I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.
If there’s one lesson to take from all the recent banking scandals, it this – don’t let your bank swindle you out of your cold hard cash. To avoid being caught out, be on your guard and watch for these tricks when applying for a loan or credit card.
Identity Theft Coverage
You’re thinking, “Yes, I do need that!” A little known fact is, the Truth in Lending Act of 1968 says you’ll be out no more than $50 if your credit card is lost or stolen. Don’t pay for this coverage. If they offer it for free, great, but they’re not really offering you anything you’re not already entitled to.
Payment Protection Insurance
This one comes in many different guises including:
- Credit Card Protection
- Repayment Protection Insurance
- Accident, Sickness and Unemployment Cover
- Loan Protection Insurance
- and many more
It is often offered at the point of sale with bank staff usually telling the borrowers that it compulsory or worse still adding it on without the borrowers consent!
Banks across the world, with a customer base in the UK, have now set aside close to £30billion to compensate customers who were mis-sold PPI in this way. So check your statements for anything similar and ensure that you aren’t paying for something that you don’t need.
Credit Score Monitoring
Many credit card companies off credit score monitoring, and they don’t offer it for free. You can utilize a number of other services, for free; to get the job done, so do not put extra money in your credit card company’s pocket for something you can get for free!
Unless you can pay off the transferred balance in full by the end of the introductory 0% interest rate period, you’re stabbing yourself in the foot with this one. You’ll have interest accrued on the balance from the original card to pay off when it transfers. If it’s not paid off, it too will start accruing interest there. Be smart about the balance, length of the interest free term, and what your budget says you can pay.
Credit Score Repair
Contrary to what credit card companies want you to think, your credit score isn’t that complex.
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Types of credit used (10%)
Credit repair services only use the same things you can do on your own. There is nothing special here, so don’t waste money.
Not falling for these tricks can save you a lot of money. Simply decline at application, and if you’re pushed, stand firm.
You’ve no doubt heard the two terms, and knowing the difference before you apply for a loan is critical to getting the best possible deal.
What is Secured Debt?
Secured debt is a loan that is backed up by collateral; a physical asset the lender puts a lien on. If you do not repay the loan, the lender can take the asset from you. For instance, you can put your land, if you own it free and clear, up as collateral for a mortgage, but if you foreclose, the bank gets the home and the land.
This represents less of a risk to the lender, because they know you’re motivated to make your payments so you don’t lose the collateral. And, they are protected if you do, because they’ll get your asset and can sell it to recoup their loss on your loan.
Secured loans will typically come with a lower interest rate. You can get home loans, auto loans, and personal loans as secured.
What is Unsecured Debt?
These are loans that are not backed with collateral. This is a heavier risk for the lender, because there is nothing for the lender to take away from the borrower if they do not repay the loan according to the terms. Most of the time, the interest rates are higher, and can be variable tied to the current prime rate.
Unsecured debt includes:
- Student loans
- Medical bills
- Credit cards
- Payday loans
Just because there is no collateral involved in an unsecured loan does not mean you should not worry about paying it back. Defaulting on an unsecured loan will wreck havoc on your credit, preventing you from getting financing in the future, and if you manage it, it will be at much higher interest rates, or require collateral to show you are not a risk.
Below is a great infographic by PayPlan highlighting Debt Perception vs Reality…
The Chancellor of the Exchequer, George Osborne commented on the predictions, stating that the British economy is “continuing to recover and recovering faster than forecast.”
Statistics from the Office for Budget Responsibility (OBR) suggest that there may be an increase of 2.7% for GDP in 2014. This is an improvement on the estimate in December of 2.4%. In addition to this, a rise of 2.3% (compared to 2.2% previously estimated), has been forecasted for 2015, with 2016 remaining at 2.6% growth. The estimated figure for 2017 however dropped to 2.6% from 2.7% along with 2018 at 2.5% from 2.7%.
Senior economist from Standard Chartered, Sarah Hewin was sceptical of the predictions, stating that: “The outlook for the UK economy still has a question mark over it”.
In addition to the forecast from the OBR is the fall in anticipated government spending, from £111 billion for this financial year, to £108 billion.
The forecast however was met with scrutiny from Ed Miliband, the Labour Party leader, who criticised the chancellor for not meeting its’ goal of government surplus by 2014 to 2015. He said: “Back in 2010 you told us that at the end of 2014 the economy would have grown by nearly 12%… Today the figures say it’s been barely half that, and you want the country to be grateful.”
George Osborne however pointed towards further forecasts from the OBR which suggest an economic peak towards the end of this year, similar to the economy prior to the financial predicament of 2007 and 2008.
The OBR have also estimated that the UK’s unemployment rate will see a drop to 5.4% between now and 2018, with them expecting, before the end of this year, a drop to 6.8%.
