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.