Patrick Eng
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Week 3 - Everything I Needed to Know About Personal Financing as a 20-Something

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Here is Week 3 of the 52 Week series on my 2018 Year of Learning. In this week, I cover six articles I consumed concerning personal financing, from retirement accounts to paying off debt.

While this is no exhaustive guide, it is at least a way for me to get a little foundation when it comes to financing and investing in general. These six articles are what I considered need to knows when it comes to personal financing as a 20-something.

If any of this information is wrong, or you have corrections or suggestions, please don't hesitate to reach out to me or comment at the end.

Come back next week to see what I learned about the average life of the American farmer.

I'll get the shameless plug out of the way and do my best to give an all-encompassing view of what Wealthfront is and how it works.

If you do want to get started investing your money, which doesn't have to be a lot by the way, make sure to use this link. By using that link, you get an extra $5k managed for free, since they charge an annual fee of .25% on accounts over $10k. I mean, they gotta get paid somehow.

You just need to have a minimum investment of $500 and then you can put in however much you want each month. I'll be transparent here and tell you that I put in $600 each month. It's something that I could afford to do and is there to help me out in the future without having to worry about it.

As I have literally no experience with investments of any kind, I may get some stuff wrong. So, take this information with a grain of salt and feel free to send me corrections if you see them.

So, what is Wealthfront?

Wealthfront is essentially a platform for people to invest their money when they know nothing about investing. With Wealthfront, you don't need to follow Wall Street and research each stock to see which one will perform well or which one to buy. All of it is done for you.

But if it's all done for you, doesn't that just mean your paying someone else to invest your money? Well, yes and no.

Wealthfront is based on robo-investing and Modern Portfolio Investing. These are two big terms though, so let's break them down and try to understand them.

Robo-Investing

When / if you decide to create an account with Wealthfront, the first thing you will do is answer a slew of questions. These questions are designed to gather information on your risk tolerance, and then feed all that information into algorithms developed by the professionals at Wealthfront.

These algorithms are built so that they give you a diversified investment portfolio (minimizes risk) and ensures that those investments are being made just for your benefit. Since until that computer becomes self-aware, it shouldn't be trying to make some money for itself.

Plus, using algorithms is cheaper and faster than a human investor and is able to make a lot of financial decisions with no bias. Learn more here.

Modern Portfolio Investing (MPT)

MPT is what the robo-advisers essentially execute at a constant rate. With MPT, your portfolio is divided into different pieces, taking into account how much money you have, your social status, and your risk tolerance (or aversion).

The foundation of MPT is Mean-Variance Optimization, which is just a really technical way of saying that the robo-advisors' algorithms look at different asset classes and find the ones that best match your risk level, and either maximize gains or minimize losses.

Methodology

The Wealthfront investment methodology employs five steps:

  1. Identify an ideal set of asset classes for the current investment environment

  2. Select low cost ETFs to represent each asset class

  3. Determine your risk tolerance to create the appropriate portfolio for you

  4. Apply Modern Portfolio Theory to allocate among the chosen asset classes for your risk tolerance

  5. Monitor and periodically re-balance your portfolio

You can learn a lot more about the investing methodology here.

On top of these five steps, Wealthfront also created three unique features for all accounts based on how much is being invested, all grouped under what they call PassivePlus:

  1. Tax-Loss Harvesting: enabled on all accounts. With Tax-Loss Harvesting, your ETFs are automatically sold when there is a loss, and then re-allocated into a very similar ETF. The reason for doing this is because selling and reinvesting can actually save you money later through your tax return. Obviously, there's a lot more to it, so here is an Investopedia article about it.

  2. Direct Indexing: an enhanced version of Tax-Loss Harvesting for accounts between $100k and $500k. Where Tax-Loss Harvesting effects a single ETF or index fund, Direct Indexing manages 500 separate stocks from the S&P 500 Index and a completion ETF of smaller companies. Then, Tax-Loss Harvesting is employed in an losses on those purchased stocks.

  3. Advanced Indexing: an evolution of Direct Indexing for accounts with $500k or more. "Using a multi-factor methodology, Advanced Indexing identifies securities which are likely to have the highest expected returns, and overweights them relative to their allocation in the cap-weighted benchmark." Learn more about it in their Advanced Indexing whitepaper.

Obviously there is a lot to learn about this platform and what it could do for your financial life. If you're not ready to hand your money over to some random company, that's entirely your decision.

But as a techy, I've always been quick to use software in my daily life, and probably trust it more than I should.