Although the OBR’s predictions are mainly positive for the economy, the chancellor cautioned that there is still a lack of investment, exports and saving and too high an amount of borrowing.
A review is to take place on whether the Bank of England should increase their number of powers allowing them to hold more of a sway over the balance sheets of banks. Currently the Financial Policy Committee of the Bank of England cannot control banks leverage ratio, this along with other functions will be reviewed.
Bank of England governor Mark Carney spoke to the Treasury Committee about how the new powers, similar to those he had while at the central bank in Canada, had made it easier to tackle the global economic predicament.
Carney told them: “If I could pick one element that was essential to the performance of the Canadian banking system during the crisis, it was the presence of a leverage ratio.”
Mr Osborne had written to Mr Carney stating that “Now is an appropriate time for the FPC to consider whether and when it needs any additional powers of direction over the leverage ratio, how it should use these powers and how any new powers would fit in with the rest of its macro-prudential tool-kit.”
Mr Carney pointed out that he was “more than mildly offended” when accused by John Mann, who belongs to the committee, on trying to show the economy as a “rosier picture”. Mr Carney also found the claims that RBS were driving feasible businesses to shut down on purpose, “deeply troubling and extremely serious”, stating that “This has to be tracked down to the full extent of the law.”
He faced disapproval with his estimations on interest rates which had caused misunderstanding. In his defence Mr Carney replied stating that: “The exact timing of when that 7% threshold will be achieved is subject to uncertainty. We do our best to give our estimates of that uncertainty… One month’s unemployment figures does not have a material change on those likelihoods.”
Mosquitoes are like pesky debts that need to be paid, there’re always pecking at you. You can wart them off or you can kill them dead. Some debts bite at you constantly and then after a few years of biting, they notice that cannot get much out of you so they give up. However, they make sure they leave you wounded with scars which reflect your credit report.
Some mosquitoes bite every day, some every month. Their main goal is to make you feel uncomfortable so you can give in. Paying the minimum balance is just enough to keep them away temporarily. Problem is they’re still close by and ready to bite again. Now you have to re-up more bug spray. We do this for years.
You have to have a game plan beyond just temporary relief that will kill them so they will never come back. We have so many mosquitoes biting us every month we become sick and wounded making it harder to enjoy life.
Flip the script. Do not hang where bugs are. Avoid places where bugs prey upon humans. Throw more chemicals on the bugs eventually they will die. This will speeds up the process. The less bugs the less stress. Stop inviting bugs into your life to bite you. Every time you sign a contract or buy something on credit you are inviting risk.
With the number of magazines, blogs, and books dedicated to personal finance you’d think we’d all have achieved financial independence by now. How is it then that most of us are still struggling day to day to make ends meet, just one job loss or illness away from financial devastation?
Financial gurus smugly tell us to live below our means, pay ourselves first, avoid lifestyle inflation, and then pat themselves on the back. Mission accomplished.
But this makes about as much sense as advising a five pack a day smoker to simply stop buying cigarettes. Wouldn’t bet on it working. How about admonishing the alcoholic to pour out the Johnnie Walker hidden in his bedroom closet? Sounds great. But not going to happen.
No, simple advice will not change behavior, financial or otherwise. The missing ingredient to our fiscal success may rest in our understanding the psychology that drives our spending.
Once we understand the underlying psychological motivations that guide our financial decisions can we effectively change our financial lives. Let’s take a look at a few of the psychological forces that influence our money habits.
Social Conformity Doesn’t End in High School
By ourselves most of us tend to make rather rational decisions. Yet when confronted with the contradictory actions of those around us we often concede to the less rational alternatives.
Psychologist Solomon Asch conducted classic experiments in the 1950′s illustrating just how susceptible we are to the influence of others. College students were asked to complete a simple task. They were to match a line on one flashcard with one of three lines on a second flashcard – a task that any five year old could complete.
But there was a twist. All the participants read their answers out loud and all but one of the students were actually decoys, part of the group conducting the study. At one point in the experiment all the decoys would start providing the same wrong answer.
Would the student follow the decoys and also give the wrong answer, or would he stick to his guns and give the answer any five year old knew to be correct. Amazingly at least 75% of the students involved in the study at some point in the experiment gave in by repeating the same incorrect answer given by the decoys.
This illustrates the effective power of socialization or, as we called it in high school, peer pressure.
Just as in the experiment even when we know the right “financial answer”, we make the wrong choices because everyone else is doing it.
Although we understand the absolute absurdity of interest only home mortgages, the fact that the people around us are using them makes it acceptable. Intuitively we recognize the value of keeping a car for five or more years, but when everyone else is buying a new car every three years we too may do the same.
