Life Lessons 101

Everything you needed to know, but was never taught in school.

Financial Freedom Types: Investors

by 2 Comments

The third type of financial freedom one normally finds, is in Investing. This is the Warren Buffets of the world, and many more who aren’t quite as famous, but still doing really well for themselves.

The idea of putting your money in a company or other entity by buying stocks and/or bonds, or other type of financial product, in an effort to see a positive return and have your money grow.

This is similar to the idea of putting your money in a savings account earning interest, however because savings accounts pay so little now a days, you have to find other methods.

There are various financial tools you can use for investing. Some have more risk than others. I’ve listed common financial tools from low risk to high risk below. Note that the lower the risk, the lower the reward, and that there is not a direct line from risk to reward, nor is everything risk free.

  • Savings Account
  • Certificate of Deposit
  • Treasury Bonds
  • Municipal Bonds
  • Bonds (high grade)
  • Bonds (junk)
  • Large Cap Stocks
  • Growth Stocks

Note: I didn’t include mutual funds as they are just collections of bonds and/or stocks usually. That means instead of buying a single stock, you buy into a “fund” which has dozens of different stocks. The idea being rarely would they all go up, or all go down. Some will go up, and some will go down, hopefully more positive than negative overall.

How much money you make is dependent upon two things. First the rate of return. On savings accounts, CDs, Bonds, they are typically fixed. However on stocks they vary quite a bit of their life time, sometimes having a positive rate of return and sometimes having a negative rate of return.

The other variable to how much you make, is how much do you invest. The more you invest, the more you can earn, or lose. The difference in money you at the beginning and end of the period of time of an investment is considered the return on investment. Your return may be positive (you make money) or negative (you lose money). Generally, the higher the risk, the more potential for return, as well as loss.

If you put those two elements together, you can see how your investment works, or doesn’t work. If you put in $10,000 and get a 2% return, you make $200. Put in $100 with a 20% return, and you’ll only make $20. So even though you had a much higher return, because you couldn’t invest as much, you didn’t make as much.

Pros

With the rise of Internet Investing firms, there are lots of low fee or no fee investment firms that allow you to buy stocks and bonds with little overhead.

Investing allows you to earn “passive income” i.e. to keep earning without direct constant input from you.

The rise of mutual funds allows you to not have to know as much about direct companies, investing itself, and provides some safety in investing.

Investment gains (especially through dividends and when bonds and CDs mature) can be rolled into more investment, to increase the amount invested.

Cons

As with some Hustler examples, you can lose money, especially as you take on riskier investments hoping to make better money.

You must have “seed” money. That is, you must have a certain amount of money to start with to invest, in order to make any money.

Many investments are long term, so you may not see a return on investment for a while.

Many books/articles on investment quickly go out of date because of changes in the financial environment between rules/regulations, market forces, etc.

Investing in an individual company can take lots of time to research and you may have found you pick a loser, and have to start all over again.

Certificate of Deposit

by Leave a Comment

A certificate of deposit (CD) is a financial tool most commonly sold by banks and credit unions (seller).

The purchaser, you for example, buys a CD for a set amount of time called the term. The term length is typically, anywhere from 1 month to 10 years. If you keep that CD for the whole time, you will be paid a fixed interest amount that was set when the CD was set up.

One nice things about CDs is that they are protected by the FDIC for your bank or NCUA if you get it from a credit union, just like your savings and checking accounts.

Because you cannot redeem your money for a (long) period of time, the seller will offer you a higher rate of interest than something like a savings account which while a hassle, allows you withdraw money at almost any time.

CDs are considered non-liquid assets, since you cannot easily turn them into cash without penalty – usually just losing any interest accrued.

CDs are considered a very safe investment, and because they are safe, and because of other interest bearing factors, the interest rates are very low for CDs right now.

The other factor that controls the interest rate of a CD is the term length. The longer the term, the longer you have to wait to gain access to your money again, therefore the seller will pay you a higher interest rate. That means a CD which has a 6 month term, will not pay nearly the interest rate of a CD with a 3 year term.