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Day 2 - Dealing with Debt (Get a Financial Life: Personal Finance in your Twenties and Thirties by Beth Kobliner)

Quick backstory as to what I am about to write / read. Get a Financial Life: Personal Finance in your Twenties and Thirties by Beth Kobliner is a book I found on Amazon while I was searching for popular financial help books.

I have never read a financial help book before, so maybe it's a great one, or maybe not. All I know is that it all sounds really helpful and that I'm dedicating this section to dealing with debt, which is also the name of the chapter in the book.

Is it Good to Have Debt?

Something I believe and continue to believe even when people tell me that "it's healthy to always have some debt" is that I should pay off any loans as fast as possible.

"Carry a lot of debt—any type of debt—can be hazardous to your long-term financial health." (p. 30)

Boom! Affirmation on the first page. Suck it Zach. He probably won't read this so it's fine. 

Dealing with All that Debt

Obviously, most people in who have money don't actually own some of that money, i.e. they took out loans to pay for something like a house, college, a car, etc. So, how do you deal with it and make sure it doesn't become an absolute suck-hole of money?

Beth recommends four fairly concrete ways you can approach your situation, regardless of the type of debt you have:

  1. If you have extra money, make sure to pay of your high-interest rate debts first

  2. Transfer your debts from high rates to low rates (refinance)

  3. Make sure you make all your payments on time

  4. Worst comes to worst, call your lender and give them the sit-rep

Credit Cards

True or False: paying with a credit card is like taking out a loan on each purchase?

If you answered false, you should probably keep reading (hint, it's true).

In today's economy, having a credit card (and thus a credit score) can mean the difference on if you can afford to buy a house, car, and any other expensive item. Getting a credit card and using it in a smart way will only help build your credit score (like your GPA but in the spending world) and there are two principles to understand when using your card:

  1. Having credit card debt is NEVER good. Instead, only use your credit card, at least in the beginning, for things that you could also pay for in cash.

  2. You don't need to have credit card debt in order to build your credit score. People who tell you otherwise are wrong. If they say your dumb and wrong, tell 'em to tweet me @crzyasinman and I'll back you up.

So, now that you know how to use your credit card properly, we should probably talk about how to choose the right one. It's like learning to play soccer before you've learned how to run, makes perfect sense.

Choosing a credit card process isn't necessarily hard, as long as you watch out for a few things and read the fine print...haha, just kidding, no one does that. But seriously, its important to read the fine print.

Leading question: what's more important, the seal on the card, like Visa / MasterCard, or the issuer, like Bank of America or Citibank?

If you thought the issuer, then you at least know more about credit cards than I do. The reason that the issuer of the card is more important than the Visa or MasterCard logo is because that issuer is the one who decides what the fees, rates and other factors are that affect you.

The credit card you choose should be one that matches your spending habits. If you travel a lot, and especially if it's for work and the company reimburses you, then find a card with really good flyer bonuses. If you never have an issue paying off each month's balance, don't worry about interest rates and find one with good bonuses.

Don't let that draw you into some sense of care-free spending, because those high interest rates will slap you like every woman slaps Jack Sparrow. Apologies, Captain Jack Sparrow.

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When it comes to credit cards, play it safe at least in the beginning. There are many ways for the fees, interest rates, and perks to sneak into your life and shatter any sort of financial foundation you have. Make sure you know how to transfer your credit balances from high interest cards to low interest ones (called refinancing or credit surfing).

Student Loans

If you graduated college with $37,000 in debt then you're about average in America. Isn't that encouraging?

And, if you're like me, you took out two different types of federal loans:

  1. Federal Direct/Stafford Loans, of which there are two types.

    • Subsidized - the government pays the interest on these while you're in school.

    • Unsubsidized - you pay the interest on these as soon as you accept the loan.

  2. Federal PLUS Loans: for the parents and graduate students

I'm not going to go into private loans because that's just too much work. But as a general note, federal loans are typically better to borrow than private loans because they (federal) offer lower fixed interest rates and multiple ways to pay them back.

So, let's look at some ways to reduce that pesky $37,000 worth of student debt (applicable for both federal and private loans).

1. Setup your account to make automatic recurring payments.

Many lenders allow you to set up recurring payments on your loans. By doing this, you never have to worry about missing a payment, and you could be rewarded with a discount for making consistent payments. Plus, missing a payment will hit your credit score, on top of late fees.

2. Pay off your debt before you have to.

Assuming student loans are the only thing weighing you down, think about paying off your loans before you're required to. Usually you have a 6-month grace period after you finish school before the interest on your subsidized loans kick in and payments are required. But you can start paying them off before you even graduate. Paying them off sooner means less accrued interest, which means you're paying less money in the end.

