Category Archives: Personal Finance

Personal Finance

Start Investing Early!

June 27, 2011 – 5:00 am

piggy bankAmy starts saving $100 a month when she’s 22. Her money grows at 8 percent a year. At the age of 62, Amy will have accumulated $335,000.

Tom waits until he’s 32 to start saving. He saves $200 a month, also growing at 8 percent a year. At the age of 62, Tom will have a nest egg of 293,630.

The example above demonstrates the power of compound interest, and explains why the earlier you start saving for the future, the easier it will be to save, and the more you’ll end up with, even if you set aside significantly less each month.

As a high school senior or a college freshman, it’s not easy to start saving for an extremely vague, distant goal such as “retirement.” Research shows that young people have a hard time envisioning themselves as old, which explains why the typical 20-years-old often can’t bring herself to start saving for her future 60-years-old.

But let us assure you, you WILL get older. And as we’ve demonstrated above, the earlier you start saving, the more you’ll end up with. In fact, to make it more enticing, let’s put it this way: the earlier you start saving, the better your chances of NOT having to work well into your sixties, retiring early and having fun while you’re still young and healthy enough to enjoy it.

To get that 8% annual return, you will likely need to invest your money in the stock market. Right now, with historically low interest rates, you’re unlikely to get this type of return on a savings account or on a CD. Of course, investing in the stock market has its inherent risks, but for you, since you’re so young, it probably makes sense to put at least 80% of your savings in a low-cost index fund such as Vanguard S&P 500.

As you grow older, you will definitely want to gradually change this asset allocation, and make it more conservative as you near retirement age – until, when you’re almost ready to retire, most of your savings are in bonds and money market funds, and only a small amount (maybe 20% or 30%) is in the stock market.

Another important rule of thumb: As you grow your savings, keep the funds you might need in the near future (2-5 years) in a relatively safe vehicle such as a savings account. Anything you don’t need in the short term can be invested in the stock market, you’ll likely get the best ling-term returns.

Ready to learn how to invest? We highly recommend The Motley Fool and Morningstar as great resources for the novice – and the experienced – investor. And remember: we’re not professional financial advisers, just avid investors, so please do your own homework and, if needed, consult with a financial adviser regarding your particular situation, before you make any investment decisions.

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Personal Finance

How to Build a Credit History

June 20, 2011 – 5:00 am

The typical high school senior does not have any credit history. Chances are, you do not own a credit card yet, and have not yet proved yourself to be a trustworthy borrower.

Well, it’s time to change that!

A student loan that you repay diligently and on time is a great way to start building a solid credit history. In addition, if you’re going to buy a car now that you’re headed for college, and plan to finance your car purchase with a loan, this is another good way to build a credit history.

Of course, it is absolutely crucial that you only borrow the amounts you absolutely have to borrow, since loans – even affordable loans – end up costing you money in interest. Also, if you don’t pay on time, your credit history will suffer. So make sure you can repay a loan before you take it.

What about a credit card? You will probably find out that getting a credit card without any credit history is not a simple task to accomplish. You are more likely to receive a credit card from the bank where you or your parents have checking and savings accounts, so start there. You might only qualify for a prepaid card at this point. Another option is to get a store credit card – those typically have lower limits and a more lenient approval process.

Just as in the case of repaying loans, it is absolutely essential that you always pay your credit card statements in full and on time. This means that you are going to use your credit card as a convenient way to pay instead of carrying cash – but you will only charge amounts that you actually have in your checking account. Never use your credit card to pay for something that you really want but can’t afford, because if you do this, you won’t be able to pay your credit card statement in full, and you’ll start paying interest – very high interest – on the balance.

Carrying a credit card balance is one of the quickest ways to get in financial trouble. Credit card debt snowballs so fast, many people never manage to become debt-free. Since your goal is to avid unnecessary debt and to build a stellar credit history, never charge more than you can later repay.

