Whether you’re trying to buy a home, looking to refinance or hoping to get a lower interest rate on an automobile loan - your credit score matters. Clients often ask me how they can improve their scores and the answer is the same regardless of which stage of life you’re in.
1) Increase Your Limits
This is pretty easy to do, yet most clients don’t realize it. Here’s how it’s done:
Call up your credit card company (all of them) and simply ask them to increase your limits. Some will simply increase it without any hesitation, but often this method produces only a minimal increase. When they say they’ll increase your limit by $2,000, tell them you want it upped by a significantly greater amount. What’s that amount? I recommend something unlikely to be granted- say 10-20 times your current limit.
The point here is that they’ll type in your request, which will likely to be denied, and then give you the maximum increase allowed by their computation.
This will improve your credit to debt ratio. The basic tenet here is that your credit score is positively impacted when you increase your credit to debt ratio. Here’s an example:
You have a $15,000 limit on your credit card.
You carry a $3,000 revolving balance on said credit card.
Your credit to debt ratio is: $3,000 ÷ $15,000 = 0.20 or a 20% ratio.
By adding all your limits and debts and using the above equation, you can determine your ratio.
So, even with not paying your debt down, increasing your credit limits by making a few phone calls will improve your score and cost you nothing.
Even if you pay off all your cards every month, your score will increase still if you increase your credit limits. Having the ability to borrow more but not doing so helps your score.
2) Don’t Close Old Credit Card Accounts
If a card is paid off and you don’t use it anymore, just shred it but do not close the account. Again, you want to keep your credit to debt ratio low. Having that credit line but keeping a $0 balance only helps. Further, the longer you have had a credit card open, the better for your score.
3) Pay Off All Cards Each Month or as Much as Possible
Duh, right? Everyone understands this, but I put this point here to again discuss your credit to debt ratio. Larger credit limits combined with less debt equals a better ratio- simple!
4) Spread Your Credit Card Debt Out
If you already have several cards, I don’t recommend opening another account, but you don’t want to over utilize any of your cards. You should use no more than 30% of a card’s credit limit and of course, the less the better.
5) Don’t Open a Bunch of Cards
While you want to work on decreasing your credit to debt ratio, this will actually hurt your score.
6) Pay Your Bills on Time
Everyone knows this, but if you have missed a payment make sure you get current on those bills.
Use these strategies and your score will go up. I’ve seen it happen both for myself and clients. If you’d like to know more about other strategies that can help you establish a strong financial foundation, check out our Financial Fitness program. FinFit is built to help our clients do just that!
As a financial planner, when a potential client comes to me with money to invest they often ask, “How should I start investing my money?” They know that they need to invest and have extra capital on hand to do so, but they’re putting the cart before the horse.
Before even speaking with them about their risk tolerance, current investments, potential strategies for future investing etc. I always ask, “How much is in your emergency fund?”
The answers can range from “What’s an emergency fund?” to having hundreds of thousands in a savings account. But more times than not, they don’t know exactly how much they should have in savings.
An emergency fund is a savings account dedicated to bailing you out when unforeseen financial troubles arise. This fund is for repairing your HVAC unit, fixing your car, unexpected medical bills, and especially loss of wages.
The emergency fund shouldn’t be so small that you aren’t able to cover a financial crisis without going into debt; but not so large that you have too much capital allocated in cash.
General guidelines for an emergency fund say it should be around 3 months of expenses for two incomes, 6 months of expenses with one income- for both single and married investors. This is a baseline, but your Emergency Fund should be dictated by your individual circumstances. You and your financial planner should collaborate to determine the amount that is right for you.
Once the proper amount is determined, your emergency fund should be moved into a high yield savings account. Most of us keep our savings at a big bank and receive terrible interest rates for parking our money there. While it may not seem like a lot of extra money, going from an account producing 0.01% interest vs. 1.0% interest just makes sense. Why not let your money earn the most it can for you?
For example, say you have $10,000 in your Emergency Fund:
Interest Rate Amount You Earn/Year
Bank A 0.01% $10
Bank B 1.0% $100
I know, this is not a huge difference, right? But over 10 years, you have received $900 more by utilizing Bank B.