3. Keep track of the interest you've paid off and use it in your tax break.

Since you're a student, the government wants to throw you a bone, because hey, you'll be giving them lots more money in the future when your solar-powered hammer gains traction. Keep track of how much you're paying in interest and see what that can shave off your tax bill.

As there are still four more sections in this chapter that I have yet to even mention, I will be merciful and end it here.

Debt can be a scary weight that might seem to always be hovering. But, if you follow a few of the mentioned steps, you might be able to break its ankles and gain the upper hand.

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1. Start sooner rather than later

It's like the saying goes, "the best time to plant a tree was 20 years ago. The second best time is now." This proverb applies to both trees and saving for your retirement. If you're reading this, then a little seed might be sprouting in your mind that is growing towards the idea of investing in retirement now while you still have no worries in the world.

But you might be thinking that the measly amount of money you would invest now would be better used in 10 years when you get a higher paying job and could invest more. This is where I'll throw this cool term into the mix and explain why whatever you throw in now is still worth it and can be even better than putting in more later.

The reason why putting in a smaller amount now can be more beneficial than a larger amount down the road is because those investments generate "compound interest".

Let's use some numbers to make it more clear. Let's say I began investing $75 a month at age 25 and that I earned 6% per year on that investment. By the time I'm 65, those $75 dollar investments per month would have added up to $150k.

In another universe though, I decided that I wanted to keep that $75 a month, and waited until I was 35 to begin putting that money away. Since I had gotten a better job by then, I could also put away more money, let's say $100 per month. Assuming this account also had a 6% return, I would have only earned $100k by the time I'm 65.

Hence, saving money now is more important than saving it later because you take advantage of compound interest. If you don't trust my math, then you're smart. Feel free to do it yourself, but I have a feeling most financial advisors would agree with me on this point.

2. Invest in your 401(k)

First of all, what is a 401(k)?

Put simply, 401(k)'s are retirement plans set up by your employer. It's key feature is that you invest money into it from your paycheck BEFORE taxes are taken, which can have some major advantages.

When putting money into your 401(k) though, know that there is a cap as to how much you're allowed to put in each year. This number changes every year to account for inflation, and also increases if you're older than 50. In 2016 for example, the most you were allowed to put away was $18,000 or $24,000 if you were older than 50.

3. Take your employer's free money

One perk of 401(k)'s is that your employer will tend to match however much you put away, to a degree. This is usually expressed in either a percentage or dollar amount, like 50% of your contribution up to a maximum of 3% of your salary.

The key to takeaway here is that you should always aim to max out your contribution each year, because you'll be putting both your money and your company's money into your retirement. By not putting away the maximum amount each year, you are not taking the free money that the company has stated they would give you to put towards retirement.

4. Open an Individual Retirement Account (IRA)

When it comes to IRA's, you have two main options:

  1. Traditional IRA: avoid taxes when putting money in, but get hit on the way out.

  2. Roth IRA: avoid taxes when taking out, but get hit on the way in.

When it comes to differences between traditional and Roth IRA's there three main categories: income limits, taxes and withdrawals. Also, the rules and limits for these retirement accounts change each year, so make sure you know how much you're allowed to contribute and the penalties you'll get hit with if you withdraw early.

About Traditional IRA's

In order to contribute to a traditional IRA, you need to have some sort of earned income and be younger than 70 ½ years old. As a 20-something, one of those is a lot easier than the other.

Your contribution may or may not be tax deductible, depending on your level of income and whether you (or your spouse) are using a retirement account through your work.

For those who are like me and see terms everywhere but never with a definition near it, I shall provide one for Modified AGI.

"Your modified adjusted gross income (MAGI) is the total of your household's adjusted gross income plus any tax-exempt interest income you may have" - ZaneBenfits

When it comes to taxes, it's actually pretty simple. When contributing money to your traditional IRA, you get a tax deduction for the year you make that contribution. And as long as all that money stays in your account, you don't pay taxes on any growth of those funds.

When you retire, however, you will get taxed when you take money out of your traditional IRA.

Withdrawing money from your traditional IRA can begin as early as 59 ½ or as late at 70 ½, though once you reach the upper limit, you are required by law to start taking money out. These mandatory payments are called required minimum distributions (RMD) and are calculated using the "account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS “Uniform Lifetime Table.”

Other useful tidbits about Traditional IRA's:

  • By contributing to your traditional IRA, you can usually lower your taxable income for that year, meaning you could then qualify for various tax-breaks.

  • You can avoid the 10% fee for withdrawing from your IRA before your 59 ½ if its being used for higher education first-time homeowners expenses.

