Financial Literacy

There are several ways that your credit rating impacts your finances, so it is very important to maintain the best score that you can. A new study showed that a whopping 76% of personal loan applicants are denied. Among the people who do get approved for loans, 35% of them reject the loan because the interest rate or loan amount is not what they want. Presumably this is because their credit rating wasn’t good enough for the best loan terms.

Getting a personal loan comes down to creditworthiness and the average American’s credit score is 687. This is well below the average 741 FICO score of those getting approved for personal loans.

Although states have differing regulations on what your credit score can be used for, it is commonly used in decision-making for:

1. Loans and mortgages
2. Insurance rates
3. Apartment rental
4. Employment screening
5. Car lease rate
6. Utility services

Some banks and credit card companies provide your credit score for free. The four ratings agencies (Esperion, TransUnion, Equifax, and Innovis) also offer your credit score for free, once a year. If you have average or poor credit (under 750), you may take steps to improve it from many online resources, books, and courses.

When some people hear the term self-insurance, they think of millionaires with piles of cash so they don’t have to buy any insurance. In reality, you can start your own self-insurance program with only $500. Here’s how:

First, a little background on insurance with an example: If you had a car wreck that involved other people with physical injuries, it could be catastrophically expensive. Let’s say $100,000 in potential financial liability. Of this $100,000 of risk exposure, you take on the first $100 of that risk and pass the rest on to an insurance company with a policy that has a $100 deductible. The insurance company may not want all of that risk, and so they may re-insure part of the policy risk with another insurance company called a re-insurer. You are actually self-insured now – the first $100 risk is yours to fund.

But there is a financial opportunity. If you could save up $500 into a savings account dedicated to self-insurance, then you would be able to afford cheaper insurance with a higher $250 deductible. Your account will now allow you to pay for 2 potential insurance claims within a year, $250 X 2 = $500. Since your insurance premium will go down with a higher deductible at $250, you can then add that premium savings to your self-insurance account each year. As your self-insurance account grows, you can raise the deductibles on your insurance coverages (health, auto, homeowners, renters, business, disability, long-term care, etc.).

In this manner, you can lower your out-of-pocket expense for insurance and the savings is piling up in one of your savings accounts. The key concept for self-insurance is: you do not need to take on 100% of the total financial risk exposure, just a small part of the risk, the cheapest and most expensive part of the risk. As was mentioned, insurance companies only accept certain risks and pass on some of the risk to others through buying re-insurance. Start small with your self-insurance account, but keep adding your premium savings into your self-insurance account so that it will grow over time. As your self-insurance account keeps growing, you can raise your deductibles over time to save even more money. Your self-insurance account is actually working hard for you. Having this dedicated fund allows you to lower your insurance premiums, and this savings is your investment return on your account, it is providing you a decent return on your money besides earning a little interest.

Anecdotal story: last week, an old colleague told me of a neighbor whose house just burned down. It was a very old farmhouse and the family had lived in it for over 40 years. Some structural defects preventing them from getting homeowner’s insurance, so they have no funds to recover or rebuild. They also have no money to replace any of their furnishings or personal effects. Instead, if they had acted as their own self-insurer, say setting aside $1,000 per year, in a 2% savings account over the last 40 years, they’d have accumulated $61,000. When this family was turned down for homeowner’s insurance, if they had been financially literate, they would have funded their own self-insurance reserve and saved themselves.

According to a survey by MagnifyMoney.com, half of American shoppers borrowed between $1,000 and $5,000 on holiday gifts (and 64% of borrowers did NOT plan on going into debt for gifts). While 60% claimed that they plan to pay their debt off within 5 months, if a borrower paid the minimum on a credit card balance of $1,000, it would take 6 years to pay it off! To add further financial damage, half of these borrowers are paying an interest rate over 10%.

These are sad statistics and point to a lack of financial literacy. The holidays don’t’ randomly show up on your calendar! Yet, these borrowers failed to save money in anticipation of an expected expense. Since they did not save money, they now have to live further below their means to pay it off, plus afford the interest expense.

The better way to go about buying holiday gifts is to plan for them:

1. Whatever you spent on gifts in 2017, divide that amount by 12 and set it aside each month so you don’t find yourself going into debt at the end of 2018.
2. Buying items during the year when you can get a good price, rather than November and December when they are at a peak price.
3. There is seasonality pricing for all kinds of items, and one tactic is to purchase items immediately after Christmas for the next year when items are on sale. Many people buy holiday cards, lights, and other known expenses right after the holidays when they are 50% off.