The “wrong” financial answer (interest only loans, purchasing a new car every 3 years, using credit cards instead of cash) all become socially acceptable because everyone else says it is. When enough people chose the wrong answer we capitulate.
The Rapidly Rising Anchor Sinks us All
Anchors are mental reference points we use in making purchases. They’re extremely important because our brains make decisions by comparing an unknown quantity to a known quantity – the anchor. Walk into a store and pick up an iron for instance. How do you know if the $30 price tag is too high? You attempt to compare it to the price of an iron you bought before or to the price of an iron you may have seen online or advertised in the newspaper.
The same concept works for higher priced merchandise as well. How does one really know how much a wedding should cost? We again compare the price to some anchor price we’ve heared or read about. If we’ve read in a bridal magazine that the average wedding costs $22,000 then we’ll subconsciously adjust our budget accordingly.
The problem occurs when our anchors get artificially skewed upward. When we hear that Lala Vasquez is planning a $100,000+ wedding or that Chelsea Clinton’s wedding costs in excess of 2 million dollars our anchor price moves artificially upward. Suddenly a $26,000 wedding doesn’t seem so outrageous in context. A $42,000 car becomes reasonable when we see a barrage of athletes and celebrities sporting $75,000, $100,000 even $250,000 sports cars. Paying $700,000 for a home suddenly doesn’t seem like such a stretch when you have images of multimillion dollar homes piped through your television on a daily basis.
The rich our becoming more wealthy than at any other time in US history. Combine this with our fascination and cult like coverage of celebrities and the super wealthy, and we have a whole set of anchors that are being artificially inflated, from homes and cars to clothes and dining.
Childhood Blueprints Influence Our Adult Money Decisions
Spend less than you earn. Sounds easy, yet commonsense knowledge crashes head long into money lessons seared into our subconscious during childhood. The way money was mishandled in our family could leave an indelible mark on the way we treat money as adults.
A child growing up in a household where parents spent recklessly and then scrambled to pay the rent may subconsciously incorporate the same patterns in adulthood. In an attempt to compensate, a workaholic parent showers their children with expensive gifts. As an adult the child may equate expensive gifts with love and subsequently be inclined to display their affection by purchasing lavish gifts as well.
Perhaps growing up in poverty a child promises never to experience it again. As an adult she overextends herself to compensate for what was missing in childhood. Maybe she goes overboard and purchases everything under the sun she never had for her kids.
I’m sure we all can identify money lessons absorbed during childhood that still influence the way we treat money today. Examining what we internalized as kids helps us understand how we handle money as adults.
Gain Control of Your Money by Gaining Control of the Psychology
Yes money success is more complicated than simple statements – pay yourself first, avoid debt, earn more than you spend. The truth of the matter is that successful money management has as much to do psychology as it has to do with the math.
Until we understand the psychology behind our money decisions, we’ll never get our finances straight. Then next time you’re contemplating a major financial decision ask yourself questions. Are you making a particular financial decision or engaging in a particular financial behavior because everyone else seems to think it’s acceptable? Are you willing to pay more for a purse, car, or other expensive item because you’re subconsciously using an over-inflated anchor price? Ask yourself what lessons you internalized growing up that may influence your financial decision making? Once you get in the practice of questioning your psychological motives, you position yourself to make better decisions.
Master your psychology, master your money.
If you didn’t take a personal finance class in high school, you’re not alone. Approximately 90 percent of American adults were never even offered a personal finance course in school. So how can you catch up on your financial education and make solid financial decisions that will lead to a better future? Here are 10 simple money management tips to help handle your finances:
1. Know where you stand financially right now
•Know your assets: anything you own that has value, like your investments, your car or your home.
•Know your liabilities: any money you owe, like a credit card balance or loan.
•Know your net worth: how much money you have and all the profits you have generated over your entire lifetime.
•The following formula represents the relationships between these components: Assets=Liabilities + Net Worth
2. Know where you want to stand financially in the future and what your balance sheet should look like down the road. Understand what it takes to grow your assets and pay off your debt. Also, set a target net worth number to work toward.
3. Make bank by maintaining positive net income every month. Have a budget and make sure you spend no more than 90 percent of your income. Also, keep track of your money to see how well you are doing by measuring your progress toward your target net worth every month.
4. Stop chasing risky returns with your investments when you can get a risk-free real return by paying off your debt. Eliminate as much bad debt as possible by selling your non-essential assets, what you do not need to pay off your debt. After you have an emergency fund set up, do not buy any investments, except 401K contributions that are 100 percent matched, until you have paid off all of your debt that has an interest rate higher than what you can get on a 5 year CD.
5. Know the difference between good debt and bad debt. The key is to balance your needs and wants. Make sure you are spending less than what you make, which will prevent you from needing to borrow money to pay for your bills.