About Roth IRA's

Roth IRA's are similar to a traditional IRA but with a few things flipped.

Both have the same contribution limit, but differ on everything else to some degree.

In order to qualify for a Roth IRA, you need to have an AGI of $135k or less, or $199k if married and filing jointly.

When contributing to your Roth IRA, you don't get a tax-break. When you withdraw when you retire, however, you aren't taxed on those earnings.

Also when it comes to withdrawing from Roth IRA's, there is no required minimum distribution, meaning you could keep money in it until you die and not touch it, and hopefully give it to someone else. And when withdrawing before 59 ½, make sure that your first contribution was more than five years ago so you avoid any fees.

Other useful tidbits about Roth IRA's:

  • Roth contributions, NOT earnings, can be withdrawn without incurring any fees or taxes before the age of 59 ½

  • Like traditional IRA's, you can withdraw upto $10k earnings before age 59 ½  if it is being used for pay for higher education or first-time homeowners expenses

5. Over 50? It's time to catch up

Since there is a annual maximum of how much you can contribute to your IRA or 401(k) each year, it's important that you start early and try to contribute that maximum each year. In case you started contributing a little late, you'll have the opportunity to catch up once you reach age 50.

This catch-up contribution kicks in once you reach 50, and allows to increase your maximum limit you can contribute each year to your IRA or 401(k). For example, in 2017, you could contribute $1,000 more into your IRA or $6,000 more into your 401(k) each year.

Once you reach 50, make sure that you take advantage of these increased limits and start boosting your retirement accounts.

6. Automation is your friend

Make automatic contributions to your retirement accounts and don't let yourself think about it. It's much easier to take home a smaller paycheck with those contributions automatically taken out, than taking home a larger one and trying to convince yourself each time that you shouldn't just spend all that money.

7. Create a budget and stick with it

Simple but effective. It's as easy as opening Excel and summing up all your monthly and annual expenses, subtracting that from your monthly/annual income, and seeing how much you have leftover.

Use that number to modify your spending habits and try to re-allocate those superfluous spending funds into some sort of investment or savings plan.

8. Set some goals

When people have a goal in life, it gives meaning to what they do. Set a financial goal, whether it be saving up enough for a down payment on a house or to just pay off your credit card debt in X months.

That goal will help you begin that path to financial responsibility, instead of just wandering around with money that you don't know what to do with and will just end up spending on eating out, clothes and fidget spinners.

9. Resist the urge to splurge

A good rule of thumb is to make sure that you have saved enough money that could cover six months worth of expenses. Whenever you get a raise or bonus, just put it away immediately and don't go off and buy those $400 pair of shoes that you'll only wear twice. If you have a goal already set, this is a great opportunity to help you reach it faster.

10. Delay social security

That's even if it's still relevant in 40 years. The longer you wait to dip into your social security, the better it pays off. While you could begin using it at age 62 at let's say $18,000 per year, it could be worth waiting until age 70 where you could be getting $31,000 per year. There are a lot of ways to take advantage of your SS, both withdrawing at 62 and waiting until 70. See some of them here.

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"When it comes to investing, how to buy is often more important than what to buy."

Mostly because well performing investments in the past doesn't necessarily mean good performance in the future. And, depending on who your advisor/investor is, they might be charging you high fees so they can pocket some on the side.

In this article / group of articles, I am going to cover how to buy stocks, bonds, mutual funds, and ETFs. The above article also covers hedge funds, commodities, currencies, annuities, and real estate though I have excluded them from the scope of this section.

Investing in Stocks

For stocks to do well, there needs to be a catalyst. Whether that be a change in leadership, introducing a new product or service, or buying another company, all these things are what enable a company's stock to do well.

All of these above catalysts can be accomplished by any company, so don't think that if you buy stock in Apple, Microsoft, Amazon, etc. that you are making a smart decision. Buying into these stocks now usually means you're paying an overpriced amount that will have very little return.

A good term to know, and what is widely used in the industry, is the price-to-earnings (P/E) growth ratio. "In essence, the price-earnings ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings." When looking at stocks, you want to make sure that you are investing in those that have a P/E growth ratio of at least 1.0.

Be Wary Of

  1. Overpriced Investments - purchase price is more important than sell price. Popular stocks will be overpriced because they know people will buy them.

  2. The Hype Train - feelings and news articles are going to lead you astray when it comes to making investments. Take your time and research potential investment opportunities. Make sure you're playing the long-game.

  3. Pump and Dump Scams - be cautious of anyone or anything that tells you that buying X stock will make you rich, but only if you do it now before everyone finds out. If you fall for this (and lots of other people too), you'll be paying for a stock that just got jacked up in price because of demand, and then tanks because the people who pumped it up to you just sold all their shares.

