Your personal finance questions, answered.
Overshopped in December? Try these 3 strategies to recover
Christmas, Hanukkah and the holiday season have come and gone — likely taking quite a bit of your cash with them.
You can’t magically make more money appear in your bank account. And it’s definitely too late to ask Santa for a check. But here are three of the next best things you can do.
It’s not surprising if you spent more than you can afford over the past couple of months. After all, we often do this to make loved ones happy, says Richard K. Colarossi, a certified financial planner and partner at Colarossi & Williams in Islandia, New York.
But now it’s time to get back on budget. Cut back your regular spending in an attempt to save more money to free up funds for debt repayment and savings.
Colarossi estimates that bringing your lunch to work for the next few weeks and skipping a $5 cup of coffee could save at least $100 in a month.
There are other things you can do, too. Consider minimal changes such as setting your thermostat a degree or two lower and cutting down on an online shopping habit.
For more substantial savings, bundle your cable and internet, cut out rideshare services, cancel some music and streaming subscriptions or renegotiate the price of your utility bills.
Pay down high-interest debt as soon as possible, Colarossi advises. And, if you’re able, make it a point to fund your savings plan as much as you can, even if it’s a small amount.
You can also control spending by managing commitments over the next 12 months. If you’re already struggling after paying for gifts, try not to overload yourself with more financial obligations.
“Plan ahead for abstention,” said Kelly Goldsmith, an associate professor of marketing at Vanderbilt University, in an email. “Don’t book a vacation, or commit to attending a wedding that you know will be accompanied by a hefty price tag.”
Allow some time to get your bearings before you take on new, out-of-the-ordinary expenses.
Give yourself positive reinforcement along the way. The first month might be the hardest, but it will get better. Goldsmith says cutting spending now will boost your confidence and make it easier to save in February, March and beyond.
“Compare your credit card bills from November, December and January and blow your own mind with how much less you spent,” she said.
As you keep saving, you’ll figure out which techniques work (or don’t work) for your lifestyle. Perhaps you’ll want to keep coffee in your budget after all, but discover that you can do without monthly beauty box deliveries.
Then, look ahead so you can put yourself in a more desirable financial position later this year. Colarossi points out that, ideally, sticking with a budget should produce a surplus that can be used for holiday spending.
Depending on what happened this time around, you may need to budget more money for the next holiday season — or budget the same amount and spend less.
Smart ways to establish credit in 2020
Dipping your toe into the world of credit? You’re in luck: There are more ways to establish credit now than there were in decades past.
You build your credit score by adding positive information to your credit reports, which are files of financial data about you. These files are compiled by the three major credit bureaus, Experian, Equifax and TransUnion. Lenders, landlords and employers may check one or more of those files while reviewing your application.
Here are three well-known ways to establish credit, plus some new products designed to give you a leg up.
Traditional credit-building tools
These three approaches can quickly build your credit.
Ask someone with good credit habits to add you as a user on their credit card. They don’t have to let you use the card; just being added to the account is enough.
Pro: You can benefit from their credit history.
Con: Not all card issuers report authorized user activity to the bureaus, so check that first.
Secured credit card
These cards are relatively easy to qualify for because they require an upfront deposit.
Pro: Payments are usually reported to all bureaus.
Con: Your credit limit is typically small.
These help you improve your credit and save at the same time.
Pro: Payments are usually reported to all bureaus.
Con: You cannot access funds until you’ve paid back the loan.
New tools that can help
Qualifying for credit when you are new to credit is tough. These new tools try to recognize or reward you for paying bills that don’t normally factor into your score.
Paying rent is traditionally not counted toward your credit score. But many companies, including Rent Reporters, RentTrack, Rock the Score, and CreditMyRent, will let you or your landlord report your rent payments to the bureaus.
Pro: You can opt in or out of having rent reported.
- Not all credit score models incorporate the data. The widely used FICO 8 scoring formula doesn’t consider rent. But VantageScore, FICO’s competitor, does.
- Reporting companies charge a monthly fee of $6.95 to $9.95 and a one-time enrollment fee of $25 to $95.
- Some companies report payments to only one or two credit bureaus. You want payments reported to all three.
This free service lets you add on-time cell phone and utility payments to your Experian credit report. This information, which is not typically counted toward your score, is used to calculate your FICO score and can push it up higher.
- You don’t need to qualify for Boost. As long as you pay utility and cell phone bills through your bank account, that information can be added to your Experian report.
- Only on-time payments are added. This is different from how credit usually works, where both on-time and late payments go on credit reports.
- Payments show up only in your Experian credit report, not the other two.
