Master Your Card » Kristy

What Happened To Rebate Checks?

Kristy — Sun, 03 Jan 2010 05:25:42 +0000

I don’t know about you guys, but I’ve been noticing an increasing trend lately that I’m not completely on-board with yet. Retailers who use rebates to lure us in are moving from a paper check to a prepaid debit card, and it’s not just retailers, either. Unemployment checks are on the decline, Instead, unemployment offices seem to be handing out reloadable debit cards when an applicant has been awarded unemployment. Each time they get paid, the card is loaded rather then cutting a check or sending a direct deposit.

After researching this a little more, I found a great article on why companies are doing this over at creditcards.com. You can read their article here.

As for my thoughts, let’s talk about the pros and the cons.

Pros

I try to be an optimist in these types of situations, so let’s start with the good.

# 1 – Less Paper

I’ve been working on making my life a little more green, and while I have a long way to go, I appreciate the fact that using these debit cards eliminates some paper usage…sort of. Some retailers decide to use more mail fillers to market their target audience, so I’m not referring to them. But, overall, issuing a prepaid debit card instead of a check does save on paper.

# 2 – Convenience

Getting a card in the mail means you don’t have to make a trip to the bank in order to use the money. You simply activate the card, if required, and go. Makes it nice and simple.

# 3 – Quicker Turn-Around Time

One good thing about getting the cards as opposed to the checks is that you get your money a little faster. It used to be that it would take anywhere from 6-10 weeks to get a paper check, what with the retailer needing to verify if you’ve met the requirements, processing the rebate, cutting the check, and then mailing it out. The debit cards streamline that process a bit more.

# 4 – Faster Processing On Lost Cards

Inline with getting your money faster, if the card is lost or stolen, the processes for having it replaced seems to be much easier as well. I’ve never personally experienced this, but from what I’ve been told, the wait time is much less than if the retailer issued a check because it’s all electronic.

I’m sure there are more pros to these cards, but in truth, I’m not a big fan so I find that I tend to see the cons a little more clearly. Perhaps readers can give us a few more pros that I’m missing?

Cons

And now let’s look at the downside of receiving these prepaid debit cards from both retailers and unemployment agencies.

# 1 – Difficult Access To The Money

Some of these cards make it difficult to access the money that is rightfully yours. Many retailers wish to keep the money they issue as a rebate in-house, so they won’t allow you to use the card with any other retailers, only within their stores. Other retailers make it difficult to access remaining cash on a card if it’s been used previously because you have to find someone who knows how to do a split tender transaction, or that allows such transactions. Surprisingly, this is not commonly taught in retail.

# 2 – Some Come With A Ton Of Fees

Aside from the fees that could be incurred just from trying to access the card, there are also maintenance fees to watch out for if the card is not used within a certain amount of time. Some even have penalty fees for using it outside the intended network. Then there are ATM fees to consider, as well as cash advance fees if you’d like to access the money that way.

# 3 – Expiration Dates

As if retailers haven’t made it challenging enough to accept these cards, they tack on a expiration date. I’ve lost out on several rebates myself because of this one. It is very easy to stick the plastic in your wallet and forget about it. If you don’t use the money by the expiration date, and provided there are no maintenance fees slowly eating away at your balance, you lose that money. The company is not likely to issue you another card.

# 4 – Benefits Lost

I actually have to credit Erica Sandberg over at creditcards.com for this one because I didn’t even think about, but it fits here so I’m repeating it. When you use these prepaid cards to make purchases, you’re missing out on the opportunity to gain reward point, airline miles, or other benefits you may receive if you had been using your credit card. While for some this may not be a significant issue, it is still a con as it relates to using the prepaid debit cards.

For myself, I don’t get rebates often enough to do much more then grumble when I get the card. I’ve actually been lucky, the few I’ve gotten have had no fees for cash advances, and since I work at a credit union, I’ve just done the cash advance to deposit to my account. It’s worked well. But, I have a member that we affectionately refer to as Mr. Rebate because he’s in at least once a week with a new stack of rebate checks. The frequency has started to slow down some and when we asked he said it’s because he’s getting rebate cards. He’s not a fan, he thinks it’s just one more way retailers make it difficult to get the rebate in the hopes that you won’t use it and they get to keep the money.

So, what are your thoughts on this growing trend? Do you think they’re a positive contribution to consumers or simply a devious plot by the retailers? Perhaps a little less dramatically, do you have any other pros or cons to add to the list?

How Many Credit Cards Do I Need?

Kristy — Mon, 14 Dec 2009 10:19:58 +0000

Sound familiar? I was recently asked this question by one of my clients and figured the question warranted discussion.

The average American has anywhere from 5-10 credit cards, though with the recent financial crisis, that number has probably gone down. Do American’s need that many? Maybe, maybe not. I think the number of cards themselves is less important than the amount of debt you can comfortably pay off each month.

As we’ve discussed before, your credit score is determined by several factors, one of which is the debt-to-credit-limit ratio on all of your cards. Ideally, you want to keep what you owe on each card between 25-45% of what your actual credit limit is. This ratio helps lenders determine what kind of risk you are, what kind of debt you can handle, and of course, your spending habits.

Credit cards are merely a tool, so the idea is to use them to help you build a solid credit history. As I explained to my client, the number of cards will vary based on each person’s individual needs. What they have to figure out is what those needs are and how many cards are necessary to meet those needs. In my personal experience, I’ve never needed more than two cards at most and have been comfortable with only those two cards.

However, in talking with people who’ve carried multiple cards, there are some misconceptions out there. I’ve heard that carrying one card from each of the major credit providers (i.e. Visa, MasterCard, American Express, and Discover) is a good idea because you never know who will accept which card. At some point, this may have been true, but the reality is that we are much more advanced now then we were when credit cards first came about. In the U.S., practically everywhere accepts Visa and/or MasterCard with more and more accepting Discover and American Express. Worldwide acceptance tends to favor Discover card, with the exception of Europe as American Express is more widely accepted there. While a combination of these cards may be advisable for acceptance reasons, that should not be the only concern when deciding whether or not to carry multiple cards.

Another factor to take into consideration is the upkeep all of these cards will require. By upkeep I mean that you’ll have to remember due dates and payments, etc. With our handy dandy computers, this is made much easier these days, so it may not be an issue for some. Others may struggle if they have too many cards, and so for this reason it would probably be best for them to have fewer cards. In either case, it’s important to have a system that works for you so that your bills are paid on time.

Whenever we discuss having credit cards, I’m always an advocate of not having them if you intend to carry balances. However, the reality is that a lot of cardholder’s were carrying balances on their cards, so my advice, while well-meaning, was often impractical to those people. In this case, I would say to consider your cards carefully. Irrespective of the number of cards you intend to keep, you should choose your cards based on your specific needs. That means if you intend to carry a balance on the card – whatever your specific reasons for doing so are – then you probably don’t want a rewards card with a higher interest rate. Conversely, if you’re a frequent traveler who could benefit from a miles program of some kind, it doesn’t always make sense to choose a gas rewards card.