  4. Thinking Stocks Care About You - this might be hard to hear, but companies don't really care about you, they care about your money. Don't pledge your heart and money to a company to the point that you refuse to sell your under-performing shares. When investing, make sure you have a diverse portfolio, that way if one or two do bad, it will hopefully be offset by the others that are doing well and you won't have a hard time selling the poor ones.

  5. The Next Big Thing - thinking that you'll find the next Google or Apple before everyone else is pretty optimistic. Instead, invest in companies that you know have a history of high earnings, returns, and wise reinvestment decisions.

Investing in Bonds

Bonds are essentially a fancy way of saying an IOU. By purchasing bonds, you are giving your money to the government or a company to use to fund whatever they do, and then they pay you back later, with interest of course.

Even though bonds are considered lower risk, you still have to research which bonds to invest in, and how they are affected by interest rates.

What to Look For

The major component about bonds to know when it comes to interest rates is this: when you purchase a bond, it is locked in at a certain interest rate. If interest rates rise though, you are still locked in at your old interest rate and are actually losing money. On the flip side, if you purchased a bond at a high interest rate, and then they fall, you will stay maintain that original interest rate and out-perform the market.

The risk you take is choosing how long you want that bond to be. Long term bonds, like 10 years, are riskier because you don't know how drastically the market could fall in that time. Short term bonds are less risky, but offer substantially lower rewards.

Be Wary Of

  1. No Easy Way to Track Prices - while different companies and organizations have made it easier to see how bond pricing fluctuates, it is nothing like the data provided for stocks. Since they aren't actively traded, it's difficult to find their current market value.

  2. The Risk Free Mentality - just because bonds are considered low risk doesn't mean they are risk free. When you purchase any bonds, you have to understand the risk you take if the issuer doesn't pay you back, if interest rates rise but yours' don't, and whether you can put those returns into other investments.

  3. Uniformity - like other investments, you want to have a diversified portfolio. This takes shape in what is called a laddered portfolio, where you essentially spread out your investments over short and long term bonds. Having all your eggs in one basket almost never ends wells.

  4. How Your Age Affects Your Bond Exposure - bonds are better for short-term returns, and so when young, it may be better to invest in stocks since they tend to return more over time. With bonds, the older you are, the more likely you'll be investing in them instead of stocks. If you're 30 or younger, you probably have none. But, if you're 40 to 50 years old, you might be investing 20% - 60% of your assets in bonds.

Investing in Mutual Funds

Since mutual funds are just a pooling of stocks and bonds into a collective portfolio, there are many overlapping strategies that are used when investing in mutual funds and stocks/bonds.

One main characteristic of mutual funds is that when creating your portfolio, you are actually relying on a fund manager. While these managers may have experience with the market and previous successes, you are also paying them to manage your investments, which can add up quickly. Plus, experts debate whether a fund manager is actually any better than you or me picking out stocks and bonds to invest in.

What to Look For

Look for a manager that is open-minded and clearly explains both his or hers thought process and general strategy. When it comes to investing, you want a manager that is consistent in what they do and in the returns that they get. When a fund manager isn't consistent in their words and actions, be concerned.

Be Wary Of

  1. Expenses - are the most important factor to understand its future return, even more so than past performance. Also, low-expense funds tend to outperform high-expense funds over time.

  2. Being Risky - while there is risk in reward, there is a fine line to walk. Make sure that the manager that you entrust your money to understands the level of risk you are willing to take and that they have previous experience in investing in consistently, well-performing assets.

  3. Fund Duplication - when it comes to having multiple funds, make sure that you keep it small and that they aren't similar to each other. Having copycat funds makes for a bloated portfolio and will cost more than it returns.

  4. Changes in Management - any changes in your fund manager is a danger to your portfolio because they could be bringing in a completely different mindset and strategy in how your money should be invested, or just have very little experience in what they are doing.

  5. Strategy Drift - when a fund suddenly begins investing in emerging or highly volatile markets, it might mean they have changed their strategy. This could imply that they didn't really buy into their old strategy, and that they are grasping for straws. Always make sure you are comfortable with how your portfolio is diversified.

Investing in Exchange-Traded Funds (ETFs)

Exchange-traded funds allow experienced and new investors alike to build affordable and tax-friendly portfolios. They tend to be cheaper and more tax-efficient than the aforementioned mutual funds, but they still come with their common risks and pitfalls.

What to Look For

Unlike mutual funds, ETFs can be traded throughout the day with thousands of choices. Popular ETFs include the S&P 500, the Europe, Australasia, Far East (EAFE) Index, Vanguard Total Stock Market ETF, and the SPDR DJ Total Market ETF.