After a year or so of being a good borrower and paying everything in full and on time, you could try applying for one of the major credit cards. Gradually, as you demonstrate that you are trustworthy, your credit history will grow, and as you graduate from college, you’ll be in a great position to do everything that grownups do, including buying your very first home.

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Personal Finance

How to Deal with Identity Theft

June 9, 2011 – 5:00 am

The very idea that someone had stolen your identity and used it to make unauthorized charges can be unsettling. But I’m here to tell you that this has happened to me, and that in recent years, assuming you’re a low abiding citizen, authorities and institutions are very much on your side.

In the past, identity theft victims used to feel like they were guilty until proven innocent. These days, there is much more awareness, and you can generally expect to be treated as an innocent victim.

If you don’t monitor your credit report, you will likely become aware that you are the victim of identity theft when a debt collector calls to demand payment on an account you don’t have, or when you receive a statement in the mail for a card you never applied for.

Here’s what to do:

1. Call one of the three credit bureaus and establish fraud alerts (they will notify the other two).
Equifax: (888) 766-0008
Experian: (888) 397-3742
TransUnion: (800) 680-7289
Placing the fraud alert means that your file will be flagged so that going forward, creditors will be required to call you before extending credit. This initial fraud alert for 90 days. You’ll receive a notice in the mail that it’s been placed.

2. Once you receive the notice, call the credit bureaus again. Ask for a free credit report, and ask to extend the alert to 7 years.

3. When you get the credit reports, examine them carefully. Assuming you discover fraudulent accounts, report them to the credit bureaus and ask to remove them from your credit report.

4. Call the creditors where the fraudulent accounts have been opened and report the fraud.

5. Report the crime to your local police and get a copy of the police report.

6. If your existing credit or debit cards are involved, report the fraud immediately to the credit card company and request replacement cards with new account numbers. If your bank account is involved, report the crime to your bank.

7. Monitor your credit report again after six months to make sure no additional fraudulent accounts have been opened.

8. If debt collectors harass you, get the person’s full name and the name of the collection agency. Tell them that you are a victim of fraud and are not responsible for the account. Also let them know you’ll be happy to complete an affidavit for them.

It’s unfair, really, that you have to go through so much trouble even though you’re the victim here. But as much as authorities these days are sympathetic to identity theft victims, these steps still need to be taken in order to restore your credit and protect your financial future.

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Personal Finance

Protect Yourself from Identity Theft

June 6, 2011 – 5:00 am

The upside to being a college student: You are far more independent than you’ve ever been.

The downside: All those grownups worries that used to be your parents’ – are now yours too! One of those is identity theft.

Identity theft is defined as the illegal use of someone else’s personal information (such as a Social Security number) in order to obtain money or credit. So, someone can steal your personal information, use it to get a credit card, have himself a little shopping spree with that card, and leave you responsible for the balance. Unless you check your credit report regularly, you likely won’t be aware of this debt until debt collectors start calling you –the criminal will typically use a fake address.

There are several ways you can protect yourself from identity theft:

1. Keep private records and statements in a safe place and shred the ones you don’t keep. So many of us simply toss receipts and statements in the trash – but they contain bits of info that can be used, with additional bits of info, to steal our identity.

2. Safeguard your social security number. Generally speaking, criminals need your first and last name, your date of birth, and your social security number to open an account in your name. Since your name is not a big secret, and your date of birth is also widely known, the one missing piece of information you should really safeguard is your social security number. Don’t give it to anyone unless you’re convinced they’re legit, and keep your social security card in a safe place – NOT in your wallet.

3. Secure your mail. Your mail includes personal information that can help criminals steal your identity. In addition, at some point you’ll have enough of a credit history to start getting “pre-approved” letters in the mail. Thieves can use these to open an account in your name.

4. Use an up-to-date firewall and virus protection on your computer. This one is fairly obvious, and is especially important if you do online banking and online shopping.