A final factor to consider when deciding how many cards you should have is your debt-to-income ratio. I’ve talked about this before in terms of lenders and their lending practices, but as a reminder, this is what you have going out every month versus what you have coming in. Experts say the magic number is about 35-40%, meaning that your debts should be about 37% of your income. This number includes your mortgage, auto loans, student loans, credit card debt, and any other consumer debt that reports with the credit bureaus. The number of cards you choose to carry should reflect your understanding of how important this ratio is to your overall credit health.

With all of that said, I reiterate my initial statement that the number of cards is less important than the amount of debt you can comfortably pay off every month. The one good thing that has come out of this credit crisis is the change in perception for many people. Credit cards should never be a crutch to lean on in times of duress, that is what your emergency fund is intended to be. Credit cards should be a tool to help you build a good credit file. Simply put, I can’t tell you the exact number of credit cards you should have, only you can answer that question for yourself, based on your needs.

What do you think? If you’re comfortable, share how many you have and why you thought that was a good number. Do you think there is a limit on the number of cards a person should carry? Does it change when that person becomes a family?

Penny Pinching or Big Ticket Savings: Which Is For You?

Kristy — Mon, 07 Dec 2009 12:41:05 +0000

In personal finance there is a constant list of things you hear in order to get started on the path to saving money and reducing your debt.

Skip the Starbuck’s coffee

Brown bag it during the week

Clip coupons

Just say no to big ticket items

Cut back on your spending in small ways

And so on.

Somewhere along the way, some people decided that these penny pinching ways were draining and may make a small impact, but didn’t really take care of the larger problem. And so, another set of equally heard suggestions came into play.

Downsize the house

Sell the expensive car and get a cheaper one

Live on the same income year after year, despite merit increases

And so on.

Proponents for penny pinching say that making the small changes and taking it slow will build lasting habits. In addition, this method eases people into a new, healthier fiscal lifestyle as opposed to the abrupt changes people face when they decide to downsize their lives in a major way. I liken this particular approach to those who inch themselves into the swimming pool when the water’s cold, or are slow to pull the band-aid off, preferring to pull one section at a time.

However, those in favor getting more bang for their frugal buck say that penny pinching is cut from the same cloth as fad diets and does not change the spender’s habits of living beyond their means, at least not long term. The theory here is that, eventually, the person will give up. If it’s not been a lifelong habit to save, trying to penny pinch after the fact isn’t going to help. So, the proponents for big ticket savings suggest downsizing the big ticket items like your home. They say it’s a better way to save, and it’s faster. In my analogy above, these would be the people that dive right into the pool and rip the band-aid off in one fell swoop. They just get it over with.

Personally, I feel like both approaches have merit; however, I feel the penny pinching approach is more universal in that it can by applied by everyone. The thing is, there are a lot of people in the world struggling with their bills that don’t have big ticket items they can downsize. I had a mother come visit with me recently who didn’t own a home or a car, but she was still struggling to make ends meet. What exactly was she supposed to downsize? My advice to her was to penny pinch. Her and her daughter were living beyond their means and after looking at her budget, we found a few key areas that she could cut back, not only bringing her below what she was earning, but also allowing her to save. It was a pivotal moment for her.

That all being said, I really don’t think either one is actually better or worse than the other. Like most everything else in personal finance, I believe it depends on the situation you’re currently in and what works best for you. But, I do think in many cases a combination of these two approaches is an effective way to really kick your savings into high gear. Especially now, with the economy still in turmoil and the unemployment rate still high, savings and being prepared are important.

So it comes to this. Which is better for your situation? Do you feel like penny pinching is the most effective method to save, or do you think the ‘latte factor’ is a waste of time and people should focus on the big stuff? Or, do you think a blended approach is the best way to go?

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Why It’s A Good Idea Not To Complicate The Budget

Kristy — Mon, 30 Nov 2009 16:46:53 +0000

Hey MYC readers, I’m ba-ack! Miss me? I know I’ve been away from the site a little while, and as I told you a couple months back, I’m on a part-time basis now. However, my summer was incredibly swamped with work and a script I was working on for myself. I’ll be heading out to L.A. in October for a convention of sorts and spent a lot of time preparing for that. But, now that I’m all caught up with that stuff, I’ll try to be on a more regular writing schedule with MYC.

One thing I’m also catching up on is the reading of personal finance blogs. And I came across a new blog – for me – that is pretty interesting and has a lot of cool ideas. But, there’s one post in particular I wanted to talk about. Wojciech Kulicki @ Fiscal Fizzle discussed using life roles to organize your budget. If you’ve got a minute, please take a quick read. Go on…I’ll wait.

…

Ok, so now that you’ve read it, let’s discuss it.

First off, if you’ve read MYC for awhile, you know I’m a complete advocate of the Franklin Covey 7 Habits of Highly Successful People program. I think there are a lot of lessons we can take away from Stephen Covey’s brainchild, including some concepts towards personal finance. Keep in mind, I’m not a licensed trainer of the 7 Habits program, so the information I share is based on my own experience with the course. But, one of the key components of the 7 Habits program is that of life roles, which basically states that at any given time we take on various roles in our life that complete us.

For example, I’m a daughter, a sister, a friend, a banker, and a writer. Throughout the day I am all of these things, but I may spend more time one day focusing on a couple of these roles as opposed to all of them. The 7 Habits program states that in order to build better relationships with ourselves and others, we need to focus on nurturing these roles each week, but not so many of them that we overwhelm ourselves. These roles are what are referred to as “big rocks.” These are the things we want to spend our time focusing on while everything else, i.e. work, school, and other non-relationship things, are considered the small rocks. You fill your bucket with the big rocks first and then the little rocks fit around them.

So, each week when I sit down to plan out the next week, I include 3-7 roles that I want to work on that week. The 7 Habits program doesn’t recommend more then seven because it’s overwhelming and can distract your focus on what is important for that week. Personally, I think seven is too many. I think it is better to go with 3-5 roles for the week and spend a little more time with each one, but living the habits is all about what’s best for the individual.

At any rate, Fizzle Finance takes this concept and applies it to that of budgeting. He says that he and his wife wanted a family budget and used the concept of life roles to really hammer out the details of their budget. If you read the article, the product of this brainstorm was a budget with 13+ categories, many of which had subcategories underneath them. In addition to that, they’re not even financing all of those categories right now, so some end up with $0 in the column.