Be Wary Of

  1. Trading Expenses - while ETFs are cheap to own, the can be expensive to trade, and quickly lose any gains just from trading. Commissions can easily eat up your gains, so pay attention to them.

  2. Ease of Trading - since ETFs can be bought and sold at any and all times, it can be very tempting to trade them when you think the time's right. More often than not, the time is wrong and you are paying for all the fees that come with trading.

  3. False Diversification - since ETFs are generally indexes, or a grouping of a handful of companies stocks, it can be easy to think that having different ETFs means that you are investing in a bunch of different companies, when in reality they are using very similar companies.

  4. Buying the High Performers - when something has gone up, just convince yourself that you missed your chance and move on. If you buy into whatever just performed well, you're going to be overpaying and then losing a lot on the sell later.

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Have you ever wondered what credit score is, why it's important, and what your score even is? I know I have, but let me adjust the question a little bit. Have you ever wondered what your credit scores are?

That's right, in case you didn't know, you have more than one credit score. And, the score you get from websites like CreditKarma or Credit.com aren't necessarily the same scores lenders see when they go in and check your score.

Your credit score is important because it is used as your financial GPA. Whenever you want to take out a loan, whether it be for a car, house, or even college, your credit score will dictate how much you will get as well as the interest rates on those loans. It can even affect your potential employment opportunities, since companies don't want to hire people who have made poor financial decisions.

Have a poor credit score? You're going to get hit with some high interest rates. Have a great credit score? Expect your interest rates to remain low. Having a high score (most of the time) means that you are financially responsible, and lenders don't need to worry about not getting paid back on time.

But before we get into checking your "score", let's talk about the ranges that your scores fall in.

Credit Score Ranges

Some basics about credit scores so we can get your feet wet:

  • Everyone has multiple credit scores that are constantly being adjusted

  • There are two main models of credit scores - FICO and VantageScore

  • Both of these models pull information from the Big Three Credit Bureaus - Experian, Equifax and TransUnion - which have credit information on everyone and recently got hacked.

Since there are a lot of variables that go into calculating credit scores, and because I don't understand most of them enough to write about them, I'll just focus on the specific numbers and less on how they calculated those numbers, besides the basics of course.

FICO Score Ranges and Variables

  • Exceptional: 800+ (which is ~1% of consumers)

  • Very Good: 740 to 799 (which is ~2% of consumers)

  • Good: 670 to 739 (which is ~8% of consumers)

  • Fair: 580 to 669 (which is ~28% of consumers)

  • Poor: 579 and Below (which is ~61% of consumers)

In order to calculate these numbers, FICO takes 5 variables and stuffs them into their magical number crunching machine, which then spits out your score.

These five variables are:

  1. Payment History (35% of your score): making payments on time has positive impacts, while late or missed payments knock your score down.

  2. Amounts Owed (30% of your score): if you're constantly maxing out your credit limit you are hurting your score. Make sure you keep utilization low by paying off your credit debts immediately.

  3. Age of Your Credit History (15% of your score): having a long history of good (or poor) credit history impacts your score. People with new lines of credit are considered risky.

  4. Credit Types Used (10% of your score): FICO checks to see what other types of credit you have and checks whether you have variety or not.

  5. Any New Credit (10% of your score): constantly applying for new credit can be a red flag. These applications cause hard inquiries, or lenders looking into your credit history, and can cause red flags if there are too many inquiries.

There are many services that will show you your credit score for free, but know that the score you see is what is called an "educational score" and only gives you a rough idea of where you actually stand.

VantageScore Ranges and Variables

Like FICO scores, VantageScore takes all the information provided by the Big Three Credit Bureaus and uses that information you calculate your score. In 2013, VantageScore 3.0 was released, which used a scale that was more similar to the FICO score scale.

VantageScore ranges are from 300 to 850 and have more segmentations than FICO scores. The same basic principles apply, however, where a higher score means you are a less risky investment and that you'll receive lower rates when you apply for some sort of loan.

Since it is now on the same scale as your FICO score, you can carry over the segment labels from your FICO score to your VantageScore.

Here are the VantageScore variables, with less specific levels of influence but essentially the exact same as FICO variables:

  1. Payment History (Extremely Influential)

  2. Age and Variety of Credit (Highly Influential)

  3. Percentage of Credit Limit Used (Highly Influential)

  4. Total Balances and Debt (Moderately Influential)

  5. Recent Credit Behavior and Inquiries (Less Influential)

  6. Available Credit (Less Influential)

In situations where you have poor or mediocre credit score, than are a number of simple steps you can take to bring it back up. But, like your academic GPA, once it dips, it is hard to recover and takes time.