Even with the higher rates of a multiyear CD, you may not find it to give you enough interest to make it a worthwhile investment.

Financial Freedom Types: The Hustler

by Leave a Comment

One of the easiest things to do, is also one of the hardest. And that is make more money. But that’s exactly what the hustler does.

There are several sub-categories of hustlers in my opinion, each of them has their own merits and detractors. But all of them are focused on making more money.

The basic idea is, if you make enough money, you’ll be financially free.

There are three common ways that people will attempt to make more money.

First, getting a better job. They might get an MBA to qualify for that management position. They might work hard to be the senior sales person, or “job hop” to a new company so that they constantly increase their salary. I worked for my first company right out of college, and increased my salary by almost 50% within the first year by working hard and making the boss look good.

Each of these has their own pros and cons, but eventually they will hit some type of limit. Either because they simply cannot meet with more clients in a day, the company only pays so much, etc.

Second, they work the side hustle. Hustlers are those people who are always working, moving, etc. This means working a side job, whether as a freelancer, a second job, or working one of the popular gig-jobs like fivr, Uber, etc. Some of the people will work to build passive income, that is something that earns you money, even if you aren’t working the job. This could be designing t-shirts on a print on demand company, writing a book to sell on Amazon, etc. Regardless, they’re going to work to bring in extra money.

Finally, the third type is the one you hear people mention a lot, but is actually rare. The people who build a successful company. Think of the Jeff Bezos, or Elon Musks of the world. People will try to tell you it’s simple. Step one, build something that is successful, step two, enjoy being a bazillionaire. Of course, in reality, there are hundreds of steps between the two, and why there are entire books written on the subject of starting a business, but that’s a different story…

So let’s look at the pros and cons of being a Hustler. Because there are different types of hustlers, some of the pros and cons will be specific to some of those types and not others, so please, bare with me.

Pros

Working for a promotion, or changing jobs is one of the easiest things a person can do to earn more money. Especially when you are just starting out. In fact, many people only stay at a job early on for a year or two because you can easily make more money when you are at the floor level. Depending upon the size of the promotion and jump n pay will change how easy or difficult that next jump is.

Because of technology, working in the gig-economy has never been easier. It used to be difficult to break into freelancing, finding clients, having an ability to bill them, but now you can quite easily, and you don’t necessarily need any extra special skills.

This is especially if you are younger, you will find you have energy earlier in your career to make those advancements, to hustle along.

Due to changes in healthcare laws back in 2010, more companies have started offering part time jobs, which means picking up a semi-steady, semi-reliable job is easier than when those jobs were handled by full time personnel.

Due to technology, starting a company is easier than ever before, especially if you have some technological skills. You don’t have to have as much inventory and a large staff to create a workable business.

Cons

Just like with saving, noting can be all positive. So let’s look at some of the hustler cons.

If you are looking at promotions and/or job hopping, you’ll find that as you become more senior, it is more and more difficult to get promoted as there are not as many of those positions. I knew a carpenter who worked really hard as an apprentice, and then got an early jump to journeyman. Unfortunately, there were only about 1/10th the number of journeyman positions open as there were apprentice positions. And the promotion actually cost him work, even though he was scheduled to make more money.

If you are working on a promotion/new job, and it takes a new degree, that slows your progress right out of the gate. Often a new degree will take between one and four years to realize, and a lot of money if you can’t convince your current work to pay for it.

Excessive job hoping is usually looked on negatively by new companies, which means they may not want to hire you. Now the definition of “excessive” varies by industry. In some industries if you are with the same company more than a few years, they begin to wonder about you, but in any company you can run into too much hoping if you are not careful.

There are only so many hours in a day, and you can only do so much hustling. So no matter what you might want, working a full time job and a part time job might be all you can physically do. (Working an additional part time job might be tough depending upon your regular job.) This will negatively affect your attempts in the gig-economy as well as other places, so be mindful of your time.

