Fast Fact Notes Chapter 5

Chapter 5 – What It Means to Be On Your Own
Time to “Fly Solo”

At the age of 18, you officially became - or will become - responsible for your financial life. Yes, that means flying solo, and although leaving the nest will bring with it many exciting benefits, there are also new things you should know to make life easier on you.

Of course, your parents may cover some expenses for the next few years – things like health insurance and other bills that you agree on. However, it is important to realize that, as an adult, you are making financial decisions now that will directly impact your own future.

How you manage your money today will determine whether you achieve financial freedom tomorrow.

Banking on Banks – How Banks Work
As a business model, banks are pretty simple. They use your money to make loans to other account holders.

• Savers - deposit money and earn interest
• Borrowers – borrow money and pay a higher interest rate to the bank

Banks makes lots of green is by loaning money to people at higher rates than they pay the people who deposit money. For example, you deposit money in a savings account and earn 2.25% interest. The bank can then loan money to customers at 8%! The bank earns the difference.

Do you need a bank account?
Yes. You need to open a bank account for several compelling reasons:

• Safer - Money held in a bank is safer than holding cash.
• Interest – The bank pays you interest every month just for putting your money in it. You can also direct deposit - your employer can deposit your paycheck electronically into your checking account.
• Organizing your budget - Bank accounts help you to keep track of your money and organize your savings.
• Future - Building a relationship with a bank will pay off in the future as your banking needs increase.

How to Choose the Right Bank
In order to decide which bank is right for you and your money, you need to consider your expectations and purpose for opening an account: is it for business, pleasure, savings, wage-depositing, eventual loans, etc.? Visit www.freeby30.com for a list of recommended banks.

First, choose a bank that offers online bill pay. In today’s economy, it’s a feature you cannot do without. You are able to check balances from the comfort of your own home or office. Electronically, you can pay monthly utility, cell phone and credit card bills without ever writing a check.

Next, look at the costs. Banks have to be competitive, so it pays to compare fees for opening and running an account. There are often fees for both checking and savings accounts. Additionally, the bank may charge separate fees for such things as:

• receiving statements in the mail
• online banking
• additional check books

Make sure to ask and compare all potential fees before settling on a particular bank.

Lastly, you want a bank that is convenient to where you work or live. Since you can now access your accounts online or by phone, many bank transactions can be done without stopping in. However, it is important to check out the convenience of each ATM (Automatic Teller Machine) location.

Money Pros build banking relationships with banks and grow with them. As their needs grow, they receive more benefits from the bank.

 

Taking Account of Account Options
A checking account is where most of your transactions will take place. This is the brain of your bank account and will handle most of the in’s and out’s. For this reason, checking accounts pay little or no interest.

Savings accounts pay interest for each day you leave your money on deposit. These are the accounts where you deposit money for short-term and long-term savings. As the amounts in your accounts grow, the effect of compound interest gets real exciting!

Once you have chosen the bank that best suits your needs, open a checking account and two savings accounts.

Open two savings accounts to make it easier to manage your savings. One account is where you will have your emergency fund - enough cash set aside for six months of your expenses. Additionally, this will be the resting spot for your long-term savings. You also want to have a short-term fun savings account that is separate from your long-term account. This way you will know exactly how much you have leftover to spend on vacations, toys and clothes for you, and gifts for others.

Savings and checking accounts can be “linked” so you can transfer money with ease between accounts. This can make saving your money easier.
It is important to have a good understanding of your account balances, so you know how much money you have available to spend at any time.

There’s no time like the present to start the habit of keeping your finances organized and paying your bills on time. Using automatic online bill paying from your bank can make this a breeze. The bank then sends a check for you, each month, for a given amount and on a date you select.

Online bill pay has many advantages:

• Looks professional – the checks are typed out by the bank
• Payments are sent like clockwork
• You have accurate records and up-to-the-minute reporting
• Your accounts are automatically balanced

Check your bank statement every month! Just one mistake - by the bank, you, or a third party – could cost you hundreds of dollars (or more!). The sooner you catch these mistakes, the easier they are to fix. In cases where there are fraudulent charges, identifying them early will save you money, too.

Money Pros pay their bills on time, with less effort, using online bill pay. Their account is automatically balanced and the checks go out looking professional.

 

The Power of Plastic: Credit Card Basics
If there is one lesson you should take away from this program, it is to avoid credit card debt like the plague.

When you use a credit card, it is the same as a loan. The credit card company is lending you money and charging you fees (interest) to borrow their money. The interest rate is determined from your credit history (your past record of paying bills and handling credit).

Starting out, you may not have a credit history, so initially the credit cards you are approved for will charge higher interest rates, higher fees and lower spending limits. That is why it is vitally important you remain credit card debt free.

It’s all about convenience. Credit cards are convenient and accepted at most businesses. Credit cards are a handy tool for charging clothes and groceries – as long as you pay the bills in full each month, instead of carrying the costs and paying sizable interest.

The best way to manage a credit card is to be the company’s worst customer. Credit card companies make their money because many Americans carry a balance from month to month. It is important to pay your credit card bills in full each month by properly planning and budgeting for your purchases.

“Cut It Out”
Simply put, if you can’t handle the debt of a credit card, you need to “cut it out” – that is, snip your plastic card into pieces, before you get in real trouble!

