How to invest when you feel like you’re behind
You know you should’ve started investing yesterday, but, since you can’t, start today! There’s a Chinese proverb that says: “The best time to plant a tree is 20 years ago; the next best is today.” The same can be said of saving. The best time to start is 20 years ago —or even before you were born—the second best is today. The same is true of savings. The best time to have started is 20 years ago; the second best is today. To help, we came up with a list of tips for how to save and invest when you already feel behind. Compound Interest Calculator The Power of Saving Early Most people think: “If you want to save $1 million over 20 years, that’s $50,000 per year. I can’t do that.” What people don’t understand, is that they don’t actually have to save anywhere near $1 million in order to have $1 million at the end of 20 years, thanks to the magic of compound interest. Instead, all you have to do is be dedicated and persistent—to keep saving week after week, year after year, and invest in assets that will help your money grow at an ever-increasing rate. How to boost savings & investment If you’re feeling behind, here are four things that you can do to help give your savings a shot in the arm. Adopt a high-savings lifestyle One of the most important things you can do to set yourself up for success in saving and investing is to adopt a low-cost lifestyle. This doesn’t mean that you need to become a minimalist, but it’s pretty hard to maximize your savings rate without minimizing expenses. Here are some easy things you can do to save money: The biggest thing about constructing a lifestyle to optimize your savings is to be conscious in everything you do. It’s amazing how many things people do for no reason except they’ve always done them. And yet, once you’ve built a lifestyle and developed habits, it’s incredibly difficult to drop them later on. But, that’s what you have to do. Establish savings goals, even in a crisis If your goal is to start saving to build toward financial independence, then all of this information needs to be consolidated around some defined financial goals. And, you need to decide exactly what those goals should be. For many who are trying to reach true financial independence, the answer is 25 times their annual expenses. Once you have that level of savings, you can theoretically live for 25 years without working—and that’s if you earn NO return on your money. If you can earn just 4% per year, you can live forever without ever having to work again. Now, your goal may not be to live without working. But, until you decide what your goals are, you can’t know for sure what you’re working towards, which makes it extremely hard to stay motivated. Pay off one small debt If you feel like your finances are stuck in a rut, you won’t believe the relief that comes with resolving just a single outstanding debt. It can be a credit card, student loan, medical debt— anything. Just the simple act of paying off one debt will give you the encouragement to keep going. Once you’re ready to start paying off debt in earnest, give some thought to which method you prefer to use: snowball or avalanche. Paying off high-interest debt is certainly more impactful in terms of total interest saved each year, but using the snowball method to completely pay off smaller loans first can help you save real money each month by eliminating payments and freeing up cash to pay down higher-interest debts. Put your savings to work Once you start to save, you can’t just put your money in a bank and expect it to grow. To help catch up with your savings, you need to invest to earn a decent return. That’s where stocks, bonds, ETFs, and mutual funds come in. Since the beginning of the year, a lot of stocks and ETFs are way down and can be bought for just a fraction of what they cost in January. Here are just a few names that I’ve invested in at substantial discounts and already started making returns: If stocks are too risky for you, you might try CDs or high-yield savings, although they won’t build your savings very fast. Right now Nationwide is offering 1.61% on savings accounts through its partner, Axos Bank, and Marcus is paying at least 1.3% for CDs that last a year or longer. For more on how to get started with index investing, see our ultimate guide here. Don’t slack off One of the hardest things about saving and investing—especially when you’re behind—is that you have to stick with it. Keep finding new ways to save; keep exploring new investments. If you already stock investments through a 401(k) (that you’re maxing out), may try finding a rental property. Already have a rental? Maybe try a fix-and-flip. Being a successful saver means not only adopting the right mindset, but maintaining it for the long term. To give you an example, five years ago my wife and I were living in a four-bedroom, four-bathroom home in a golf course community in Ohio. We had two club memberships and dined out in restaurants at least four nights per week. After we sold our house, we rented for a while in a high-rent area of Miami. Even though we had dropped our club memberships and gone down to one car, we found ourselves eating out just as regularly, Ubering everywhere, and drinking more. Then, we moved across the country to a much cheaper area. It wasn’t until we moved across the country AGAIN that we found a house that was much cheaper to live in and in an area that helped us cut down our dining expenses. Most recently, we’ve given up eating meat, stopped going to bars due to
How to Build Credit When You Have None