If you’re “hustling 24/7” are you really “free” or are you working yourself to death without enjoying your life. One has to be careful of taking anything to extremes.

If your hustle type is starting a new company, note that most people have started multiple companies which have failed before succeeding. In fact, most companies who start, are closed within 3 to 5 years, depending upon your industry. Some close even faster than that.

Hustling by creating a company, is often dependent of factors that you cannot control, and thus has a huge risk factor associated with it. Timing is often considered the most important element of any new business, and trying to time something is really difficult. That includes timing when your competitors come after you. Consider MySpace, Friendster, and other… all supplanted over the years. And while Facebook seems like the 800 lbs Gorilla right now, it too could be supplanted in the future…nothing is guaranteed.

Conclusion

For any success, there has to be some hustling involved. Where, and how much is up to you. If you’re willing to assume the risk, it can turn the fastest reward (especially with a good promotion or side job) that will start you on your way to financial freedom.

What is my FICO Score?

by Leave a Comment

When a lender is about to loan you money, they want to know what is the chance of you paying that money back. Hence the FICO score. Now to be fair, there are different scoring systems out there, each with their own methods for calculation.

The Score

The score ranges from 300 (very bad risk) to 850 (very good risk). The lower your score, the more the system thinks you’re likely to not be able to repay the loan. Where a high score says they believe there is a high chance of you repaying the loan.

The average score varies from year to year, but right now it is estimated to be just under 700.

Typically, the younger you are, the lower your score will be, we’ll talk about why in a little bit. In your twenties you’ll see a score of about 660 and in your thirties, it will be 670 to 680 on average.

However, you can have a high score and be in your late 20s and 30s. I know, I had a 735 at 25, and ~750 at 30.

A good score doesn’t just help you with getting a good interest rate. It can also help you get a good (car) insurance rate, and some jobs will use it to determine how (financially) stable you are, especially if you are going to be working with money.

What makes up the score

Now the actual way it’s calculated is a bit of a mystery, and it is updated from time to time. However, we can give you a basis.

Payment History

Want to kill your credit score – miss paying a bill, or two. The longer it is late the worse the effect will be. Miss a couple, and you can quickly tank your score.

This is the number one contributing factor to your score. Up to 30% for most scoring companies.

Amount Owed

The amount owed, as a percentage of the amount you can borrow, is the second highest scoring factor.

The system can’t tell that you went on vacation, put everything on the card and will pay it off next month, so it drops your score. When you pay it off next month, your score will go back up.

The thought is, if you can borrow $100,000, and you are, then it will be difficult to pay that all back. It might even signal that you are getting ready to “run” instead of paying.

Run can mean physically leaving town, or something like declaring bankruptcy, etc.

Typically this only/mostly looks at unsecured loans (credit cards) not your mortgage or car loan, although it may, just to a lesser extent.

Credit Age

The longer you’ve had open accounts, the better your score will be. Bad accounts tend to get closed, and new accounts, people may not know how to use them.

Your credit age, makes up a big part of your score and is part of the reason why younger people don’t have as good of a score. Opening a card in college helps get people’s credit established, but too many abuse it.

I got a credit card for emergencies, and then didn’t even keep it on me, so I wouldn’t be tempted to use it. It let me build up some history, without it costing much money.

New Credit

Get a new card, and it looks suspicious. Add a bunch of new debt, and the system asks why. Did you lose your job and need to buy food so you got a new card, but that means you’ll have a hard time paying it back…

If you are getting a lot of new inquires, it looks “suspicious”. So your score will drop. To protect you, typically only the first check will count against you. So if you got to three car dealerships and they each run your credit, you only get hit once.

Check on mortgage options, and get three or four quotes, only the first one affects you. The basic idea is that the average person won’t be buying multiple new cars or houses at one time.

However, each credit card inquiry into your account, will negatively effect you since you could get multiple cards at once.