While you will have to pay more in taxes with Bank B, you will still come out well ahead. I encourage you to look at the current return on your savings account, then go here to compare it to other options available. You may be pleasantly surprised what this simple move can do to increase your earnings on the money you have already saved.
Roth IRA accounts have been available since 1997. In a traditional IRA, you contribute pretax dollars that grow tax deferred, but are taxable upon withdrawal. Roth IRAs are for after tax contributions that provide tax free growth and distributions upon retirement.
The magic of compounding means, the earlier you start, the greater the tax-free growth within the account. If you are 20 when you start making contributions, you could be looking at four doubles of your original contribution by the time you retire at age 60. That means a $5,500 contribution this year could grow to $88,000, allowing you to potentially create $82,500 of tax free income for your retirement years.
Another reason to open a Roth IRA is the flexibility it can provide to fund emergencies that may arise over your lifetime.
The Five-Year Rule
You can always withdraw any Roth IRA contributions without taxes, after all, you paid income tax on the money prior to making the contribution. However, if you haven’t had the Roth IRA open for at least five years, your distribution could still be subject to a 10% tax penalty, similar to the early withdrawal penalty for traditional IRAs.
The five years for withdrawals begins when you open the account, not when you make subsequent contributions. There is also a five-year rule for Roth IRA conversions that start in January of the year you make a conversion. This additional rule was enacted to prevent someone from using a Roth IRA conversion to avoid early distribution penalties from traditional IRA withdrawals.
Who qualifies for a Roth IRA
If you have a modified adjusted gross income of less than $116,000 and are single or less than $183,000 if married filing jointly, you can make Roth IRA contributions of 100% of your income up to $5,500 if younger than age 50 or $6,500 if age 50 or older.
Back-door Roth IRAs
Because there are no income limitations for converting traditional IRAs to a Roth IRA, many who are disqualified for income resort to the back-door method for funding a Roth IRA. This works because anyone may open and contribute to a non-deductible traditional IRA, even if you are covered by a qualified retirement plan.
Once the funds are deposited into the nondeductible traditional IRA, they can then be converted to a Roth IRA. This has the same net income tax effect as contributing directly to a Roth IRA.
The Early Bird Gets the Worm
Tax free growth and tax free distributions are very enticing especially for those with many years until retirement, so start today. The more time your account has to grow tax free, the better.
I often get the question of what to do with an old 401(k) or 403(b) sitting with a former employer. In short, there are only a few circumstances where you would want to leave it be, but in those circumstances it can be extremely advantageous to do so.
So, when should you leave the money in an old 401(k) or 403(b) rather than roll it over to an IRA?
Other than these scenarios, I recommend rolling over your nest egg to an IRA with a reputable fiduciary. Just some of the reasons are:
This is one of the walls in the reception area of my office. You can see I like to hang lots of little items there. The items were picked with some care, they are meant to convey to clients and prospective clients a sense of who I am and what I believe in. They are also there to remind me of what I aspire to. If you came to my office you would find that none of the items on the wall relate directly to money or wealth in the traditional way you might expect at an investment advisor’s office (though there are other places where you could find some of that).
The items on the wall are there to remind me that money is just something that allows us to live fuller lives. It is not a goal in and of itself. One of the plaques reads “Enjoy the little things in life because one day you will look back and realize they were the big things”. That is a reminder that everyday I have the chance to enjoy something. It may not be a big new shiny thing, but that is not important, what is important is for me to be mindful and grateful for all that comes my way.
One of the cards reads “You are what you eat…I need to eat a skinny person” That is there to remind me to have a sense of humor and to laugh once in a while. Life is meant to be fun.
Another reads “Success is getting what you want, happiness is wanting what you get” That’s a reminder that I am as wealthy as I allow myself to be, by being happy with what I have.
Maybe you have a wall of your own. Maybe it exists only in your head. What do you hang on your wall?
It is important to understand all the risk you face as an investor. Risk comes in many forms and some risks are higher than others at different stages of market cycles. Understanding the risks that could hurt you the most and how you can offset or reduce that risk is important to your long term success as an investor.