If you fail to do these, then you may be joining the borrowers paying unnecessary interest; hopefully taking less than 6 years to pay it all off.

When you choose to sell an item of value, there is a natural tendency to over value its worth to others.  If you reject reasonable offers and refuse to make a counter offer, then you’re likely to be left without any buyer. Without a buyer, you may watch your item fall in value from age, obsolescence, or market changes.

I have observed this phenomenon on countless occasions, even among professionals:

• A friend rejected a $31,000 offer for her car, only to accept a $23,000 offer a year later. A needless loss of 25%
• An acquaintance rejected a $120,000 offer for her home, only to accept a $79,000 offer 18 months later. A needless loss of 34%
• A friend is a business analyst. One of his clients has been actively trying to sell his business for a long time. Three years ago, the owner rejected an offer for his business of $128 million, and has not received an offer since then. My analyst friend doesn’t think anyone would offer more than $45 million today because of increased competition. A needless loss of 65%
• A relative priced his used car worth $3,000 at $6,000 so he didn’t get a single offer in 2 years. Then the engine-timing belt failed, breaking all of the engine valves. With a useless engine, the most he could recover for his car was $400 from the junkyard, minus the tow fee. A needless loss of 88%

I could list many more stories like these with different assets, but hope that you are beginning to see the pattern. An overly optimistic valuation leads to rejecting reasonable offers. Rejecting reasonable offers likely leads to giant financial losses and delays. The delay is the time period it takes for the seller to accept the reality of the marketplace. But this is unnecessary – if you do this work upfront. Instead of being offended by a perceived low offer, make a counter offer. I know one couple unwilling to accept reality for 17 years and going. Every few years they put their home on the market at a price 30-40% higher than what it is worth. After a year of no offers, they take it off the market. They have done this many, many times and just removed their “For Sale” sign after no interest for 10 months. Meanwhile, the homes around them have been selling like hot cakes.

Please do not create your own similar story of needless financial loss to this list. Price your item reasonably and always make a counter-offer; which includes considering how long it might be before you receive another offer.

The banking industry would like you to borrow money from them, as much as possible and in as many ways as possible, and then make payments to them for as long as you live. This is how they can maximize earning interest from you. It is your role in this Debt Game to minimize the number and amount of loans, and making the interest rate charge as low as possible.

The banking industry wants you to believe:

• It is fine to borrow money to purchase a car.
• It is Ok to borrow a colossal amount for a bachelor’s degree.
• It is normal not to pay your credit cards off each month.
• Everybody borrows for boats, jewelry, and vacations.

The only way for you to win the Debt Game is:

• Never borrow money for anything but an affordable home.
• Maintain the highest credit rating to qualify for the lowest interest rates.
• The only favorable scenario to borrow money is when purchasing a business or asset that earns enough money to make all of the debt payments for you.

The money that you have to pay in interest is money that you have earned but can never: spend, save, invest, or donate. It is your financial assignment to perform better in the Debt Game so that you possess more of your money at the end of each month, and not your lender. So how are your relatives and friends doing in the Debt Game so far? (A family friend with an average income leased a brand new car right after I showed her precisely how much money is wasted by doing that.) How are you doing in the Debt Game so far? What can you start doing this month to improve your performance in the Debt Game?

Each year, the U.S. Social Security Administration (SSA) erroneously declares 5,000 Americans deceased, who are actually alive and well. The result quickly cascades across your finances, creating a paperwork mess that needs to be reversed. (The rate used to be 12,000 a year but system checks have reduced it to 5,000 a year).

So what happens when the government declares you dead? They automatically notify:

• Credit Bureaus
• Banks
• Credit Card Companies
• Health Insurance Providers
• Life Insurance Providers
• Medical Doctors
• Social Security Retirement and Disability
• Medicare
• Medicaid

Your first sign of trouble may be that your credit cards and ATM card no longer work. If SSA has erroneously classified you as deceased, you’ll need to go to an SSA office in person. You’ll need to bring your: birth certificate, passport, driver’s license, or other IDs to prove who you are. You need a written letter from SSA stating that you are NOT deceased. Make many copies of the letter because you’ll need to present it to all of the institutions listed above, or any other that is denying that you are alive. Going forward, you will likely need this letter for any new institutions that you may want to deal with, because they may also have the erroneous notice that you are deceased. So you need to be able to prove that you are not some scammer or identity thief.