For me, that’s just too much. I feel very overwhelmed just considering the budget they look at every month, much less trying to incorporate something like that into my own budget. Do I think they’ve taken the program too far? Absolutely not. I love the way he’s taken the concepts and applied them to finance, because I’ve done the same myself. And this seems to work for him and his family, so more power to him. But, it’s not for me. And, I definitely don’t recommend it for those new to budgeting.

Starting out in budgeting is a very fragile thing. It’s easy to get overwhelmed and frustrated with the numbers, and sometimes, it’s just downright hard to face the truth. No one likes to watch the money they’ve worked so hard for just going down the drain. Sometimes, ignorance is bliss. That’s the mindset people need to overcome if they ever want to get ahead financially. So, a budget is important, but a simple budget is best to start out with.

Having 13+ categories with a slew of subcategories underneath may be a complete budget that focuses on every aspect of your life, but it’s also something that can most likely be condensed and more manageable for the untrained beginners. Typically, a budget when you first start out should contain the essential categories, listed in no particular order:

Standard Bills - rent or mortgage, utilities, cable, etc.

Living Expenses – groceries, personal care, clothing, etc.

Savings – personal savings, CD’s, investments, emergency funds, etc.

Transportation – car payments, car insurance, oil changes, maintenance, etc.

Debt Repayment – credit cards, student loans, etc.

Home Care – home repairs, new appliances, household products, etc.

Entertainment – eating out, movies, date night, etc.

There may be other categories you feel are important and you want to add, but these seven categories cover a good chunk of what a simple budget needs to have in order to be successful. It’s not set in stone because each budget is personal and should reflect what’s important to you, but the point I’m trying to make is that having too much on a budget could throw you off. In our busy and hectic lives, keeping up with expenses can be tough and a little mundane. Don’t add to that task by adding more categories then you can possible keep up with. It’s always a good idea to set yourself up for success, so take an uncomplicated approach to budgeting when you’re just starting out.

What are your thoughts? When is a budget too much? When is it too little? How do you like the life roles being a part of the budget?

Photo by Jeff Keen

Banking 101: The Five Points of Negotiability

Kristy — Tue, 18 Aug 2009 15:36:14 +0000

Everyone knows how to write a check…ok, well not everyone, but I bet the majority of our readers do. So, for this post, let’s assume you know how to write a check. What most people don’t know is that there are five points on a check that make it negotiable. If any one of the five are missing, then the check can be refused. It always seems to get people when we bring it up to them at the credit union, they just don’t seem to understand why, so I figured it would make a good post. The following are in no particular order.

# 1 – Date

This particular point of negotiability seems to throw people the most. For some reason, people don’t understand that post- and stale-dated checks are not negotiable instruments. So, let me explain what that means.

A post-dated check is a check that someone has given you with a future date on it. Their intent was that you wait until that time to cash it or deposit it in your bank. However, while some banks have started accepting the check for deposit, many are still refusing them because of the date. Since the check is a promise to pay, or a contract between you and the person you wrote the check to, the future date makes it non-negotiable until that date arrives. Keep in mind that while some banks will accept the check for deposit, the issuing bank could reject it and send it back unpaid.

A stale-dated check is one where the date is six months in the past. After six months, most checks are no longer negotiable, unless stated on the check, Some say void after three months, some say void after a year. In those cases, we defer to what the check says. However, in most cases the general rule is six months. Now, in some cases your bank may take the deposit because of their relationship with you; however, the same rule applies as with post-dated checks, the issuing bank can return it unpaid for a stale-date.

When dealing with checks, it’s best to make sure the date is current and that you don’t hold onto the check for a long period of time.

# 2 – Words of Negotiability

This is referring to the part of the check that says, “Pay to the order of.” This is present on about 99% of checks. The other one percent has some variation of this phrasing, but what usually differs is that the terms “or bearer” are thrown in.

If there is any other phrasing, you may want to check with your bank about the validity of the check. I’m not saying that it could be fraudulent, but most checks say ‘pat to the order of.’

# 3 - Payee

This is how it works. The check is made payable to a person(s) or a company and only those individuals have the right to negotiate that instrument. So, let’s say that you’ve got a check made payable to yourself. Simply endorse the check and then deposit, cash, or whatever your plans are for those funds. Let’s say the check is made payable to you and another person with the word ‘and’ separating your names. This gets more involved because now this check is the property of both parties, therefore both parties must sign the check.

With personal checks, most banks will just stamp the check for the joint owner if it’s being deposited. However, government checks and insurance checks do not allow the bank stamp. They must be signed by all parties on the check. This is especially important when you’ve got a check made payable to yourself and a business – a good example are the insurance checks you receive when you file a claim. Those are made to you and whomever holds your mortgage or auto loan. The bank holding your note has to sign the check before your bank can negotiate it. Sometimes it’s a hassle because you have to mail it to your lender and then wait for it to come back; however, the lender is part owner of that check and they must sign it in order for you to use the funds.

So, moral of the story here, make sure you pay attention to who the check is made payable to and have all parties endorse the check.

# 4 – Amount Certain

This refers to the amount of the check. There are two places on the check where we in the banking industry look to verify amount. There is the box to the right of the payee’s name, which we call the numbered amount. Then there is the line underneath the payee where the amount is written out in words. If there is a discrepancy between these two numbers, we go with the written amount as it is the legal tender. If that is unacceptable to you, then you would have to take it up with the person who wrote you the check.

# 5 – Signature

This really should go without saying, but all checks presented to the bank must be signed. If there is no signature on the front, it’s not valid. The only time not having a signature on the front of the check is acceptable is when you receive the online bill pay checks that state a signature is on file. But, if you’re just walking into the bank to make a deposit, the likelihood that you’ll have one of those checks is rare – unless you’re a business. So, always make sure the person handing you the check has signed it.

And that’s pretty much all there is to the checks. On a few of these points the bank can make an exceptions, but some of them there are no exceptions to be given. If you have a question regarding your checks, the best thing to do is take the check to the bank and ask. Most tellers can’t give you any information specific to your check without seeing it. They can give you a general idea, but if you want to know for sure, just take it in.

What questions do you have regarding checks and the five points of negotiability? Have you had a situation where a teller has refused one of your checks because of this?

Photo by Pulpolux

When Did Personal Responsibility Become A Lost Art?

Kristy — Mon, 10 Aug 2009 12:11:00 +0000

I was talking to my grandparents the other day and I posed this question to them. I’ll get to the story that lead to the question in just a minute, but I wanted to find out what their take was.

According to my grandfather, in his day (why do they always phrase it like that?) people took responsibility for their actions. Sure, there were a few bad apples in the bunch, those looking for the easy ride and a way to skate by, but the majority of folks where good, honest, and hard working people. They didn’t spend more then they had, mostly because credit wasn’t really an option, but also because they knew the consequences affected more then just themselves.

