10 Key Characteristics of Debt-Free People

Photo Credit: kalyan02

The other day a friend and I were discussing why some people manage to live their lives in complete control of their finances, while others are continually struggling to get out of debt — no matter how much money they make.

Financial freedom can be achieved by anybody, regardless of their income level. So what is it that separates the financially free from the financially inept? How come there are some families out there making ends meet with household incomes under $40,000 and no debt on the books — or at worst, a single mortgage payment — while others make millions per year and can’t keep their financial heads above water?

The truth is, there is no single trait that determines who will successfully manage their personal finances and those who won’t. People of modest means who know how to properly manage their finances have some combination of multiple characteristics. Here are ten of the biggest:

1. They’re detail-oriented. People who are in a good financial position always pay close attention to their personal finances. They know how much they earn and they keep track of how much they spend and where every penny goes. Because they’ve got a good handle on the state of their personal finances, they are less likely to buy something they can’t afford.

2. They realize debt is a mortgage on their future. Debt is a form of indentured servitude where we end up sacrificing our future earnings in exchange for instant gratification. Financially savvy people understand that, in most cases, such a trade almost always ends up being a Faustian bargain.

3. They’re pragmatic. More often than not, folks who are debt-free are also practical people. As such, they understand the meaning of value. For example, they tend to look at cars as merely a means to get from point A to point B — so they’ll refuse to buy a Lexus when a Corolla will do. In the same vein, they won’t pay double for designer jeans that have the same lifespan as the no-name alternatives, and they’re open to buying store-brand groceries.

4. They’re self-reliant. Most people who work hard to maintain a life of financial freedom take pride in being self-reliant. They live within their means and save as much money as they can for rainy days and lean times.

5. They aren’t addicted to shopping. A lot of people get a high from spending money — whether they have it or not. And while such a high is not physically destructive like, say, a drug or alcohol addiction, an uncontrolled shopping habit is almost always financially calamitous.

6. They’re patient. Debt-free people don’t achieve that state because they’re impulsive shoppers, or looking for instant gratification. If the money for something isn’t available, then they save and wait.

7. They’re self-confident. Financially free people never let their self-worth be defined by their possessions. They understand that their status in life is more accurately conveyed by self-confidence, rather than dubiously deceptive displays of wealth.

8. They understand that credit cards are a double-edged sword. People who are in control of their personal finances aren’t afraid of credit cards. In fact, they embrace them. And while the financially savvy understand the incredible benefits that credit cards provide their owners, they also know that if they fail to pay them off in full at the end of each month, they will pay a heavy price. This knowledge fosters healthy respect that keeps their credit cards from being abused.

9. They believe in personal responsibility. Financially responsible people refuse to make excuses. They know it’s their responsibility to put aside funds for unexpected events such as a job loss or unforeseen accident — and if they don’t they’ve got no one to blame but themselves. Short of a catastrophic medical issue or natural disaster, they also understand that living within one’s means goes a long way towards ensuring their ability to control their own destiny.

10. They’re not materialistic. Yes, the pursuit of expensive toys and other possessions can make life more luxurious. But at what cost? Debt-free people understand this, which is why they tend to live simpler lives that focus on the joys of family, rather than the accumulation of material possessions.

This is by no means an exhaustive list. However, the more of these characteristics that a person possesses, the more likely they are to be financially free. How many apply to you?

The Dangers of Choosing Credit Over Cash

Cash or credit

Using cash may seem like a thing of the past these days. Credit cards have seemingly become the most common way to make purchases and while there are certainly advantages to using them, there are also some risks. Even if you choose to shop primarily with cards instead of a debit card or cash, it’s a good idea to make sure you understand the credit card lingo and be prepared to avoid some common credit card mistakes. Here are five dangers of using a credit card, and how to steer clear of the red zone.

1. Makes Overspending Easy

A credit card can make it easy to spend more than you can afford. You don’t have to have the cash on hand to make a purchase and you can get swept up on the impulse to buy something outside of your budget. Of course, this can lead to months (or even years) of accumulating interest and making large debt payments. You can end up paying for that item much longer than you even use/wear/enjoy it.

2. Potential Damage to Credit Score

If you use credit to spend above what you can afford and need to pay late or incompletely, you can damage your credit score and end up paying more in interest payments and late fees. (If you don’t know where you stand, you can get your credit scores for free from Credit.com, updated every 30 days.)

3. Fees & Interest

It’s ideal to pay off your credit card bill in full every month. Making only partial payments will mean you pay interest. Making the minimum payment will keep you from getting charged late fees but it won’t keep you from paying a lot of interest. Plus some credit cards, especially rewards cards, come with annual fees. It’s important to weigh the rewards you are earning against that annual fee.

4. The temptation to Chase Rewards

That leads us to another danger — chasing rewards. Some credit cards offer things like cash back, points or travel rewards. This can be a great tool to earn money for purchases you would be making anyway. But if you aren’t able to pay off your credit card balance each month, you will almost certainly end up spending more on interest than you earn in rewards. It’s important not to get swept up in chasing rewards and spending more than you can repay when the bill comes.