Everyone says money doesn’t make you happy – so why do financial planners push it so much? That is easy to answer: sooner or later, something will occur for which you’ll have a critical need for money. And if you haven’t saved for this expense, there will likely be some unpleasant or expensive consequences. Let’s go through a few common ones:

• A relationship can be challenging, being broke can break it.
• Losing your job can be tough, being broke makes it a crisis.
• Your car breaking down is inconvenient, being broke makes you immobile.
• Needing some dental work can be painful, being broke makes you toothless.
• An illness is a bad break, being broke prolongs it or allows it to worsen.
• Having children can be expensive, being broke reduces their opportunity.
• Sometimes family members need financial assistance, being broke means you cannot help.
• Losing a loved-one is a tragedy, being broke can make it more difficult.
• Having a talent or aptitude is a blessing, being broke may prevent you from expressing it.
• Most people want to retire at some point, being broke makes that nearly impossible.
• Getting accepted to a great university is fantastic, being broke may mean you’ll have to turn them down for a cheaper school.
• Having a business idea is great, being broke may mean watching others profit from it.
• Needing money is stressful, being broke means you may have to borrow it and become poorer.
• Requiring a nursing home is disappointing, being broke means your only option is the worst state-run institutions.

Whatever your situation, having savings set aside is the best source of funds for:

• Necessary maintenance
• Repairs
• Opportunity
• Financial support
• Or for any unexpected event that requires money

Whenever something adverse occurs, being broke makes it worse. Having extra money may not make you any happier, but having some savings can solve your financial problems.

In personal finance, there are numerous ways to fall behind, get into trouble, make mistakes, or incur expenses that you could not avoid. You can’t do anything about the past, but you can start putting out your current financial fires before larger troubles arise on the horizon.

What are a few red alarms that your finances are headed toward serious trouble?

• A credit card is maxed out
• Fail to pay-off your credit card balance each month
• Have not opened a Roth IRA, even though you are working
• There are people financially relying up you, but you have no life insurance
• Routinely use payday or car-title lenders
• Getting divorced without a financial expert to split pensions and assets
• Have borrowed money from family and friends
• Student loans have gone into forbearance
• Your bad credit rating requires that someone else co-signs for your loan
• You have a variable interest-rate mortgage
• Prematurely taking money from retirement accounts
• Routinely gamble or buy lottery tickets
• Have clothing, shoes, or accessories that you never wear
• Overspend at restaurants and bars
• Do not monitor risky investments, doing nothing as they collapse in value
• Have money secrets that you keep from your spouse
• When you refinance your mortgage, you take out extra money
• Borrowing money from your 401(k) account
• Fail to set aside money for income taxes
• Have no estate planning – Will, Power of Attorney, or trusts

Some of these arise from not knowing what you can afford or living above your means, and others are from a lack of financial literacy. However, if you have run into anything similar to what is on this list, please use it as a trigger that you need to actively make some immediate changes in your life to create financially stability.

The state where you reside has an incredible impact on your lifetime expenses. The total tax burden on residents varies greatly between the states. But that is only a part of the cost-of-living equation. Housing, food, and even the price of gasoline, has prompted many people to move to a cheaper location. Of course, most people are tethered to their extended family or current job, but you may want to make the evaluation anyway. The cost of living between different states is so large it can make the difference between retiring early and never being able to retire.

GoBankingRates performs an annual study for retirees that are over age 65 and indexed the states for cost of living. In general, the Southeast, the band from Texas to Georgia is cheaper to live than the Northeast or Farwest states. Here are the top 5 most expensive states in which to live; along with the average annual expense:

1. Hawaii $83,887
2. California $60,887
3. Alaska $58,733
4. New York $58,264
5. Massachusetts $57,795

The cheapest 5 states for retirees are:

1. Mississippi $37,984
2. Arkansas $39,260
3. Oklahoma $39,820
4. Michigan $39,974
5. Tennessee $40,084

Although some cities (like New York City and San Francisco) have salary inflation to help compensate for their high cost of living, most areas do not. As a result, the money available for saving and investing is consumed by high rent and food costs. It is a lifestyle decision for you to make, but be aware that if you have financial goals, they will be delayed and impaired in high-cost of living areas.