But, the one thing that stuck out for me was that my grandfather said people in his day didn’t spend a lot of time blaming other people for their problems. He said there was too much to do and blaming others didn’t solve the problem, especially when it was no one else’s fault but the individual’s. Seems like we need to get back to that frame of mind, if you ask me.

I look around at where we stand in the economy, both globally and on the home front, and it’s amazing to me how much finger-pointing is going on. Folks who bought into homes they knew they couldn’t afford are blaming the banks for lying to them or falsifying the paperwork. Banks who took on risky loans are blaming the public who started to rely on credit as a viable cash flow. The credit industry is blaming the subprime mess for their current problems. And a group from every sector seems to be blaming the government.

Maybe I’m naive, and that’s ok, but it seems to me that each group needs to take responsibility for their part in the problem. Only then can we really find a solution that works for everyone and not just a band aid to fix the immediate needs while leaving the root causes to fester under the surface. But, in truth, this article wasn’t meant to be about the economy, so I’ll leave it there for now.

What I really wanted to talk about was people taking personal responsibility for their actions involving personal finance.

Here’s a little story to get you thinking.

I recently had a member come into the credit union upset because she had opened a checking account and was now overdrawn. Prior to the checking account she had a savings account only with a debit card. When she opened the checking account, we explained to her that her purchases would be coming from the checking account rather then the savings account and to make sure she had the funds in the checking. If she didn’t, the savings would act as an overdraft protection account, but it was a $3 fee. She said she understood that.

When she came back, she was overdrawn in her checking and the savings account was depleted. She said that no one ever told her the funds would go through her checking account and that her direct deposit went to the savings account. So, I again explained what we told her initially and that we had given her the information. She insisted we didn’t and that we should have to pay the fees since it was our job to make sure she understood the account, not hers.

Let me repeat that. It was OUR job to make sure she understood her account. Not HERS.

If you’ve been reading this blog awhile, you know that I’m a big advocate of personal responsibility and I’d be lying if I said this didn’t rile me. So, I explained to her that we are there to assist her with her accounts, but that understanding how they work was her responsibility, in fact, when she signed the account application, she signed an agreement to that very statement. Furthermore, regardless of which account the funds came from, she still spent more money then she had because she wasn’t keeping track of what she was spending – again something she needed to be responsible for, not the credit union – and she could have saved herself a lot of trouble had she simply taken the time to understand what we had told her and the information we had given her from the beginning.

The conversation continued like that for several minutes. She stubbornly denying she had any responsibility in the matter and me adamantly refusing to return any fees. I would have been more then willing to help her out had she admitted some personal responsibility to the matter, but coming in and blaming the credit union for her actions was not going to win my sympathy. The reality is, it would take us probably a good hour to sit down and talk to someone about every detail of their account. If we explained that to someone, they’d turn around and leave. Consider it, if you walked in to a bank to open an account and they told you it would be about an hour, would you do it? Most likely not. So, we have to tell you as much as we can in the 15 minutes or so that we have your attention, but we also have to be careful not to overwhelm you. Hence the reason we give you the disclosures – which, by the way, too many people never read.

Part of my job is to help educate people, and sometimes, paying the fee is the only way they learn. Now, don’t misunderstand me, I’m not a total grouch who just wants to argue and make people pay unnecessary money. I probably return more fees then most when I feel it’s appropriate. But, in a situation where someone refuses to take responsibility for their own actions, I’m not going to help out. And, I realize this is probably a touchy subject for a lot of folks who’ve had trouble with their banks. But, the truth is, a large majority of the time that something goes wrong, it’s because of something you did, not the bank. I don’t agree with the overdraft fees being as high as they are, nor do I agree with some of the policies out there regulating them. However, don’t confuse the issues. Take responsibility for your actions rather then blaming them all on the bank.

It’s easy for us to get wrapped up in the “reasons” we don’t achieve something with our finances. It’s easy to come up with excuses as to why we don’t save, why we don’t put anything towards retirement, or why we spend so much money. But, the fact is, until we’re ready to take personal responsibility for our actions and choices, we’re not going to get ahead. Blaming others won’t get us anywhere, but it will keep us from getting ahead. So, I hope that more people learn to accept their responsibility in the choices they make and use that constructively in their personal finances.

Tough love moment here: When it comes to the state of your finances, you have no one to blame but yourself.

Do you agree or disagree? Is there ever a time that it’s ok to blame your misfortunes on someone else?

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Repairing Bad Credit and Why You Should Bother

Kristy — Thu, 30 Jul 2009 14:00:25 +0000

Repairing your credit isn’t easy and it isn’t fun, I should know. But, it’s possible to do if you have the patience and will to get it done.

Why Bother?

I’ve had a number of clients over the years who’ve asked me that question. Why should they bother to clean up their credit, what good is it to them? Well, most of us understand that our credit is what determines whether or not we can get various loans, and then what interest rate we’re offered for it.

At some point in our lives, most of us have had the need for a home loan, car loan, or general purpose loan. With bad credit, you’ll be hard pressed to be approved for these types of loans and if you are approved, you’ll have higher interest rates, which equates to more money out of your pocket. A 9% rate on a $150,000 mortgage is a lot of money. It’s much different than paying 9% on a $15,000 car loan. If you want good rates that will save you money and allow you to spend it on other things, rebuilding your credit is a great way to start.

Every once in a while I’ll get someone who doesn’t think this explanation suffices. They say they don’t need a car loan or a house loan; they can just rent and keep their old car. Ok, fine. Let’s take a look at that scenario then. Almost every apartment complex, utility office, and insurance company checks your credit before signing you up.

Your credit report reflects your payment history and all of these vendors want to know that you’ll pay them. If you’ve ever applied for an apartment and were told that you need a deposit including first and last month’s rent, that’s because you have no credit or bad credit. If your electric company wants a $200 deposit before they connect you, that’s because you have no credit or bad credit. If you want to be able to get electricity turned on in your place – be it a house or an apartment – and not have to pay through the nose to do it, you need to repair your credit.

What if you live with friends and everything is in their name? Do you still need to worry about your credit? Well sure. What about your car insurance? If you have bad credit, your premiums could be higher or you could be flat out refused for coverage. You see, you’re a risk and no one likes a risk, especially in today’s market. There is very little in this life that doesn’t depend on our credit rating anymore.

I drag this out to illustrate a point. There aren’t many scenarios in which it would be appropriate for someone not to be concerned about their credit score. I know there are plenty of people who aren’t the least bit concerned about it; however, they should be.

Bottom line: Having bad credit costs you more money.

What is bad credit?

As strange as this may sound, many people don’t know the difference between bad credit and good credit. If that’s the case for you, not to worry, you aren’t alone in that respect. Before we talk about fixing your credit, though, let’s talk about what bad credit is and where it comes from.

