Check-Up (Week 3): Achieve Your Most Important Financial Life Goals

June 08, 2015

It is week 3 of the Financial Check-Up Challenge and I’ve heard from readers who are participating in the challenge. I’ve also heard from others who basically told me, “I get it Scott. It’s important to check in occasionally to assess our financial health but LIFE HAPPENED and I didn’t get a chance.” Continue reading “Your Financial Check-Up (Week 3): Achieve Your Most Important Financial Life Goals”

Financial Planning For Any Weather

May 06, 2015

In some parts of the country, May means beautiful flowers and beautiful weather but for most of us, it also means checking the weather app on your phone constantly to have a clue of what’s going to happen. Will it be a mild spring day, rainy, or shorts and flip-flop weather? At least you can get a good guess from the weather app, but what about the unexpected events in your financial life? How do you prepare for life’s unexpected changes? Continue reading “Financial Planning For Any Weather”

Will You Be A “Boomerang Buyer”?

April 08, 2015

Since 2008, over 14 million homes have been lost to foreclosure. It may have been caused by a job loss, illness, or other heavy financial burden, but whatever the cause, losing a home can feel like a financial defeat….NOT SO! In 2014, roughly 10% of home purchases will be made by homeowners who lost their home to foreclosure or short sale between 2007 and 2013. These new homeowners, affectionately called “boomerang buyers,” did not give up on their desire to own a home and you shouldn’t either. Here are some steps you can take following a home loss to get back in a home of your own: Continue reading “Will You Be A “Boomerang Buyer”?”

You Are Not Your Financial Situation

January 27, 2015

When I tell people what I do for a living, I almost always get questions on how to become financially secure. As I started to talk to people, I noticed that a pattern started to emerge. People started connecting themselves to their financial situation vs. seeing their situation as a temporary situation. Continue reading “You Are Not Your Financial Situation”