- You have to let Experian’s data partner scan your bank account transactions.
- Lenders unfamiliar with this new product may interpret your utility and cell phone information as part of your debt load, which affects your chances of qualifying for credit. Experian is “working with lenders to ensure they understand these positive payments,” spokeswoman Amanda Garofalo says.
This new score is not yet widely available, but FICO says it will roll out this spring. Unlike the traditional FICO score, UltraFICO takes into account how much you have in savings, how long your bank accounts have been open and how active they are.
If you cannot qualify for a credit product with your score, you can ask lenders to pull your UltraFICO and give you a second shot.
- Rewards responsible spending and saving.
- You have to let FICO’s data partner scan your bank account transactions.
- You cannot see your UltraFICO score unless you’ve been rejected.
Experian is also working on a new credit score, meant for lenders, that uses nontraditional data to paint a finer picture of your finances. The data includes on-time rent payments, payday loans, prepaid cards, check cashers and public records such as evictions and professional licenses, Experian says. It also looks at whether you pay your bills in full or minimums.
“Lenders can use the new score as their primary score, as a second-chance score (for loan application declines) … or as an overlay to an existing score to create a more complete picture of a person’s creditworthiness,” says Alpa Lally, vice president of Experian Data Business.
Experian Lift will roll out to lenders early this year, she says.
- Considers data from financial institutions that don’t usually report to the major credit bureaus.
- You cannot see your Lift score unless you’ve been rejected.
- You cannot opt in or out of sharing your data.
Here’s what bad financial advice costs you
Good financial advice leaves you better off. Bad advice does the opposite, and may even enrich someone else at your expense.
Here are some areas where you need to be particularly careful to seek out good advice, since bad advice can be so costly.
Most financial advisors aren’t required to put your best interests first. They’re allowed to recommend investments that cost more or perform worse than available alternatives. Why would they do that? Because the inferior investments pay them or their employers more than the better ones.
This kind of conflicted advice takes a heavy toll. White House economic advisors estimated in 2015 that conflicted advice cost Americans $17 billion a year and resulted in losses of one percentage point per year for affected investors.
One percentage point may not seem like a lot, but over time it adds up. Someone who contributes $5,000 a year to a retirement fund could have nearly $1 million at the end of a 40-year working career if the average net return is 7%. If higher costs reduce the return to 6%, the nest egg would total about $775,000.
Look for advisors who are fiduciaries, meaning they are required to put your interests ahead of theirs. You might also consider a robo-advisory service, which uses computer algorithms to design investment portfolios at low cost.
The second-worst piece of college financing advice is “Don’t worry about the cost.” The worst? “College isn’t worth the cost.”
Education still pays off in higher lifetime earnings and lower unemployment. Someone with a high school diploma could expect to earn $1.3 million over a lifetime, according to research by the Georgetown University Center on Education and the Workforce. Someone with a bachelor’s degree can expect to earn $2.3 million. Unemployment rates are currently 2% for those with bachelor’s degrees and above, and 3.7% for high school graduates. Those rates peaked in 2009, just after the last recession, at 5% for college graduates and 11% for high school grads.
Rather than skip college, skip the costly debt. Limit your borrowing to federal student loans, which typically max out at $31,000 for undergraduate education.
Claiming Social Security
More than one third of Social Security recipients start benefits at the earliest opportunity, which is age 62. Fewer than 4% wait until age 70, when benefits max out. But starting Social Security at 62 can cost people up to $250,000 in lost benefits, according to a study for the National Bureau of Economic Research.
Unfortunately, many people don’t get good advice before they claim. Even Social Security itself may not be a good source, since its representatives have been known to steer people wrong.
Social Security claiming calculators, such as the free one at AARP’s site, can help you determine the lifetime impact of starting benefits later. If you have substantial retirement savings, you also should consider consulting a fiduciary financial planner about the best ways to coordinate Social Security claiming with retirement plan withdrawals.
Managing your credit scores
You may have heard that you don’t need to worry about your credit scores because they’re not important or because they’ll be good as long as you handle money responsibly. Neither is true, and having bad scores can cost you tens of thousands of dollars over your lifetime.
People with credit scores of around 720, for example, could expect average mortgage interest rates of 3.67% on a 30-year, $300,000 mortgage, according to Informa Research Services Inc. The monthly payment would be about $1,374. People with 620 scores, on the other hand, average 5.03% or $1,616 a month. That’s a difference of $86,891 over the life of the loan.
Similarly, someone with 720 scores could expect to pay $5,000 less on a six-year, $30,000 car loan than someone with 620 scores.
