Financial Fitness: Pumping up your Finances

17 Jul

I have a confession to make: I’ve never been money savvy.

If you know me, you’re probably not terribly shocked by this. I have spent most of my life hating and/or avoiding money issues. I’m not a rich girl by far, and I’ve always assumed that I didn’t have enough money to save or invest.

Well, recently, Zach and I have decided to think about purchasing a home. Luckily, we live in an area where homes are pretty cheap, and we qualify for an FHA loan, so it looks like, even on our limited budgets, we will be able to get something relatively decent. In preparation for this major life event, I’ve started trying to ‘buff up’ my finances — improving my credit score (I’m embarrassed to say I hadn’t ever even looked at it before this process! I know! SO bad!), more carefully budgeting every penny and trying to put a little more into savings.

Turns out I’ve been doing everything all wrong. I recently checked this book out of the library:

 

 

It is great! I was always under the impression that I didn’t make enough money to even qualify for financial advice. Boy was I wrong! Suze Orman has some really fabulous advice. Here are some highlights:

1. Nearly every financial decision you make is being watched, with the goal of determining your financial profile. Your FICO score (basically, your credit score), is the single most important number in your financial life. I think of making this number bigger the same as making my muscles bigger. I’ve got to put in the work to bulk up this score. The better score you have, the better deal you’re going to get on mortgages, car loans, credit cards, etc. You will end up paying SO much more of the life of your big-ticket items and credit cards if your score is low.

So how do you bulk up this score? Well, the first step is usually the scariest. You have to check your credit score. To me, this was the equivalent of jumping off a bridge. I knew it probably wasn’t great, but I thought I didn’t want and or need a credit card. I thought I was being responsible. “I can’t afford to spend beyond my means,” I told myself, “Plus, I got a credit card when I was younger, and it did not turn out well.” So, I had my credit score checked. I was right, it wasn’t the best ever, but it wasn’t the worst ever either. According to our mortgage broker (who is the nicest guy, and filled with great advice), I was hurting my credit by avoiding buying anything on credit.

The next step is to figure out what everything is. If you don’t recognize something on your credit score, get it verified. If it is in collections and it checks out, you can usually settle for a fraction of the balance, and get it removed. If it doesn’t check out, you can request to have it removed. At the end of the day, knowing your score is very important.

Once you know your score, you can get an account on Credit Karma which keeps a running tab on your score. You can see anything that is added or deleted, and it will notify you if your score goes up or down. It will also suggest credit cards that you qualify for, so it’s a great way to shop around for a credit card. Which, I’ve learned, actually help you. If you use them correctly.

2. Don’t keep a savings account if you have a lot of high-interest credit card debt. I really like what Suze says about this, because it makes a lot of sense. Why would you try to bulk up a savings account that you are making maybe 4% interest a year, meanwhile you’re carrying a huge balance on your credit cards and paying 18% interest? If you think of it that way, it really doesn’t make sense. If your high interest cards have more than a 30% debt to limit ratio (meaning you have used more than a third of your credit limit), pay them off  before you save.

3. “You only live once” and “I deserve to have fun while I’m young” are excuses. “Make the right choices now, or when you are older, you will be so broke you are miserable.” This really hit a chord with me. This is a healthy living blog, and when people ask me why I eat right, or exercise daily, beyond saying, “It’s something I enjoy.” My typical answer is, “I want to be healthy enough to enjoy life when I’m older.”

So being financially fit is the same! Why would I want to live a long, healthy life if I’m too broke to enjoy it?

4. Never, ever borrow against your 401(k). Suze is very adamant about this. A lot of people get into high interest credit card debt and are tempted to borrow from the 401(k) to pay it. Remember, the money you put into your 401(k) is pre-tax money. If you borrow from it, when you pay it back, you will be doing so with after-tax money, and then when you retire, you will once again be taxed on that money. The best bet to reducing credit card debt is to work on boosting your FICO score and transferring the balance to a lower-rate card.

I wish I could just summarize this whole book for you, I think you should just read it! Suze also has books for people who aren’t so broke, so if you’re not as poor as me, feel free to check them out.

In my next Financial Fitness column, I’m going to talk about budgeting!

 

 

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2 Responses to “Financial Fitness: Pumping up your Finances”

  1. Samantha July 18, 2012 at 1:43 pm #

    This is a great post, Kristy! Those pre-tax and after-tax dollars are important to understand. I have a Health Savings Account that I put money into every paycheck (pre-tax), and that way, when I have expenses like glasses, dentist bills, co-pays, etc., it’s always right there for me without it coming out of my normal (after-tax) budget. In fact, my husband ordered contacts from Walmart and forgot to take an HSA check, so when they came in last week, I asked them to refund the purchase to my credit card so I could buy them again with my HSA check. The cashier kind of rolled his eyes at me, but oh well! That saved us around $20 or $30 on his three-month supply!

    Student loan debt has really opened my eyes to budgeting and saving. I’m starting to eye how I can begin smart investing while we’re waiting to become eligible for our companies’ 401(k), and in addition to it.

    Keep the financial posts coming, I think they go hand in hand with the healthy life posts.

    • kristyshealthrevolution July 18, 2012 at 1:44 pm #

      I really like the story about buying the contacts with your HSA account. A lot of people don’t think about pre- and post-tax money, but when you think about it, you don’t want Uncle Sam taking a chunk more than once!

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