5. Review your credit card statements carefully. I do, and I’ve caught several fraudulent transactions over the years. Thieves often charge small amounts on each card they steal, hoping that the owner won’t find these small charges. So, for example, they could charge $50 a month for a few months. If you don’t check your credit card statements, there’s a good chance you won’t notice these unexplained charges.

6. Monitor your credit reports. Use annualcreditreport.com to check your credit report annually. You are entitled to one free annual credit report from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion.

Next week we’ll walk you through the steps you need to take if you find out you have become the victim of identity theft.

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Personal Finance

Dealing with Money and Credit after Leaving Home

June 3, 2011 – 5:00 am

It’s an exciting time in your life! Leaving home, going to college, and – above all- becoming an adult and being treated like one. It can get overwhelming, for sure, especially when it comes to handling finances. Hopefully your parents and you have discussed the main aspects of being financially responsible. But just in case, here’s an overview of the main points.

1. Set a Budget and Stick with It. Setting a budget is fairly simple. You basically figure out your monthly income (such as what you earn from part time work plus anything your parents are giving you) and your monthly expenses (such as rent, tuition, utilities, and groceries). Total each of these columns. If you are showing a higher income column than expenses, good! You can use some of the extra money for fun and stash the rest in a savings account. But if your expenses are higher than your income, you will need to make changes – either lower your expenses, or find a way to make more money. If you’re trying to cut, it makes sense to cut on discretionary expenses such as clothing and entertainment. Your fixed expenses, such as rent, tuition, books, car payments, utilities and food are likely, well, fixed.

2. Avoid credit card debt. This is extremely important. You probably took out at least one student loan to finance your higher education. This is not necessarily bad debt – in many cases it’s an investment in your future that‘s going to pay off in higher lifetime earnings. But credit card debt is bad debt. Rates are typically very high, and it can easily snowball and get out of control. So avoid financing purchases with credit. Always stay within your budget. If you want to buy something, it’s fine to use a credit card, as long as you’ll be able to pay the statement in full when it arrives.

3. You don’t need to have what “they” have. The fact that a friend might buy any new and shiny Apple gadget that goes on the market does not mean that you have to do it too. This is not high school anymore. It’s fine to just be YOU and focus on your studies and on your future. Electronics, fancy clothes, eating out every night – very few students can afford this lifestyle without getting into serious debt.

4. Always pay your credit card statement, and any other bills, on time and in full. This will help you avoid late fees, interest payments and fines. It will also keep your credit history clean. The fact that the credit card company allows you a “minimum payment” does NOT mean you should take advantage of that. Only paying the minimum means you’ll get into major debt, quickly.

5. Check your credit history. At this point, you probably don’t have much of a credit history, but it’s definitely time to start building it! Your credit history is a record of your past borrowing and repaying activities. It enables lenders to decide if you are “safe” to lend to. If you’re planning on getting additional credit cards, a car, or a house at some future point, you should make sure your credit history is squeaky clean. Use annualcreditreport.com to check your credit report annually. You want to make sure your credit activities (such as using your credit card or paying car loans) are reported by the lenders and are being recorded, and you want to make sure there are no mistakes or identity theft issues.

6. Protect Yourself from Identity Theft. Identity theft is defined as the illegal use of someone else’s personal information (such as a Social Security number) in order to obtain money or credit. To protect yourself from identity theft, keep private records and statements in a safe place (shred the ones you don’t keep), safeguard your social security number, secure your mail, use an up-to-date firewall and virus protection on your computer, review your credit card statements carefully, and monitor your credit reports.

7. Teach Yourself the Basics of Investing. For now, if you have any extra money left in your budget, you can simply stash it in a savings account in your bank. But start reading and learning about the basics of investing. At some point, you’ll want to open a brokerage account and start investing some of your money in the stock market. This is a good place to start educating yourself.

This was just an overview. Stay tuned for future blog posts, where we will discuss many of these topics in more detail.

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