Some articles for your reading enjoyment.
- Tax Refund Anticipation Loans–Just Say No! by Dough Roller – Anyone that are willing to give you money in advance wants to do it for one reason…to make a lot of money. If you can avoid it, you’ll be better off for it in the long run.
- Using Margin to Lower Trading Costs by InvestorGuide – The concept is a little complicated but it could work in some situations.
- Investing for Retirement? Use (Don’t Lose) Your Emotions (Part I) by the Wealth Pilgrim – Keeping your cool is important when it comes to long-term investing
- Ask the M-Network – Questions from college and on housing by Gather Little by Little — Several good questions and answers
- Understanding and Improving your Cash Flow by Debt Free Adventure — Great article about cash flow management
One of the bad money habits that I picked up from my dad was saving bills to pay later. The idea is to sit on the bills a long as I can and don’t pay them until a few days from the due date. The logic behind this is to keep money in the bank as long as possible.
It’s not a bad idea in principal, and in fact, many corporations run by really smart MBAs are doing exactly just that. But the reality is it’s a bad idea for normal folks like you and I…unlike the big corporations, we don’t have leverage.
Let’s take a look at this in more detail.
- Even the best savings accounts give you sub 2% interest rate. This means keeping $200 in the bank for another 15 days will translate to nothing more than a few pennies.
- One late fee could wipe out a decade worth of diligent “saving”.
- Enough late payments and your credit score can take a hit.
Fortunately, I was able to rid myself of that habit. Unfortunately, I am still unable to convince my dad that it’s a really bad idea.
Some good financial finds:
- Homeowner fighting ‘air’ property tax at Don’t Mess with Taxes — Funny, sad, and educational at the same time…definitely a good read.
- 4 Smooth Moves for Graduates at Wise Bread — Timely article and a good read for recent grads
- BP Logo Design Contest: Win $200 By Making A Statement at The Digerati Life — Nice round up of articles, but the gems are the funny BP logos.
Yesterday, my friend was feeling rather dejected. You see, he has been trying to get a job as a database administrator with a bank, and things were going well…incredibly well…with his interviews. Unfortunately, he just got a letter saying that he didn’t qualify for the job and he suspected that it was due to his bad credit score and poor credit history.
Increasingly credit history and FICO score are being used to judge people in non-credit areas. Car insurers, potential employers, and prospective landlords are all using credit pulls to judge people and determine what to charge them, or whether or not they are suitable for a job. On the surface, some of these seem to make sense. But I’d argue using credit history in these ways is at best useless and at worst misleading.
What a Credit History Is and Is Not
It’s important to understand what a credit history is and what it is not.
A credit history is:
- A list of your open and closed credit accounts
- Your payment history on these accounts
A credit history is not:
- An indication of your current ability to pay debts
- An indication of your financial situation
- An indication of your personal integrity
Using Credit History For Non-Credit Purposes
The use of credit history for non-credit purposes to predict something about a person — the trustworthiness of a potential employee, how often someone will make an insurance claim, or if they’d be a promptly-paying tenant — is a poor attempt at best.
- First, you can have poor credit history for a host of legitimate reasons largely outside your control. I’m thinking major illness, job loss, divorce, and errors on the part of creditors or the credit bureaus.
- Second, credit score says nothing about your current income situation and the ability to repay the loan.
So it’s my opinion that using credit history and score for alternate purposes does not make sense. That said, we are in a society where credit score and history do matter, so it’s a good idea to check these things occasionally. You can get free credit report from AnnualCreditReport.com and reference this article on how to get your free credit score.
My wife just started a new job recently, and as part of the usual new job stuff she had to sign up for benefits. We decided to switch to her health and dental plans to save money, but the best thing is the opportunity to take advantage of Flexible Spending Accounts (FSAs). In my opinion, FSAs are great. If your employer offers them, take advantage of them.
Here’s How Flexible Spending Accounts Work.
The company takes money out of your paycheck before tax in the amount you designate for: (1) health care spending, (2) dependent care, or both. When you incur these expenses, you file for reimbursement of the covered expenses and get a check. In case of the health care spending FSA, you can even get more than you contributed thus far, as long as it’s still within the designated amount — unfortunately, you can only get out what you put in for dependent care FSA.
We pay $1,000 per month for our daughter to attend daycare, so this is an opportunity to save money — basically, you save what you would otherwise pay on income taxes for the amount you designate. In our case, we designated $5,000 for 2010 — the maximum you could reserve for dependent care FSA. As we incur the expenses, we just get our daycare provider to verify that we spent the money with them, fax the form in, and get money back.
The health care version works similarly, but without the validation part.