There is company specific risk. That is the risk that you will own a company like Enron or MCI or Kodak or any other of a myriad of companies that have fallen by the wayside. The cure for market risk is broad diversification. If your portfolio had a 1% exposure to Enron when they imploded it didn’t really hurt, the other 99% of your portfolio likely bailed you out. But if Enron was 20% or more of your portfolio it hurt a lot and took a long time to recover from.
There is interest rate risk. That is the risk that interest rates will rise. This is generally bad for dividend paying stocks, but is really, really bad for bonds, as bond prices fall when interest rates increase. I would venture that interest rate risk is higher in most portfolios today than at any time in the last 25 years.
There is inflation risk. The risk that the falling value of a currency will lead to lower purchasing power per unit of currency. Inflation is really bad for bond holder as they are repaid with currency that purchases less goods and services than the currency they originally loaned out. You can offset inflation risk to a degree by investing in inflation protected bonds or by investing in companies that pay dividends that go up over time.
There is political risk. That is risk that an act of the government could adversely affect an industry. Energy policy can mean millions of dollars of extra business for oil companies or millions of dollars of extra business for renewable energy firms. Tax policy can benefit some industries more than others. Political risk is hard to avoid because it changes so often and is so capricious in its implementation. Here, diversification is once again your friend.
Finally, there is obviously, market risk. Which is will the market prices of the securities you own go down in value over some arbitrary time frame. I say some arbitrary period of time because over the long run this risk has always disappeared. Over the last decade, we have seen markets go down by 50% or so, only to see them rebound by more than double that number. In your lifetime, you will likely see over two dozen times when stocks will retreat by at least 15%. Yet over your lifetime the stock market will almost certainly be a one-way street with the bias to the upside. Maybe we should call this the risk of missing out rather than market risk, because the fear of short term dips could prevent you from profiting from the permanent ups of stock ownership.
Understanding the risks you face and the ways you can offset that risk will help you become a better investor. Invest some time to contemplate the risks you are facing today.
With the new administration in place and President Trump threatening to tax imports from countries like Mexico, some have become concerned that we will set off a trade war with the rest of the world. For many reasons, I hope this is wrong and that, like most of the time, the biggest export from Washington, DC is merely rhetoric.
Yet, I read a headline the other day about our trade with Mexico that caused me some concern. The lede to the story stated that 16% of US exports were sold to Mexico, but that 80% of Mexican exports were shipped to the US. On the face of it that sounds a bit one-sided and I guess that is the story the writer was trying to tell.
But you should know this is a case of lies, damn lies, and statistics. According to data from the world bank in 2015 the United States exported 2.264 trillion dollars of goods and services to the rest of the world. That means that about $362 billion of our products and services were sold to Mexico. Now Mexico on the other hand exported a total of about $404 billion to the rest of the world. Doing the math that means that Mexico exported about $323 billion worth of goods and services to the US.
You cannot spend percentage points, so the bottom line is we have a positive balance of trade with Mexico. Looked at from the other side for every dollar we spend in Mexico, Mexicans buy $1.12 worth of US goods and services. That is a good trading partner.
It’s that time again. The time when we make resolutions for the New Year. Resolutions are things we want to change. I resolve to…
Resolutions are your goals for the coming year. Write them down on paper – in ink. Committing goals to paper makes them more concrete than goals we merely hold in our head. And don’t stop with just writing them down, stuff that piece of paper in your wallet or purse. Tape it to the visor in your car. Put them somewhere so you will see them on a regular basis.
When you see your goals think of one thing you can do that day that will bring you closer to reaching that goal, and do it. Do something, do anything…everyday.
Every year about this time, the popular press comes out with predictions for the new year. We all know that no one has a crystal ball but we read them anyway. Happily, Google never forgets. Here are some of the predictions made for 2016.
So, read the predictions for 2017 with a healthy dose of skepticism, it’s just for fun.
With the end of the year approaching now is the time to look for opportunities to save on income taxes. Here are some items you should look for.