First of all, it’s important to know who determines your credit score and how they determine it. Your individual score is based on the formula from the Fair Isaac’s Company. This company works independently from the three credit bureaus and uses their unique formula to assign your credit report a number based on your history.

The credit score was invented as a short-hand method for banks and lenders to assess a borrower’s creditworthiness. Going through a credit report is time consuming for lenders and so Fair Isaac’s created what is commonly called the FICO score. This score is comprised of various factors from your credit report and then computed to produce a number between 300 and 850.

The lowest possible credit score is technically 0, this means you don’t have any credit at all. However, once you start amassing credit, your score will jump up and fall between 300 and 850. This is simply a range that Fair Isaac’s developed for the purposes of providing lenders with a “snapshot” of your financial picture. The higher your number, the more creditworthy you are considered.

Given this information, what then is considered bad credit? Numerically speaking, the magic number that most lenders are looking for is 620. Anything below that and you’re extremely lucky to get credit at all. If you do, then you’re looking at pretty high rates. From 620-680 is considered good credit, and the average American credit score runs at about 680. Anything over 680 and you’re moving into very good and excellent credit.

One thing you have to realize when looking to repair your credit is that it is very difficult to achieve a perfect credit score, in fact, only 1% of the population has done so. However, someone with a 720 credit score is going to get as good a deal as someone with an 820 credit score, despite the 100 point difference. This is because lenders typically tier their rates based on score groups. So someone with a 720+ credit score is one group. The next group may be 680-719, the one below that may be 620-679, and so on. The tiers will vary per banking institution and lender; however, the point is that a perfect score is not necessary to get the very best rates on the market. The rate will be determined based on the score group you fall into.

So now that we’ve talked about the range and what constitutes bad credit, let’s talk a little about how that score is determined. Unfortunately, the exact formula that FICO uses is not known to anyone besides themselves. There is also going to be some changes made this year to the formula, so what’s listed here could change, depending on what FICO determines with the new scoring model.

However, we do have a fair idea of what goes into the scoring model as it currently stands. As such, the breakdown is as follows:

35% – Payment history
30% – Amounts owed
15% – Length of credit history
10% – New credit
10% – Types of credit used

So, you can tell from just a glance that the biggest factor in determining your credit score is payment history. That is why you will hear people say that paying your bills on time will have such a big impact on your score. It may seem like such a simple thing, but the fact is, people lend you money with the expectation that you will repay it on time, as per the terms agreed upon. It makes perfect sense, then, that this should also be the largest factor in your credit score. Remember, the credit score is merely a “snapshot” of your credit report.

The next largest item is amounts owed. No one wants to lend to someone who is maxed out on all of their credit cards because the message that sends the lender is that you can’t handle anymore credit. This is also why you’ll hear people say to keep low balances on your credit cards. Anything too close to the credit limit will affect your score, and by extension, your ability to get new credit.

Obviously, the length of time you’ve been in the credit bureau will affect your score, and this is also why only 1% of the population has reached 850. To get up to 850, you have to be in the credit bureau for at least 30 years. But, the point of a credit report is to show your history and lenders like to see a solid block of positive repayment history.

New credit and types of credit are each at 10%, meaning they play a role in your score, but are not nearly as important as the others. While they aren’t as important as the other factors, you still want to watch the number of new accounts you open and keep a fair balance between revolving lines and installment loans. Just to clarify, revolving lines are usually credit cards. They refer to lines of credit that can be used again and again as the balances are paid down. Installment loans refer to standard loans with a fixed rate and a fixed term. Repayment over that term will result in the loan being paid in full and closed.

How to Repair Your Credit

Now that we know why it’s important to repair our credit reports and what is considered a bad score, let’s look at how we would go about repairing it.

Step 1: Get a copy of your credit report

In order to know where you stand, you’ll need to get a copy of your credit report. Normally I advocate getting one copy from one of the three credit bureaus every four months, that way you have a steady idea of where you stand throughout the year. However, in this situation, I believe it is important to have the full picture sitting in front of you. As each of the three credit bureaus is a little different in the information they list, you may have things showing up on one that’s not on another. You’ll want to know.

You are entitled to one free copy from each of the credit bureaus every year. If you have not already pulled a copy for the year, then your request should be free. However, the credit reports themselves do not include the score. If you want the score, you’ll need to pay for that separately.

Keep an eye out here because we’ll be posting a guide on how to read your credit report, step by step. You’ll get to see just what a lender looks at when they make decisions, and hopefully, you’ll have a better understanding of the things you need to be looking for. In the meantime, if you need help with looking over your credit report, visit your personal banker at your local bank or credit union, or your personal financial advisor with your brokerage firm. Either should be able to help you, or at the very least, direct you to an expert.

Step 2: Check for errors

Once you’ve got your report(s) sitting in front of you, the first thing you want to do is make sure that the information listed is correct.

- Double check the name and social security number.

It is not uncommon for Jrs., II, and III to get mixed up so make sure you’ve got your report and not your father’s or brother’s.

- Be sure the address and employer are current.

Lenders like to see consistency and they like accurate information. Making sure you have the most up-to-date information listed on the report reflects well on you.

- Go through your accounts and check for mistakes.

If there are any accounts that do not belong to you, show open when they should be closed, were closed by you but do not say “closed by customer,” show late payments when there were not any, or list bankruptcies not identified by their chapter, be sure to inform the credit bureau immediately.

Each credit bureau has a dispute form online that you can fill out, or you can hand write (or type) a letter to them. This secondary method is actually preferred because you are able to include supporting documentation for your claims. If you have supporting documents, send them in.

The credit bureau has 30 days to investigate the claim and get back with you on a decision. If you disagree with the credit bureaus decision, you have the right to send an explanation to be attached to your credit report so that lenders and others pulling your credit can view it. The credit bureau must attach it to your file.

Here’s an example of a good dispute letter:

Date
Your Name
Your Address
Your City, State, Zip Code

Complaint Department
Name of Credit Bureau
Address
City, State, Zip Code

Dear Sir or Madam/To Whom It May Concern:

I am writing to dispute the following information in my file. The items I dispute also are encircled on the attached copy of the report I received.

This item (identify item(s) disputed by name of source, such as creditors or tax court, and identify type of item, such as credit account, judgment, etc.) is (inaccurate or incomplete) because (describe what is inaccurate or incomplete and why). I am requesting that the item be deleted (or request another specific change) to correct the information.
Enclosed are copies of (use this sentence if applicable and describe any enclosed documentation, such as payment records, court documents) supporting my position. Please reinvestigate this (these) matter(s) and (delete or correct) the disputed item(s) as soon as possible.

Sincerely,

Your name

Enclosures: (List what you are enclosing)

You can find this same letter at myFico.com under their samples. I use this letter as an example because it works. It’s the same letter I sent to the credit bureaus when I had charges to dispute and it covers everything that the credit bureau needs in order to get the dispute processed. You merely have to fill in the blanks.