  • Make all your payments on time. Both your FICO and VantageScore check how often you make on-time payments and use that as the most influential variable in calculating your score.

  • Decrease your debt. The closer you get to your credit limit, the more red flags you are setting off. Keep your debt low and make sure the gap between it and your limit stays wide.

  • Increase your credit limit, but don't use it. Having a higher limit but never reaching it tells lenders that you are financially responsible. Just make sure you keep that gap wide when applying for a higher limit.

  • Start and maintain relationships with one or two financial institutions.

  • Find the best rates.

  • Only use what you need. Pretty easy to say, but a little more difficult in practice. To start, just only use you card for what you know you could pay for with cash. Once you master that, increase your threshold, while always paying it off on time.

  • Check reports and dispute any errors. Any errors that appear on your credit report affect your score. Make sure you verify the accuracy of those reports so you aren't screwed later.

While all of these numbers and practices may seem pretty intimidating, don't let them scare you. Most of the scores that you'll get aren't entirely accurate, as in they are meant to show in which range you are and not exactly what your score is.

Borrow responsibly, only when you need, and only as much as you need.

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When it comes to talking about your financial life, there may be a few terms that are thrown around that you might not totally understand. For me, that's about 98% of what is being talked about. Even though I've been researching personal finance for a week, I have only scratched the surface, and to be honest, I don't even think I left a mark.

When people throw around terms like AGI, ARM, or even Amortization, it might be easy to just nod your head and say how you love them in that movie you just saw.

So, I found an article that outlines 25 common terms that are used whenever talking about finances, with these terms being broken up into specific sectors: Banking and Credit, Investing, Real Estate, Career, Insurance, and Tax.

Banking and Credit Terms to Know

Compound Interest - is a powerful tool when it comes to growing your account because it is essentially "interest on interest". When you invest a certain amount, say $1,000 into an account that has compounding interest of 5% per year. After five years, you would have $1,276 because the interest would be calculated based on the initial deposit plus any interest already accrued. If you had used simple interest, you would have gotten $1,250 instead. While this is only a different of $25, the number can quickly grow over time and as the investment increases.

FICO Score - is a number calculated by banks and other lenders that give them an idea of how financially responsible you are. It takes into account how often you make payments on time, how much you borrow, how many credit lines you have, etc. and impacts what kind of loans you can receive in the future. A higher FICO score, the more likely you'll get a low interest rate loan or smaller premium.

Net Worth - is a simple calculation of all your assets minus any liabilities. For example, to find your net worth, you would need to add up the current market values of your house, car, boat, checking, savings, and retirement accounts and any investments. Then, you would add up all your debt, credit card balances, and loans and subtract that number from your asset value. The difference is your Net Worth.

Investing Terms to Know

Asset Allocation - when investing, you put your investments in what is called a portfolio. This portfolio is going to have different percentages of asset allocation, like stocks, bonds and cash or cash equivalents. Having a diverse portfolio based on risk tolerance, length of maturity, general goals and different assets minimizes risk while also setting you up for better returns.

Bonds - are basically small loans you give to the government or corporations. The money you lend is then returned to you with interest, and can be a short, medium or long-term loan. While long-term loans tend to give the highest return, they are also more risky because you are locked into the interest rate when you first get it. When the bond reaches its maturity date, you are paid back in full plus some.

Capital Gains - another way to say the increase in value you have made on an investment. This can work the other way as well, if your investment actually loses value. Then, it is a capital loss.

Rebalancing - is a process of maintaining or adjusting your portfolio to maximize gains and minimize losses. This could look like adjusting your portfolio is invest more in stocks and less in bonds because of current market performance.

Stocks - also known as shares, by owning stock in a company, you actually own a piece of that company, meaning both its assets and earnings. If you are a common stockholder, then you can vote in company decisions and receive dividends, or recurring payments. Or, if you are a preferred stockholder, you have priority over common stockholders when it comes to handing out dividends, but don't have voting rights.

Real Estate Terms to Know

Amortization - the process of paying off your debt in fixed installments, like your mortgage or car loan. You would pay the principal amount plus any interest accrued.

Adjustable Rate Mortgage (ARM) - is a type of mortgage that is fixed in the beginning, let's say five years, but then adjusts after that to match the market. While this could give you low payments in the beginning, it could easily jump at the five year mark to something you can't afford.

Escrow - in short, is when a third party holds money given by the buyer that will be used once the house is sold in order to protect both the buyer and the seller. This money is held in escrow until the deal is closed, and can't be touched by either parties. In the end, the buyer would be used to pay for things like homeowners insurance and property taxes.

