If I Knew Then…

For the first time this year, I had a long weekend off and I took advantage of doing a whole lot of nothing.  One of the things I did manage to do was to watch several Star Trek movies (one of our favorite things to do). This  included the movie that relaunched the franchise in 2009. The makers of this movie had an interesting challenge: bringing new life into the franchise after four TV series and ten movies. How would you approach the story to present a fresh perspective that would appeal to new fans? How would you also ensure you would not lose the faithful “trekkies” which would spell disaster for the movie’s box office? Well, they hit a home run in my view because they took advantage of a favorite creative device in the series: altering the timeline. Basically asking the question: what if the events did not happen in the way we all know they happened? In essence they created a blank canvas by introducing an alternate reality where the story is not already written. The possibilities are endless.

As you look at your finances, do you ever think about the decisions you made and wonder if there is a way to alter that timeline? Well, I can’t tell you how to go back in time but I can share some of those mistakes I made with money and also share how to correct them going forward. Hopefully, I will catch you just in time.

If I Knew Then What I Know Now (My Alternate Reality)

1. I would not buy a brand new car right out of college using a loan to pay for it. Instead what I would do is look for a very cheap used car and then save monthly (let’s say $400 which is the average car payment in the U.S.) and then move up in car with cash. New cars lose 70% of their retail value in the first 4 years. My loan was for 5 years. Because of my lack of “credit history” I ended up with a nice interest rate of 11%.

2. I would not be working so hard to build my credit history with credit cards. Instead I would be working to build up my savings. The conventional wisdom is that you need to build a credit history so you should get one or two credit cards to help you with that. I took that advice while doing an internship in college and ended up with two credit cards while still in college and not earning an income. I did not max them out prior to starting on my first job but they did not really help me with my “credit history” either (notice the nice interest rate on my first car). Eventually, I got used to credit cards ending up with 7 or 8 at one point in time plus the debt. But you can live without credit cards. We have been credit card free for over 4 years now. Now, do remember to check on your credit report at least once per year to ensure its accuracy.

3. I would not borrow money from my 401K. Now, this lesson did not quite sink in. I made this mistake 3 times. Why is this a mistake? First, you unplug that amount of money from your investment vehicle missing on the growth opportunity. Second, if you lose your job, the money is due back very soon after you leave your job. If you don’t pay it back, it is considered an early withdrawal with the associated penalties and tax implications. I was fortunate enough that I kept my job during those 3 separate times but I would never take that chance again. Neither should you.

4. I would not mistake my credit lines for an emergency fund. Instead what I would do is quickly build an emergency fund to cover 6 months of expenses. You think you are ok with credit cards because it is convenient to have access to that “money”. In reality you have to understand that a credit card/credit line always represents risk and not security.

5. I would not buy a house until I had saved a nice down payment and I would not take a 30 year mortgage. Instead I would make sure that my mortgage payment would be no more than 25% of take home pay, I would save enough of a down payment (as close as you can get to 20% so you can avoid paying for the Private Mortgage Insurance -PMI-), and I would take only a 15-year fixed rate mortgage. By the way, there is no law in the land that says you have to take a 30-year mortgage.

So there you have it. I have shared some of my biggest mistakes with money with the hope that it can help you or someone you know. We can’t go back in time and correct everything but with this new information we can take your finances where they have never been before.

You Want Answers?

I love movies. It can be either a drama, comedy, action, or even romance (yes, I can even enjoy some of the so called  “chick flicks”.  They make for great date nights). Even though Hollywood produces far more bad movies than great ones (or even good ones), I still love a great story and finding those scenes and moments that endure.

One of my very favorite movie moments is in the great movie “A Few Good Men“. You know the setting. Tom Cruise playing the young Navy lawyer (Lt. Daniel Kaffee) questioning Colonel Nathan R. Jessep (Jack Nicholson) at the climactic moment of the movie. It is a classic exchange:

Col Jessep: “You want answers?”

Lt. Kaffee: “I think I am entitled to them.”

Col Jessep: “You want answers?!”

Lt. Kaffee: “I want the truth”

Col Jessep: “You can’t handle the truth!”

We all have quoted that last line sometime! While I was trying to decide on the topic for my next blog post, this scene gave me an idea: I decided to do a Q&A format focusing on some of the most critical questions for winning with your money. And here it goes. Because I know you want answers and I hope you can handle the truth. Let me know what you think!

1. Do I really need to prepare and live on a budget every month?
The short answer is yes. This is the most fundamental weapon in your arsenal. There are only two sides of the equation in money management: income and expenses. A working budget is the blueprint that will control how your money is allocated to your expenses. It puts you in control and will make the money you get work harder for you. You will never win with money until you have a budget that works for you.

2. Why do I need to have a savings account? Wouldn’t a credit line/credit card serve as my emergency fund?
You need to have access to liquid savings because life happens. Cars break down. AC units and water heaters wear out. Medical conditions are diagnosed. Layoffs are announced. If you don’t have an income, how do you expect to pay back the credit card/credit line? At a minimum you need $1,000 as a beginner’s emergency fund. A fully funded emergency fund will cover 3 to 6 months of expenses. A good working budget should have an allocation for saving money.

3. How can I build up my credit history?
The only reason you would want to build up a credit score is in order to borrow more money. If you are not planning to borrow any more money, you do not need to worry about “building credit history”. It just simply starts you on the path of borrowing money you don’t have to pay for stuff now. Instead, you should be learning the discipline of waiting and saving to pay cash for those things you want to buy. The more debt you carry around, the more risk you have.

4. But isn’t my FICO score a good indicator of my financial stability?
No. First of all, A FICO score simply documents your interaction with debt: What kind of debt do you have? How long have you have those accounts opened? How much did you borrow? Did you pay on time?. It all revolves around your usage of debt. It has nothing to do with your financial stability. It does not take into account for example your net worth (i.e., your assets minus your liabilities) or your salary or employment history. However, you should make sure your credit report is accurate. Click here for more information on how to do that.

5. But, don’t I need a good FICO score in order to qualify to buy a home?
Not necessarily. It is true that most mortgage companies do use the FICO score to evaluate your credit worthiness and if you don’t have any interaction with debt (no credit cards, no car loans, etc.) eventually your FICO score will go to 0. In that case the mortgage lender can simply do manual underwriting (the way things used to be done). Based on a solid job history, paying rent and utilities on time, and a good down payment, you should be able to qualify for a home.