6. Know your emergency reserve requirements, how much money you have put away in case you lose your job and income. Calculate your desired reserve, which is your living expense reserve plus other reserves for large purchases. Make sure you fund these reserves in a highly liquid account such as a money market. Over time your actual reserve will surpass your desired reserve and at this point you will start having money available to pay off debt and then invest.
7. When you invest, think risk first, return second and make sure you understand your risk tolerance. Know what kind of investor you need to be in order to achieve your financial goals. This starts with understanding how much risk you should be taking. Only start investing after you understand your risk tolerance and make sure you are diversified across different asset classes.
8. Real estate is a snake with two heads: assets and financing. Make sure you are not overpaying for your home and avoid buying overvalued property. If you are taking out a loan, make sure you have done the math and know how much home you can afford. Make sure to get a fixed rate loan unless you are a sophisticated real estate investor and have a very strong balance sheet. You can visit making-bank.com for financial calculators that will help you assess your real estate investments.
9. If you can, have insurance for all of your insurable risks and get to know your 1040. Understand your insurable risks, such as premature death, sudden illness or car accident. Then, take advantage of work-related plans and make a plan to cover the rest. For example, this might involve obtaining health insurance on your own, in which case you might need to adjust your budget and lower other expenses. Also, research and understand what line items are affected on your 1040.
10. Being rich is not everything, but being financially secure is. Happiness is not measured with what’s in a bank account, but what it’s in the heart. This is my mom’s greatest financial lesson to me.
Look at your own finances first before judging mine.
I was thinking about hiring a cleaning lady for about 2 hours a week to clean our house. The average wage for a cleaning lady in my neighborhood cost about $30/hour.
So we are looking at $60 a week (max). So at max we would spend $240 a month. We have no debt except the mortgage. We pay our mortgage, utilities, and insurance payments. The rest we save/invest. Our expenses are about 35% of our income.
There was a debate between me and a colleague. He mentioned that I must be rich because I am able to hire a maid. I said it’s only for two hours a week (now a live-in maid is a different story) He mentioned that he cannot afford to pay anyone $30 an hour.
Now let’s breakdown why he cannot afford it, his Lexus cost him $800 a month, he has credit card debt and he has student loans. We make around the same income.
The reason why he cannot afford a maid is because his income is directed to creditors (banks).
It’s not about how much you make it more about what you do with money once you get it. If he had no debt, he will then have more cash flow to live/breathe/relax. This in turn makes the $240/mo expense easier.
Truth is that he CAN afford it; it’s just that his income is going to debt. He rather finance his inflated lifestyle. I rather pay for a housekeeper. Everyone have different tastes. The problem I have: is when someone tells me they cannot afford something, when in actuality they can but they just cannot see what is holding them back. If his car was paid off like mine that will give him an extra $800 cash to take home every month.
When you hear people mentioned that no debt gives you more freedom –believe them.
Figure out what debt is holding you back and make a change. Most of the time it’s not your income~
I was listening to a podcast on money and wealth building and the interviewee was telling the interviewer “You can’t tell who’s Rich anymore ! I also agree.
You have middle class people that live like wealthy people and you have poor people that live middle class., (cable TV, car, and iPods) Of course, both classes are living above their means.
For Example, the average middle class person has credit card debt. The credit card is the number product that can help you live beyond your means in my opinion. Want to take a trip to Hawaii and stay at the Four Seasons Hotel and have a round of golf and a day at the spa? No problem a credit card can make this happen. You do not need the cash to have a vacation anymore. Regardless of income, class or integrity, as your credit card limit is under the amount of your purchase, it’s yours!!
Do you want that new Infiniti M35? No problem, there is a bank somewhere that can make sure you are approved. Of course, you don’t know the stress and anxiety these people get on the first on the month when everything is due. Unless they open their credit report and bank account to you, you will feel that they have the money to afford these things.
During the 2008 housing crash, there were people that were making $50,00 a year and being approved for $500,000 homes, yes you heard right.
You can live in an upper middle class neighborhood and make an income of a middle class person, an interest only or a negative amortization loan can get you in the house of your dreams. In the long run, none of this will last. But the point I’m making you cannot tell the Rich from the Middle Class anymore, thanks to screwed up credit options– we all can live rich and have TVs in every room and take nice vacations and dine out extravagantly.
The way I can tell when a person is rich, (now that I am older and mature enough to know the difference) is when you are surrounded with great friends and loyal family members, have cash in the bank to handle emergencies for 6 months or more, a 0 balance credit card and a healthy retirement account. Having good mentors in your life can also make you rich.
There are people will adopt this strategy and they will also be people that can care less about personal finance/responsibility. These people will always find a way to get what they want without going taking the correct path. They are the shallow rich!