Higher interest rates aren’t the only cost. Bad credit also can cause you to pay more for insurance, make it harder to get an apartment and cause you to miss out on the best cell phone promotions.
The best advice: Learn how credit scores work and monitor at least one of yours so you can address problems before they cost you a fortune.
Does marriage have to mean merging money?
Marriage is made up of about a thousand daily decisions — and 700 of them involve money.
Often, one of the first and biggest is whether to merge finances. A 2018 survey conducted by Bank of America found that 28% of millennials keep their finances separate from their partners’, while 11% of Generation X and 13% of baby boomers do.
But statistics can’t determine what’s right for you and your partner. “All couples are unique, and they have to create the financial blueprint that’s going to fit their relationship best,” says Liz Higgins, licensed marriage and family therapist at Millennial Life Counseling in Dallas, Texas.
Here’s how some couples have approached merging and what to consider as you make your own decision.
Merging money: The pros and cons
Most couples still combine finances, and Kiersten and Julien Saunders, a Smyrna, Georgia-based couple who blog about money at Rich & Regular, found that to be the easiest route. It eliminated the stress of tracking multiple accounts, and Julien says it gave the couple “one single, simple point of view on spending.” It also helped them consolidate points and other card rewards.
“We’ve never made the same amount of money, so figuring out the ratios of who should pay what was always very complicated,” Kiersten adds. “This makes it easier.”
Of course, giving your partner a window into your spending isn’t always ideal. “It can make you defensive about your purchases,” Kiersten says. For example, “If you get your hair done, and it’s $200, and your spouse is like, ‘You paid $200 for that?’ It leads to conversations about how you value things.” (Read more about budgeting here.)
When working with couples, Riley Poppy, a certified financial planner and founder at Ignite Financial Planning in Seattle, facilitates these discussions before setting any goals. Other couples choose premarital counseling. “It forces you to have those difficult conversations,” says Melissa Neacato, Ann Arbor, Michigan-area author of the Traveling Wallet blog, who went through the process with her husband.
A joint account can also ease major life transitions. When Neacato was laid off, “[My husband and I] still had to have discussions about how we’d adjust our budgeting, but we had already set the groundwork for it being our money,” she says. “There was no need to ask permission” to use their joint funds.
Separate accounts: How it can work
Neacato and her husband also each give themselves an allowance from their joint account every month. “I think it makes for less friction for things that only affect one person,” such as meals out with friends, she says.
And Higgins says she’s seeing more couples take a hybrid approach. “They’re fairly established as individuals, so there’s not really this need or desire to join 100%,” Higgins says.
Other couples choose not to merge finances at all. Debt is one major reason, according to Jennifer Silvas, tax manager at Sensiba San Filippo, a Bay-Area accounting and consulting firm. Keeping money separate might also be smarter for folks entering second marriages or high-income couples. And “some people … want to have their own money and spend it however they want. It’s a personal preference,” Silvas says.
Mark Patrick, a St. Louis-based blogger at Financial Pilgrimage and financial services professional, says he and his wife, Dawn, decided to keep separate accounts because they’d done so prior to marriage. “If it ain’t broke, don’t fix it,” Patrick adds.
Like couples who’ve combined money, though, Patrick and his wife talk finances regularly. They’ve historically split household bills so each has a similar amount of discretionary cash. And they abide by certain ground rules: Both have agreed not to accumulate credit card debt and discuss purchases of more than a few hundred dollars.
If you do choose separate accounts, it’s best to set up documentation such as a living trust, in case one of you passes away. “That trust can spell out who gets what, where things are going to ultimately go,” Silvas says. (Learn more about living trusts.)
Opening a joint account: What to know
When it comes to starting a joint account, you’ll first pick a bank. What makes a bank good for an individual also makes it good for a couple. If you’re looking for a checking account, choose an account without monthly fees and a solid ATM network. For savings, prioritize your interest rate — you can easily find accounts that pay above 1.50% annual percentage yield these days.
Keep in mind that joint accounts offer double the federal insurance of individual ones — meaning you can keep up to $500,000 in them and still be covered in case of bank failure. But though most banks do offer joint accounts, some newer banks — including Chime and Varo — do not.
Opening a joint account is similar to opening an individual one: You’ll just need both partners’ personal information, often details such as your Social Security numbers, full legal names and addresses. (Find out more about joint accounts here.)
No matter how you manage your accounts, sharing a future involves shared money goals — and those require making time to talk. “In a healthy couple that has good communication, it can work really well to [combine finances] anyway,” Higgins says.