photo © 2009 Andrew Magill | more info (via: Wylio)A lot of people always say that sometimes no credit is just as bad as poor credit. And I’d like to attest, this is correct. I, Amanda Miller, am in my 20s. Which means, you guessed it, I am the poorest I will ever be again (knock on wood).
When I was in my teens I moved overseas and left my financial standing in the States in limbo. I did not have a credit card, loan or any sort of debt I was paying in the States and with that, upon returning, I had zero credit.
In moving back I was faced with an awful credit score and no lender was willing to help me build my credit.
I was stuck. Much like many people with poor credit are stuck. But in my case, nobody would give me the chance to start proving myself.
I looked into getting a secured credit card to start but with my situation then: working full time, running a household, living paycheck to paycheck and zero savings, I just couldn’t do it. I eventually landed a very (VERY) low limit card with a yearly service fee which gradually brought my credit score up. However, I knew things HAD to change. If I didn’t get on track now, with time on my side, then when?
That’s where we are today. I have found and have written a lot of information on how to get OUT of debt but barely anything on actually starting your credit path and building a good and healthy credit report.
How to Start Building a Sound Financial Future
With thirty percent of twenty-somethings making less than $20,000 it’s no surprise that savings is virtually nonexistent and most in this age group are living paycheck to paycheck.
However, fellow age group, we do have time on our side and if we start now we’re going to be much better off in the future.
Savings This sounds obvious but it can be quite a daunting task. When you’re living paycheck to paycheck I know how rough it can be to get the proper amount of toilet paper needed let alone to stash some cash.
However, savings is just as much a necessity as paying that electric bill on time. An old friend of mine once told me to live by the 5 P’s. Proper Planning Prevents Poor Performance. This holds true in so many aspects of life: work, home and finances.
If possible, I’d recommend stashing enough cash in savings to at least support yourself for three to four months in case you hit a bump in the road and income stops coming in for one reason or another. This is not the back up fund for going to Cancun for a week. Most people will be able to focus on this before getting into a tight financial living situation while others who are currently struggling simply can’t afford to put that in savings at this given time.
Integrate your allotted savings into your monthly expenditures. It is a bill you owe to yourself and to your future. Try to keep it in your mindset as an expense and not “free money”.
One very important thing I learned with savings is to not have it linked to your debit card. It’s very easy to blow through savings if you can go to the ATM and pull out cash with your card. I would recommend a separate account with your bank that if you needed to pull some money you could do so online by transferring the money to your main account or in the branch of the bank. These extra steps will make impulse buys a little less impulsive.
Recently, we interviewed world renowned behavioral economist, Dan Ariely. One bit of information I took away from the interview was one that I will carry with me forever. Think of not only what you are about to purchase but how much is costs. Then think, with the amount that it costs what else could you buy that you need or want more.
For example, I am a sucker for books. I will buy books left and right, fully intending on reading them but more often than not they will sit on my bookshelf collecting dust until the day I finally pick it up for a read (by which time, I’ve either lost interest or found a new and exciting read). When I find a new book that looks interesting and I feel I might “have to have” it I’ll remind myself of the dust collectors I have already, think about the price of the book and reconsider. That $15.99 could be better spent on groceries or bills instead of a glorified paper weight. I’ll usually make note of the book and when the time comes when I need a new read I’ll look up the book, which is usually at a lower price by then or I can get a used copy. In doing this, when a new book comes out that I’ve been waiting for I don’t feel as guilty purchasing it because I know I’m not blowing money on books I haven’t read.
Sometimes when you have money burning a hole in your pocket you feel the need to spend, spend, spend. This happens to the best of us. Let’s face it, spending feels good. Getting new and fancy things usually makes people feel like a million bucks. But on the flip side, think about how awful it feels to be without money. How awful it is to be in such a bind that ramen noodles and tuna is all you eat for a month. There needs to be a middle ground.
I do not suggest packing away all of your money and cutting out fun completely. We all need fun. It is when we have such a lack of fun that we go overboard when we get our hands on money.
A great tip I learned from Steve Rhode is to allocate your paycheck into three parts. 1/3 should cover your monthly bills and expenses. 1/3 should go into savings and 1/3 should be set aside for fun, nights-out and spending. With this balance you’ll begin to see an increase in financial well-being and overall happiness with the ability to still live, save and thrive.
Credit Another important step to building credit is to acquire credit. I do not agree with people that encourage you to avoid credit completely. I’ve said it before and I’ll say it again, there is such a thing as good credit. Credit you use responsibly and pay off in a timely fashion is good. Credit you use irresponsibly and pay off only minimum payments is bad. I also have an issue with cards that charge a yearly or monthly fee. I feel like this is wasted money. However, when you’re score is low and you’re trying to build, sometimes these are the only cards available (trust me, I have one).
To find the right card for you do some research on the types of cards available.
Another thing to consider are the APR rates. Again, for us starting the APRs are likely to be very high (usually in the 17-23% range). This will freak a lot of people out, as well it should if you’re going to carry a high balance on it. However, if you get into the habit of putting small purchases on the card and paying them off monthly this will help build your score and you will not be charged APR if you pay the balance in full. As a general rule of thumb, never carry a balance higher than 1/3 of the credit limit. This will lower your score.
Investments I was recently turned on to the site Betterment.com. As per the Betterment site they provide a service that allows you to invest your money into two smart portfolios of stock and bonds and an easy way to invest and/or withdraw your money. It’s a hassle-free investing method with no minimum balance and free trades and transfers.
If you find yourself between a rock and hard place already at such a young age. Ask for help. I scream, ASK FOR HELP! Letting debt float on the surface of shallow water will one day drift out to sea and you’ll more than likely, be in deep. As I said before, time is on our side. We have time to build, time to fix and time to grow as financial prodigies.