In case you missed how the money saving magic happens, here it is again. Since the deduction happens before you’re taxed (i.e., pretax dollars), your dependent and health care expenses aren’t costing you quite as much as they normally would. For example, assuming you’re in the 25% tax bracket, you would have to earn $1,333.33 to have $1,000 after-tax to pay for one month worth of daycare. Since the money from FSA is pretax, you essentially saved $333.33 that you would otherwise pay to the IRS and State.
But wait, there is a catch…of course!
Because you have to determine at the beginning of the benefits year how much you want deducted over the course of the year, you may get the amounts wrong.
If you deducted less than your actual expenses, you will end up spending after-tax dollars and missing out on the saving. But that’s not too bad, the worse scenario is when you deducted more than you actually spent. It this case, you’ll lose the amount that you didn’t spend — it’s called “use-it-or-lose-it.”
My little brother was very excited about his first purchase made on a credit card — a 40″ HDTV.
Considering that he just finished college…with student loan debt…and not making all that much money with his job, this is quite an extravagant purchase.
I talked to him about it and he doesn’t think it’s a big deal.
Actually, he thinks he got a good deal…zero percent interest for 12 months. He told me he plans to pay it of at $65 a month for the next 12 months.
I was quite impressed that he thought this through enough to tell me how he is planning to pay it off without paying a cent in interest — good for him. I would have been more impressed if he had started putting a little away each month in his saving account for the purchase.
My concern is that he won’t stop here and start piling on more charges on the credit card. After all, this is how most people get in trouble with credit cards!
Some good financial finds:
- Before Your Roth IRA Conversion: Have You Considered Taxes? at Money Ning — A lot of buzz around the 2010 Roth IRA conversion. This article point out a major problem…at least for some people.
- Commission-free Vanguard ETF trades in Vanguard Brokerage Accounts at My Money Blog — This is really cool. I have to seriously think about switching to Vanguard, because this will save a lot of money in the long term.
- Simple ways to improve your debt management skills at Good Financial Cents — Good advice even if you’re not in debt.
Here’s another look at the past. After I graduated, I carried over a bad habit from college days.
My parents used to send money at the end of each month. When that happened, I would go out and spend some money…basically, to catch up since I starved for so long. I guess that should be expected considering how poorly we were, and still are, educated about personal finance.
Unfortunately, I carried over this bad habit. When I received my paycheck, I would go to my favorite hobby shop and spend some money instead of putting that money in the bank.
I even justified my purchase with a stupid logic: “Oh, I only have to work 3 hours to pay for that $24 purchase.” Really stupid considering I didn’t even take into account taxes. Not to mention I spend my paycheck on the stuff I wanted, instead of the stuff I should be saving for…like rent, food, and so on.
Luckily, that didn’t last very long…
Some good financial finds:
- It’s Never Too Early to Teach Children Good Money Habits at Cash Money Life — Really…it’s never too early.
- Don’t Waste Your Tax Refund Check at Moolanomy — These tips are equally applicable to your paychecks.
- 5 Financial Items We Tend to Procrastinate at Fiscal Fizzle — I can relate. There are a few items on this list that I could do better on.
Looking back to the time when I just graduated from college, it’s simply amazing how little I knew about personal finance. I lacked the fundamental understanding of basic financial concepts, such as, budgeting, cash flow, credit, investing, etc. Frankly, I’m surprised I made it this far and has done this well.
But I was lucky.
Although I had no idea what I was doing, I was determined to get rid of my student loan and credit card debt — and all I did for the first two years. I lived a very frugal lifestyle and didn’t spend money on anything. Most of my paychecks went toward paying off these two debts.
However, that’s not how it should have been.
Ideally, I should have learned something while I was in high school or college — unfortunately, they don’t teach this essential life skill.
Very unfortunate.
Some good financial finds:
- 26 Life Lessons I’ve Learned in 26 Years of Living at Man vs. Debt – I mostly agree with the list. I always find Adam’s work amazing and inspiring.
- What is a good credit score? at Moolanomy – Learn more about this important financial concept as early as you can. Like it or not, it could impact your finances and life.
- 5 Dangerous Misconceptions People Have About Money at My Two Dollars – Great list to start with to help you improve your financial knowledge.
I started writing personal finance articles for Moolanomy Personal Finance a while ago — you can see my articles here. Seeing first hand the power of blogging, I’ve decided to start my own blog here at Money Destiny. Hopefully, I can share more with you, as well as, be myself a bit more here.
Why the name Money Destiny?
When I graduated from college, I didn’t know anything about personal finance. I was unemployed and in debt. But from there, I took steps to turn my situation around. I built up my skills, got a job, paid off my debt, and worked my way toward my financial goals.
I am not trying to boast. What I am trying to say is if I can do it, so can you.
Your financial future doesn’t depend on luck, and it isn’t out of your control. You can take charge and write your own financial destiny.
I hope that I can walk you through some of the steps that I went through and lessons that I learned along the way.
Welcome to Money Destiny.