If you don’t have any existing credit history, building credit should be one of your financial priorities. However, getting started can be tricky. You won’t be approved for certain types of loans (like a mortgage, for example) with no credit history, so you’ll need to start with specific types of accounts and take the appropriate action to move in the right direction. What is a Credit Score Your credit score is a numerical value that’s intended to give lenders an indication of the level of risk they would face by lending to you. But it gets confusing if you don’t understand that there are a few different types of credit scores. You may have heard the terms “FICO score” and “credit score” used interchangeably, but they’re not exactly the same thing. The FICO score was created by the Fair Isaac Corporation in 1989 (source). “Credit score” is a more generic term and there are other types of credit scores, including the Vantage Score, which was created as part of a collaboration between the leading credit bureaus Experian, Equifax, and TransUnion. Lenders may use your FICO score or your score from Experian, Equifax, or TransUnion to evaluate credit and loan applications. Some lenders will look at scores from multiple bureaus. Credit scores can range from 300-850, with a higher number indicating a stronger credit and repayment history, and lower risk to the lender. There may be differences in the credit reports and scores that you have with each of these bureaus due to some accounts not being reported to all of the bureaus. Why Does My Credit Score Matter? Your credit score can impact you in a number of ways, including: A bad credit score or no credit score can prevent you from getting a loan or credit card, force you to pay higher interest rates, or even prevent you from being able to rent an apartment or land a job (source). With major implications, it’s easy to see why a credit score matters. What is a Good Credit Score? According to Experian, credit scores fall into these buckets: Experian also reports that the average credit score in the U.S. is 703 (according to a 2019 report). The same study found that 59% of Americans have a score over 700, while 34% of Americans fall into the “very poor” or “fair” categories with scores of 669 or below. How is My Credit Score Calculated? The credit score can seem like a bit of a mystery if you don’t understand how it’s being calculated. The tradelines on your credit report will be used by an algorithm to determine your credit score. Each loan or account that is being reported to the credit bureau is a tradeline. This could include things like a credit card account, a student loan, a car loan, a personal loan, a mortgage, or some other type of loan or debt. The tradelines will include information like the current balance, available credit (for credit cards and lines of credit), the status of the account, and payment history. The section on payment history will indicate how many times the account has been 30, 60, and 90 days late. In general, late payments will not show up on the credit report unless they are at least 30 days late. Each credit bureau has its own algorithm for calculating credit scores and they don’t share the specific details with the public. However, they all use very similar factors and the difference between the three leading credit bureaus and the way they calculate the score is of minimal importance. In general, to improve your credit score or maintain a good credit score, these are the most significant factors: Payment history. Making payments on time is the best thing you can do for your credit score. Credit utilization. Maxing out your credit cards is a bad sign to lenders. Try to keep your balance well below your credit limit. Length of credit history. Older accounts can help to show stability and increase your score. Start building your credit now and you’ll benefit in the future. Credit mix. Try to have a few different types of accounts/loans. New credit. Opening too many accounts at once can hurt your score. When we’re talking about payment history, it’s important to clarify that this refers to making the minimum required payment. Paying off your credit card in full each month is a good habit, but for the purposes of your credit report and credit score, simply making the minimum payment each month is all that’s required. Your credit report won’t show a late payment because you paid the minimum instead of the full balance. What is the Difference Between Bad Credit and No Credit? A credit score of 670 is the minimum needed to fall into the “good” category provided by Experian. Failing into the “very poor” or “fair” categories can hurt your chances of getting approved for loans, and some loans or credit accounts may require even higher credit scores (for example, certain credit cards require excellent credit). However, there is a difference between having bad credit and having no credit history. Not everyone will have a credit score. In general, you’ll need at least one account that has been reported to the credit bureau for six months or more in order to have a score. Having no credit score indicates a lack of credit history. Although it doesn’t indicate that you have a poor payment history, a lack of a credit score can make it equally challenging for you to get approved for a loan or line of credit. It’s very common for young people to have no credit score. If you’ve never had a credit card or never had a loan in your name, it’s very possible that you have no score. What Does it Mean to “Build Credit”? If you’re in a situation where you have no credit score or you have very limited credit history, building credit can go a long way