Credit Mix

The different types of loans you have does matter. The more revolving lines of credit (credit cards, department store cards, etc) the worse for your score. These tend to be more risky.

Time to Check your Credit Report

by Leave a Comment

Your credit score direct affects your finances. In addition to determining how much you will be paying in interest on a loan for your car, home, or even a credit card; a good score may even get you lower car insurance rates. Looking for a new job? Some companies will check your credit report, especially if you work with money at all.

However, your credit score is composed of lots of information, and with all of that, there is a chance of there being an error. Luckily you can get a free credit report from the big agencies, once a year. Now if you search for “free credit report” you’ll get a lot of sites. However, https://www.annualcreditreport.com/ is the official free site as part of the Fair Credit Reporting Act.

As part of my new year routine, I like to get them in January. Even if I don’t plan on making a large purchase in the next month, I want to be ready. It’s also a good first step if one of your new years resolutions is to improve your finances. Whether it be to save for a new house, pay down a credit card, etc. (A higher credit score can get you a lower interest rate on a credit card, making paying it down easier.

Unfortunately, about every other time I check, I see an error. Hopefully you won’t, but if so, lucky for you, it isn’t too difficult to fix the errors.

So here are the steps to check and see if you have an error.

  1. So go to annualcreditreport.com.
  2. Enter the information needed to verify who you are. This will include your:
    • Full Name
    • Address (previous address if you’ve liver their less than 2 years)
    • Social Security
    • Date of Birth
  3. Request the reports you want. I always select all three, but you don’t have to if you don’t want to.
  4. Review the reports.

When you get done, you’ll see a screen like below which will take you through the different reports:

What should you check in your report?

There are a few things I always check.

First, I check for errors in the credit statements. The two most important include:

  • Past due notices when they were not? Sometimes things don’t get reported, its important to fix these late payments will hurt your credit score. If you were past due, there is little you can do other than work on not continuing to have these.
  • Any extra accounts showing up? This has happened a couple of to me, usually from someone with a similar name, or who lived at the same address that I used to. I’ve caught a credit card which had over $30,000 used on it, and a property lien. This is also important to check to see if someone has opened an account in your name, in which case you are a victim of credit fraud.
  • Are closed accounts showing correctly? Did you pay off a student loan? The mortgage when you sold your house? These should be shown as closed.

Don’t worry if your credit used on your card isn’t showing, or that you paid off last months credit card. That info may not have been sent in to the credit reporting company yet, they do not update in real-time.

It’s important to know that each company reports data differently. Some will use just text, others will use color coded tables. Luckily they provide a key for you:

Hopefully yours is all green. The further down the list in this key, the worse. Try to avoid getting there if possible.

The next thing I look at is credit inquiries. When a person or company contacts one of the credit reporting companies they record it. Generally someone will go to one, but rarely all three, so this will be different for each report. Some checking is normal. For example when you go to get a loan (to buy or lease a car, rent a home), apply for a job, or a few other special cases. However, you should know when this someone is requesting a look.

If you look and see companies checking your credit, and you didn’t apply for them, someone may be attempting to steal your identity. You may think you don’t have anything, so it’s not a big deal, but it can follow you around for years, and it is worth investigating with a professional if you think it might be a real problem.

Finally I review personal information. This will include things like current address, other known names, etc. Each reporting company may offer different details in different ways, but that’s OK. Reviewing, and correcting, what you need to reduces the chances of future mistakes.

What’s not in your report?

The one thing you don’t see in your report is what your credit score is. This is not required by the FCRA. You can buy this from the companies if you want, and they will attempt to sell it to you. However, you are under no obligation to get it, so don’t worry about trying to.

While you’ve seen what goes into your score, you won’t know the number unless you order it. Luckily there are ways to get your score for free if you want/need it.

Credit monitoring/protection is not included either. The report allows you to manually review your report. It does not protect you, or monitor it for you. Please keep this in mind. If you don’t see any red flags in your report, you can probably skip it. If you do see it, then you might want to look into a service which can help.