Step 3: Work on cleaning up the credit report

If you had some errors on your report and you’ve gotten them fixed, you may have noticed an increase in your credit score. Congratulations. That’s the easy part. Now comes the tough part. First off, understand that while it is easy for your credit score to drop, it’s much more difficult to raise it. This is mostly because it takes time to build a good credit history.

First of all, it is important to understand that any derogatory accounts or collections listed will remain on your credit report for seven years – unless they are removed beforehand for whatever reason. After the seven years, if the item isn’t paid, the collection agency can put it back on and the seven years starts all over again. This does happen, so just be aware. If you’re a few years away from seven years and thinking you can dodge paying someone, think again. It can come back to haunt you.

Now, there is a little silver lining in this news. A collection or derogatory account only affects your credit score for five years. So, even though it’s still on your report, your score won’t be impacted by it anymore. However, lenders still look at the whole report. And just because that collection isn’t factored into your score doesn’t mean we don’t consider the possibility that you won’t repay us.

While a good score is important, it’s not the end all of the lending process. I’ve had customers apply for loans with a 700 credit score that we’ve had to deny because of past history, public judgments, and various other derogatory accounts on a report. Typically, the score you carry – assuming all other factors are in accordance with an approval – will determine the interest rate you would qualify for. It’s not a determining factor on its own. The point of this guide is to help you clean up your credit report, not just improve your score, though by extension, improving the one does help improve the other.

Ok, moving into how you can clean up your credit report.

Payment History Tips

As your payment history accounts for 35% of your overall credit score, this is the largest area to focus on. Here are some tips to help you get there.

- Make a budget.

Bet you didn’t see that coming! Seriously, you need to get to a point where payments can be made without struggle and be on time. In order to do that, you need to know precisely what’s coming in and what’s going out. If you’ve been avoiding the ‘b’ word for some time now, you’ll want to get acquainted.

- Make your payments on time – every month.

Now that you’ve got a budget all worked out, you’ll want to make your payments on time from here on out. This will help you build a positive repayment history that looks solid to lenders.

- If you’re behind on anything, catch up and stay there.

If you have bills that are past due, call your lenders and make arrangements. The worse thing you can do is ignore them, so be proactive and call them first. Once you’ve gotten yourself caught up, stay there. Remember, you need positive repayment history over a period of time in order to improve your credit report.

Amounts Owed Tips

The next largest item that’s factored into your score is the amount of money that you owe other people. It accounts for 30% of your overall score and is the area that most closely affects your debt-to-income ratio – a number that if too high, even an 800 credit score can be turned down for.

- If you still have credit cards, keep the balances low.

The ideal balance-to-limit ratio is 40% if you’re carrying a balance. This shows that you are capable of using the card responsibly and makes lenders more comfortable giving you money. When you have high outstanding debt, it negatively impacts your score and lenders are not likely to add to that debt.

- Pay off your debt when you can rather than moving it around.

Sometimes it is tempting to take advantage of low rate offers and move large balances to lower rate cards; however, you still have the same amount of debt – which was the problem in the first place. If you want to improve your score, pay down the debt.

- If you have no credit cards and can’t get approved for one, try a secured credit card.

This is actually preferable to getting a card with a high interest rate, annual fee, and monthly maintenance fees. Those “credit repair” credit cards often come with a lot of risk of their own. Stick with a secured card, make your payments on time, and establish a history of solid repayment.

Length of Credit History and New Credit Tips

- Don’t close out unused credit cards and limit the number of new ones opened within a short period of time.

Cancelling a credit card closes out the history on that card. So, if you had a credit card for seven years and decided to close it, those seven years of history are now gone. Because longevity is the name of the game when it comes to credit scores, yours just plummeted. Likewise, opening too much new credit has a similar affect. You have not established history, so your score is lower. Having a whole bunch of new credit and then requesting more is also a red flag to lenders.

- Manage any new accounts that you open responsibly.

You’re really going to have to stick to your budget with this. Adding new credit to the mix can sometimes feel like there’s extra money and that’s the mentality that got you in debt in the first place – for most people, anyway. If you can’t be responsible with a new account, or you feel it would be too much temptation, then you may want to forego it for awhile.

Types of Credit Used Tip

- You want a balance between revolving lines of a credit and fixed loans.

This gives your credit report a nice mix and shows lenders how you manage different types of debt.

Cleaning up your credit report isn’t going to happen overnight, so don’t expect it to. Typically, it takes about two years to rebuild a decent credit history where you’ll be approved for credit cards and loans at decent rates. Some experts recommend that when looking to get a mortgage, you should wait four years from when you started cleaning up your credit report in order to get the best rate.

There are some great tools out there to help while you’re trying to rebuild your credit, but my personal favorite is MyFico. There is a lot of helpful information and credit education that can be found on the site, but what I like best is that it provides a tool to help you gauge how your actions will help or hinder your score. You can find more information about it at www.myfico.com.

If after reading this guide, you feel like you need more help, you may want to consider a credit counseling service. There’s nothing wrong with seeking help to turn your financial life around; however, you will want to be careful. There are many companies out there who would seek to take advantage of your situation and claim they can get derogatory accounts removed from your report. Very often, the means they use to do so are illegal and unethical and can often come back to haunt you later on. It’s best to stick with reputable companies. For more information on credit counseling, be sure to visit the National Foundation for Credit Counseling or Association of Independent Consumer Credit Counseling Agencies. These companies specialize in helping consumers repair their credit reports the legal way, and can teach those in need better money management skills.

I hope you’ve found this guide helpful and best of luck as you set out to repair your credit! Let us know if you have any questions.

Photo by telstar

12 Side Hustles To Stay Afloat

Kristy — Thu, 23 Jul 2009 15:23:46 +0000

I’m on this whole holiday kick and one of the things I’ve been thinking about lately is how I can inject a little more cash flow into my budget. I’ve got things locked down pretty tight just because I’m cautious like that. Besides having a solid emergency fund, there are some things you can do – side hustles, if you will – to help put cash in your budget and tide you over when times are tough.

1.) Part-Time Job

This one is fairly obvious and the first one most people will go to. But, it can sometimes be difficult to fit it into your already full schedule. I mention it because it’s an option, but don’t feel like this is the only one you have.

2.) Donate Blood/Plasma/Sperm

Who knew your bodily fluids could be so valuable??? Most donation centers will compensate you for your time, and you can donate rather often. Ladies, you can obviously only donate blood and plasma (they pay more for plasma), but fellas you get the sperm banks thrown in as an added bonus. The compensation on sperm donations can be lucrative, but there’s one drawback. They’re picky as all get-out when it comes to sperm. Check with your local banks and find out the rules and restrictions, but donating any of the three can be a great way to pad you budget!