A common misunderstanding is that it is okay to pay the minimum payment that the credit card company calculates for you. In fact, this is the minimum amount that, if paid, will keep your account active. It is barely high enough to actually retire the debt.

If you understand the dangers of credit cards, you can see how it is possible to use them to your advantage. When emergencies happen, a credit card can be a lifesaver.
However, until you have your six-month emergency fund you should not apply for a credit card.

Already in debt
If you’re already in credit card debt, it’s not the end of the world. It will just take added dedication to get out of the hole. The key to getting out of credit card debt is to prioritize the payments.

Call each credit card company you owe money to and find out the interest rate it is are charging you. While you have them on the line, ask about any promotional rates you may be approved for. Once you get the rates each credit card company charges you, organize a payment structure.

Pay the minimum payment on all credit cards except for the one with the highest interest rate. Put all the money you can to pay the high rate credit card down first. Once that is paid off, take the next highest rate credit card and pay that down. You will save a lot in interest by following this payment structure. Keep up that plan until they are all paid off.

For those of you that are in a substantial amount of debt - debt that exceeds one to two years of future income – you should talk to credit counseling specialists and/or a lawyer.

Money Pros get their first credit card once they have six months in their emergency funds and can live within their budget. They build their credit history by using their card and paying the balance in full each month to avoid paying interest.

 

What is a credit report?
A credit report contains detailed information on your credit history. Your credit history is a record of how you pay all your bills, and whether you’ve ever been delinquent with your payments.

Prospective lenders review your credit report to determine if they will loan you any money, and if so, at what interest rate. This is why you must maintain an excellent credit history.

To illustrate how this works, let’s take a look at what happens when buying a car. If you have good credit, you will receive a lower rate. Thus, for a $25,000 car, with good credit you may get a rate of about 6.25% and your payments would be $486 on a five-year loan. But if you have bad credit, your rate would be about 12% and payments rise to $556 per month.

Maintaining an admirable credit history is important in many aspects of life. Good credit helps in qualifying for a mortgage, car and bank loans, and is key to getting the things you want out of life.

Moreover, without an excellent credit rating you are paying the loan company a lot more than you should. With bad credit, you pose a higher risk to lenders, which will increase your interest rate and closing costs. You are literally giving money away.

What is a credit bureau?
A credit bureau collects and stores credit information on consumers. There are three main credit bureaus - Equifax, Experian, and Trans Union. Each has its own records and individual credit scores.

Your credit score is a report card of your credit history for the past 7-10 years. The grading system they use is called a FICO score.

720 or higher - “Excellent” A
660-720 - “Good” B
620-660 - “Average” C
560-620 - “Poor” D
560 or less - F

Let’s explore what the FICO score evaluates. Check out these five categories of credit data that influence your score in varying degree.

• Payment History - 35% - Pay your bills on time.
• Amounts currently owed - 30%
• Length of your credit history – 15%
• New credit – 10% - this factors the number of recently opened accounts.
• Types of credit used – 10%

Credit bureaus look at all five areas when scoring your credit, but the payment history and amounts currently owed have the biggest impact. So keep your bills paid on time and your balances low!

Tips for maintaining excellent credit

• Pay your bills on time.
• Check your credit once a year.
• If your credit score is low, hire a professional service to clean up your prior mistakes (including convertible Pintos!).
• Keep revolving debt low (credit cards, equity lines).
• Keep credit cards open with a zero balance. Credit Bureaus will give you a higher rating because of having the ability to access more money.
• It is important to actively use your credit and pay everything off in full every month. The credit bureaus punish people that do not use their credit.
• Do not run your credit often - Each credit inquiry will lower your score. A new rule allows you to shop for a mortgage without this happening.
• Space out new credit - If you apply and receive several new loans (or credit cards) at once, your credit scores will drop.
• Build up to $25,000 to $40,000 available credit on various credit cards and maintain a zero balance on each one at the end of each month. Don’t do this if you cannot control your spending.

Money Pros are able to pay less for anything that requires a loan because they established and maintain good credit. They are able to qualify for car loans, rent an apartment, buy a home, and get a job easier because of their credit status.

 

Identity theft
An identity thief can steal your social security number or account number and start to charge up your accounts. It is important you protect yourself from this by following some basic guidelines:

• Purchase a shredder and destroy all documents that have any sensitive or confidential information.
• Keep all account numbers and pin numbers hidden and safe.
• Check your credit at least once per year to make sure nobody has gotten into your credit file.

If you are already a victim of identity theft, the FTC suggests you:

• Contact the fraud departments with the three consumer reporting companies to place a fraud alert on your credit report.
• Close the accounts that you know or believe have been tampered with or opened fraudulently.
• File your complaint with the FTC.
• File a report with your local police, or police in the community where the identity theft took place.

Extending money to friends, AKA loaning money to friends
Money shouldn’t - but often does - come between friends and family. As a general rule, you should only loan money to them if you do not expect it back. Money is not worth losing friends over, so protect your friendship by outlining the details of the loan in writing. That way there is no misunderstanding later.

Many times, when friends are in need of money it is because of poor money management. Of course, emergencies do occur and you may want to treat these situations differently. Yet, if they are already unable to pay their bills, there is a good chance they will be unable to pay you.

If you want to help out but don’t want to lose the money, you can take some form of security - a bike, car or something else of value. This way your friend or relative is motivated to pay.