Fixed-Rate Mortgage - is another type of mortgage, but unlike an ARM, a fixed-rate mortgage rate has a fixed interest on the entire life of the loan. If interest rates go up, you don't have to sweat because you're locked into your current rate. But, if they fall, you're stuck paying a higher interest rate.

Career Terms to Know

Defined-Benefit Plans - is a type of retirement plan that used to be offered by many companies to their employees based on length of employment and salary. This plan can also be called a pension, which as you know, isn't normally offered anymore in favor of 401(k)'s.

Defined-Contribution Plans - is another type of retirement plan, typically 401(k)'s where the money you put in doesn't count towards your yearly earnings, thus reducing the amount of taxes you would normally pay. Companies will also occasionally match the amount you put into your 401(k), usually up to 3% of your salary.

Executive Compensation - is a package provided to senior employees covering "base salary, bonuses, incentives based on the company’s earnings (such as stock options), income guarantees in the event of a sale or public stock offering, and a guaranteed severance package." These compensations are typically customized per senior level employee.

Stock Options - is an employee benefit that allows them to purchase stocks in the company at a preset price. This present price is generally lower than the public price, and can be sold for a gain.

Insurance Terms to Know

Permanent Life Insurance - is an insurance policy that lives indefinitely and can provide cash value for certain investments while covering the buyer. Since it spans the lifetime of the owner, it tends to be more expensive than term life insurance.

Premium - is a payment you make to an insurance company in exchange for the services they provide. Payments can be made in a variety of fixed installments.

Private Mortgage Insurance (PMI) - is a type of insurance built to protect the lender when you make a down payment on a home that is less than 20% of the house's market value. The premium on this insurance can be added to your mortgage.

Term Life Insurance - is a life insurance policy that covers the buyer over a specified period of time, anywhere from five to thirty years. If the buyer doesn't die in that period, they can either renew the plan or cancel it. But if they do pass away in that term, his beneficiaries will receive payments based on what plan was chosen.

Umbrella Insurance - is an insurance policy for issues that happen outside of the normal home, auto, and boat insurance plans. These extraneous issues would be slander, defamation, libel, false arrest, etc.

Tax Terms to Know

Adjusted Gross Income (AGI) - is your taxable income. To calculate this, you add up your job earnings and any interest on investments and subtract IRS approved deductions.

Dependent - is someone who is financially dependent on you, typically a child or close relative. By claiming a dependent, you reduce your overall taxable income and thus pay less taxes.

Itemized Deduction - are certain payments you have made that could be used to reduce your overall taxable income, like payments made on mortgage interest, medical and dental expenses, or charitable donations.

Standard Deduction - is what everyone gets to reduce their taxable income. It basically comes down to whether you are filing your taxes independently or married. Depending on what you choose, you are given a certain deduction.

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Too Long; Didn't Read

Wealthfront is a robo-investing company that takes your money and automatically creates an investment portfolio for you based on your risk tolerance and social status. Since it's investments are made using specific algorithms, it costs less money and removes any sort of bias that a manager would have. Like pocketing money on the side through commission. Use this link to begin investing so you can get $15,000 managed for free.

When it comes to investing in your retirement, you need to have started yesterday. While you might think to yourself that you can wait until later when you can invest more, it is actually more beneficial to start saving now because retirement accounts have compound interest, which get better with time and give you interest on interest.

Your main sources of retirement accounts will be either 401(k)'s, which are supplemented by money from your employer, or IRA's, which you can put your own money away in. For these two accounts, you can have either Roth or Traditional accounts. As always, watch out for any penalties if you need to withdraw money before age 60 and the maximum you're allowed to put away each year.

  • Roth - your money is taxed as normal, but when you withdraw later you won't get hit with any taxes.
  • Traditional - you can use any money you put away to reduce your taxable income, but when you withdraw that money later it will be taxed.

When making investments into stocks and bonds, know that bonds are usually safer but don't offer as high returns. Stocks are great for high returns, but over long periods of time. With bonds you are essentially loaning your money to the government or a corporation, who will then pay you back that initial amount plus interest. With stocks, you are buying pieces of that company and are paid either through dividends or by selling that stock when it increases in value.

Your credit score is important because it tells everyone your financial GPA. This score decides what kinds of loans you are able to take out and at what interest rate, plus it can have an impact on potential job opportunities. The higher your score, the more financially responsible you are and will get lower interest rates on the loans you take out. The two main scores you need to check on are your FICO score and VantageScore.

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Patrick Eng