3.) Participate In Medical Trials

Much like # 2, donating your time for medical trials can pay pretty well. I did this once and it wasn’t that bad. I was part of the control group so they didn’t give me any real drugs (you don’t get to pick), but all in all I got a little over $3000 for a two-week study where I sat in a room at night and did whatever I wanted – watched movies, played games, read. It really was like a vacation that I got paid for. I can’t vouch that every medical trial runs as smoothly as mine did, but it was certainly a great experience, I got paid for it, and it advanced medical research. I can’t complain.

4.) Sell Unwanted Stuff Online, Or Have a Garage Sale

This is easy enough. Most of us have stuff we don’t want that’s just taking up space. I’m getting ready to move in a couple of weeks, so I’ve been selling stuff like crazy…thank God for eBay and Craigslist!

5.) Start a Blog

Ok, so this isn’t the most lucrative thing out there, but with a little time and effort you can make money. I suggest writing something you’re passionate about because you will need to spend a great deal of time with your blog in order to be successful. How you make money is up to you, but one way is through advertisements. Write great content that is rich in keywords and the advertisements will go along with the content, making readers want to click them. Not always, and this is only one aspect of blogging, but the point is that it’s an option and very much in style at the moment.

6.) Survey Participant/Mystery Shopper

If you don’t get taken in by scams, this can be a really good way to earn a little cash and keep some freebies. There are plenty of scammers out there with these two, so you really have to do your homework. The other drawback is that there isn’t always a high demand, or when there is they want someone with experience. You may have to work your way up with these kinds of hustle’s, but like I said – money and freebies!

7.) Dog Walker

Advertise in your neighborhood that you’ll walk dogs for a nominal fee. Don’t overcharge and try to get a good number of dogs. You’ll be getting some exercise in and making money at the same time, it’s a win-win. I think I read somewhere that Drew Barrymore’s dog walker makes almost a million per year. I’m so in the wrong business if that’s true!

8.) House Sitter

I’ve done this too and it’s awesome! Most of the time you get to stay at the person’s house – unless you’re neighbors or something – and it’s even better when they have way cooler stuff than you do! The family I house sat for was gone for a week and they gave me $200. I got to stay at their house and swim in the pool, soak in the hot tub, watch movies in their home theater (and I mean theater literally), and play with an amazing dog! It was a blast. Again, a vacation that I got paid for.

9.) “Date Night” Sitters

This is something you can start up in your neighborhood and probably do well with. Find out what the going rate is with normal babysitters and charge a little less. Be available to babysit on Friday and Saturday nights and try to get a few kids so you make more money – but don’t take so many that you stress yourself out. This gives people a chance to have normal dates at affordable prices, which is why they would use you over a regular babysitter. Have games and snacks for the kids and you’ll be just fine.

10.) Tutor Someone

If there was a subject you were good at in school (especially math), start a tutoring business. People are always looking for good tutors, and if you’re in a college town, you’re as good as gold.

11.) Stoozing

Granted, you won’t see immediate results with this one, but you can pull in a nice sum annually, and combined with any of the other side hustles you might participate in, it could be enough to get you by comfortably. What have you got to lose?

12.) Seasonal Work

There are plenty of things you can do that are fairly seasonal such as mowing lawns and cleaning swimming pools in the summer, and putting up Christmas decorations in the winter. Not very glorious work, I know, but these are things people hate doing, yet the want them done. They’re usually pretty happy to fork over money just so someone else will do it for them. Nothing wrong with banking on that if they were going to pay someone to do it anyway, right?

Bonus Hustles:

- Maid services

- Car wash services

- Chauffeur services

- Pick up and deliver groceries

- Designated driver services

Obviously, some of these will have a greater demand than others. But, there is no limit to the things you can think of to make some money on the side, and when times are tough, you have to buckle down and do what you gotta do.

What do you guys think? Did I miss any really good ones?

Photo by heather

An Overview: Prepaid Debit and Gift Cards

Kristy — Tue, 21 Jul 2009 16:48:45 +0000

I’m noticing a trend at work that I thought I’d talk a little about. More and more people are going over to the prepaid debit/gift cards as a way to avoid compromising their debit and credit cards. I’m seeing this for a lot of people who shop online and are completely freaked out by the thought of someone clearing out their accounts.

Since I’m seeing an increase in these, I figured I’d give you guys some pointers and do a little round of Frequently Asked Questions. If you’ve got a question that doesn’t appear on the list, feel free to ask in the comments and I’ll get you an answer!

1. What is a prepaid debit/gift card?

I use the two terms synonymously here because they’re essentially the same thing. But, they are a card with either a Visa or MasterCard logo that can be pre-filled with a specific amount of money. Depending on where you purchase the card, there may be minimums and maximums on the amounts imposed, but generally speaking, you can add as much as you want to the card.

My credit union sells them for $2 and the minimum you can put on the card is $10, but we don’t have a maximum amount so you can go as high as you want. Anywhere you go, you’ll find these cards have an initial price to purchase them. Most are nominal, somewhere in the $2-5 range, but it may not be worth it depending on how much you’re planning to put on the card.

2. Are these cards reloadable?

This depends on where you go. Some of them are, some aren’t. The ones we sell at our credit union are not reloadable. So, if this card is being used as a means of online shopping so you don’t have to use your debit card, then it may be best to find one that is reloadable to avoid paying the fee each time you buy a new card.

3. Where can I get a prepaid debit/gift card?

You can usually find these cards at any financial institution or authorized retailers who sell them. Authorized retailers usually include your grocery stores, Wal-Mart, Costco, Sam’s Club, etc. It’s a good idea to shop around with these cards to make sure you’re getting the best deal possible as some may have higher hidden fees then others.

4. Are there hidden fees?

Usually. Most prepaid cards have a specific time that the funds must be used by before the card is assessed a fee of some kind. This will vary from card to card, and the rules may be different on cards that are reloadable, but as a general rule, cards with balances after 7+ months are typically charged a monthly fee until either the card is used or the balance depleted.

The cards we sell at the credit union are $2.95 after 7 months. This is something we always disclose to people, so it’s a little less hidden then if we just didn’t tell them, but it’s important to note what the fee is on the card you’re picking out so you can compare it with other cards.

5. Will I need to activate the card when I receive it?

This largely depends on the card and where it was purchased. If it was purchased from a financial institution, then it should already be activated, you just may need to register it. If it was purchased from an authorized dealer, then you may have to activate it following the instructions provided with the card.

6. What does registering the card do?

Along with activating a card, it may be a good idea to register it. This will allow you to use the card online to make purchases. It’s usually just a simple matter of going online to the respective card’s website and entering your name and address information.

7. Where can I use the card?

Anywhere Visa or MasterCard is accepted. However, I offer a word of caution here. If you have a car loan with a financial institution and you would like to use your prepaid card, be aware that most institutions run this through as a cash advance and you may be charged a fee for this. It is best to check the card’s particular policies before trying to do a cash advance. But, the general rule to this is that the cards are accepted anywhere Visa and MasterCard are.

8. What if my available balance doesn’t cover the purchase balance?

In most cases, this isn’t a problem at all. Just let the cashier know how much you want to pay with the prepaid card and then the rest you can use whatever method you want. Please note, if you try to use more then the balance on the card, it will deny you the purchase. But, also be aware that some merchants cannot split the tender like that, so you may have to use another form of payment altogether.

9. What if I need to return a purchase?

Shouldn’t be a problem, just make sure you hang on to the card. Anytime a merchant does a return for something that was purchased with a card, they want to put it back on the card. It is important to hang on to your prepaid cards until you are certain of your purchase (at least 30 days for the normal return policy) so that you do not have trouble returning an item. Many merchants may work with you if you let them know the card was a prepaid card and that you no longer have it, but just as many may not. Better to be safe then sorry.

10. What if I lose my prepaid card?

When you get the card, there should be instructions with it telling you what to do in the event that the card is lost or stolen. This information will vary by card, so it is important to keep that separate from the card so that you can easily retrieve it if you need to. Simply follow the instructions and you should be able to get a new card issued to you.

Those are some of the basic questions that are usually asked regarding the prepaid cards, at least, those are the ones I am normally asked. In addition to the above mentioned information, there are a couple more things it’s important to keep in mind and a couple of things it’s important to remember about these cards.

Tips to Remember

Prepaid cards do require activation, so when you get the card (whether you buy it for yourself or receive it as a gift) verify that it has been activated. If not, it will be denied. You can check activation via the card’s online services or by contacting the 800 number listed on the back.

Keep track of your current balances as not all merchants have the capability of doing so for you. I personally recommend a register if you are using a reloadable card, but you can also use the secure online system to keep track of your balances, as well.

It’s a good idea to note your prepaid card account number and the 800 number on the back and keep it in a safe place just in case the card is lost or stolen. Most of the time, the customer service representative requires the card number and some personal information to determine who you are and get the process started.

Remember to keep your cards at least 30 days after you’ve used them just in case you need to make any returns. Not all merchants will allow you to make a return without the card used during the purchase.

It is not recommended that you set your reloadable cards up to be auto-filled from your bank account or credit cards as it sort of defeats the purpose of using them in the first place should the prepaid card be compromised. I had a client who had this set up and she lost the card, but whoever found it was using it and when it reached a certain level, it simply drafted more funds from her checking account, effectively wiping her out. Because she’d authorized the auto-fill she had a hard time getting the fees her bank charged in overdraft returned to her. The money was returned because most of these cards have zero liability, but she spent two months arguing with the bank and Visa to have the fees returned to her. Just a warning that you should set those kinds of transactions up with caution.

Ok, so we know these cards are great for shopping online and traveling. Is there a time that it’s bad to use them? In my opinion, not really, so long as you’ve done your due diligence in choosing the right card. If you picked the most expensive card with a bunch of hidden fees, then yeah, that might be bad. But, the biggest downside to these cards is the lack of rewards. With so many credit cards – and even debit cards – on a reward system, using prepaid cards for everything does mean you forfeit the rewards.

Have you ever used a prepaid card? What was your experience and would you use them again? Did I miss any frequently asked questions regarding the card?

Photo by barsen

Personal Finance Is Not A Race

Kristy — Mon, 20 Jul 2009 15:56:09 +0000

We all have our own goals in life regarding personal finance. Some of us want wealth, some of us just want enough. Whatever your specific goal, it’s important to remember that personal finance is not a race, and getting to your goal faster or slower than someone else doesn’t make you anymore important then them.

I was talking to a relative of mine recently and the topic of personal finance came up. She’s been wanting to leave the small town she grew up in for several years and she’s quite envious that I managed to achieve that feat well before her. She went on to say that she wanted to be financially well-off by now and that almost everyone who mattered from her high school graduating class has left the town and made something of themselves.

Her choice of words struck me as odd, first of all, she’s never been the snobby type, and secondly, what defines those people as the ones who “matter?” Was it the popular kids? The smart kids? Which specific clique(s) qualified? I found it interesting for reasons beyond this post, but when I asked her to explain her meaning, she simply said she meant those she knew in high school.

As I explained to her, just because those guys left the small town they grew up in doesn’t mean that they’re all 100% successful by her definition. Furthermore, their goals may be completely different from hers, so what she would consider an utter failure on their part may, in fact, be an absolute success to them. I illustrated my point by telling her a little of my story. We’re not particularly close, so she hadn’t heard of it before.

I shared how I left home around 16 and moved away from the small town I’d been raised in. But, as it turns out, that was the start of all my problems. I explained my reckless spending, lack of a budget or even tangible goals, and everything that eventually lead to a spiral of debt. I explained how I eventually had to go back home, tail between my legs, and really take a look at my situation before I turned it around and made it into something positive. And even with my experience and background, I’m still learning something new, every day.

If I spent all my time worrying about how other people were doing with their goals and their achievements, I’d never accomplish anything of my own. So my choices were to worry about myself and my goals, or to worry about how quickly everyone else appeared to achieve their goals. But there’s the crux of the matter, as I explained to my relative. Appearances can be deceiving. Just as they don’t know your situation, you don’t know theirs. They could appear to be highly successful, but be struggling with a mound of debt brought on by a case of the Joneses. Or, they could appear to be poor and not wishing to better their circumstances, yet they’ve achieved their financial goals and wish to live simply.

Because personal finance is so different for everyone, there’s no reason to think of it in terms of a race. In fact, more often then not, those who amass a fortune quickly also loose it just as quickly because they do not understand the value of time versus money earned. Not always, but in many cases. When it comes to amassing wealth, if that is your goal – which it was for my relative – slow and steady is the best course of action. You will be better off in the long run.

I don’t really think my discussion with my relative made much of a difference. She made a comment shortly after about how great it would be to win the lottery. I just shook my head. But, hopefully it helps someone else who might be reading this. The danger in considering finances as a race is that you lose sight of what’s important, of the reason for doing what you’re doing. Most of us don’t just want all the money in the world just cause. We have a specific goal in mind. We want to retire early and be able to travel. We want to be able to provide well for our children. These are examples of the driving force behind our decisions.

I can’t say this enough, but money is merely a tool. It’s meant to help you achieve your goals and live your life to the fullest, not to be a gauge for success – though many would say otherwise. Regardless, if you stick with your goals and stop worrying about what everyone else is doing, you’ll be more successful in your life and your decisions.

What are your thoughts? Is money an indicator of success overall? Do those who choose to live simply deserve to be labeled as failures?