5. Your Cash Flow Can Be Harder to Track

When you strictly run on credit cards to make most purchases, it can be challenging to calculate how much you are spending. You may get a bill at the end of the month for much more than you expected, particularly if you have been “keeping track” in your head. However, identity theft experts suggest checking accounts online regularly — the balance shouldn’t really be a surprise. A bigger-than-expected bill could also create leaks in your budget and hold you back from reaching financial goals. Paying for things only with cash can be easier because when your wallet is empty, there’s nothing left to spend.

If used properly, credit cards can be a great financial tool. But it’s important you are keeping a close eye on your budget, buying only what you can afford, paying your bills on time and earning rewards wisely.

Why Do Credit Cards Expire?

Expiration Date

On the list of questions, you may never have thought to ask, is this question: Why does a credit card have an expiration date? There are a few reasons why.

FRAUD PROTECTION

Even before the days of data breaches and EMV cards, there was credit card fraud. Thieves would get their hands on your card number and go on a shopping spree. Credit card companies came up with a low-tech way to help make stealing your card more difficult: adding a second number, the expiration date.

Eventually, that proved to be not quite enough: Fraudsters could get both numbers from the receipt you got for paying with a card. Later, a third, three- or four-digit security number was added, which was printed on the front or back of the actual card and never appeared on the receipt. All the same, changing the expiration date makes it more difficult for thieves to validate and use your card.

ELIGIBILITY CHECK

Just because you qualified three years ago doesn’t mean you qualify now. If the card has an expiration date, it gives the card issuer an opportunity to reevaluate your eligibility (and terms). Don’t expect a credit check unless the issuer asks, but approaching the expiration date is a time when paying your bills promptly each month works in your favor.

PHYSICAL CONDITION OF THE CARD

Do you have a card in your wallet that’s looking a little shopworn? How about one that you have to swipe multiple times before it works? If you use your cards often, they will wear out and the last thing the card issuer wants is for you to have a non-functioning card. The expiration assures that you get a shiny, new card before it wears out.

BRANDING

Along with making sure your card is working, the issuer may want to update the look of the card. No company wants its branding from yesteryear on the card forever. The expiration date helps to guard against having a card that looks like you (or your dad) once used it to rent a movie from Blockbuster – on a VHS Tape.

REMINDER THAT YOU HAVE IT

Maybe you’ve sworn off that particular credit card. You cut it up or stuffed it in the back of your dresser in case you absolutely needed it. That was two years ago and you’ve all but forgotten it was there. Credit card issuers are no strangers to human behavior. They know that putting a shiny, new card in front of you may entice you to make a few binge purchases you wouldn’t have otherwise.

(Hint: If you swore off using your credit cards, don't rush to go shopping now.)

THE BOTTOM LINE

Card issuers have a method to their madness. First and most important, they want to cut down on fraud as much as possible. After that, it’s about getting you to spend as much money as they can. They know that if you charge up the card, you’re not likely to pay it off without paying at least a little interest.

Don’t fall for it. There’s nothing wrong with credit cards if you’re the type of person who can pay the full balance each month. If you’re not, it’s best to keep the cards in the dresser most of the time.

Don't cancel them, however: Giving up a card will raise your credit utilization ratio because you will instantly have access to a lower amount of credit. And if you've had a card a long time and have been responsible, you will lose part of your good credit history. If you don't want to use the card, put it away except for necessary purchases that you pay off promptly. For more information, see What Happens When Your Credit Card Expires and How Your Credit Card Can Improve Your Credit Score.

6 Signs You Might Lose Your Job

Unemployed

One of the unfortunate realities of today’s workplace is that we’re usually not given an advanced warning about an upcoming job loss. Many employers would have us tool along thinking everything is fine, right up until the day we’re asked to leave. But even if there is no formal notification that your job is in jeopardy, there several ways to know if it is.

Here are several strong clues…

1) You’ve Just Had a Bad Review

You can virtually assume that you are on probation if you have just had a bad performance review. Even if your employer doesn’t tell you as much, you will most likely be gone if you don’t begin showing measurable improvement soon. But a bad review can be an even bigger marker if you’re pretty certain that it isn’t true. Some employers will use a bad review as an unofficial warning, or as an attempt to push an employee out the door.

Do your best to improve your performance after a bad review, but it’s also a good time to start considering other options. You can never be entirely certain that it’s really about your performance, or maybe about something much bigger.

2) An Important Function (or Two) Has Just Been Taken Away From You

Everyone has one, two, maybe three, critical functions that substantially define their job, and justifies their existence on the payroll. If one of these functions has been taken away from you – without your consent – there is a better than even chance that you are being demoted, even if your title and pay aren’t degraded.

It’s generally a sign that either your employer has lost confidence in your ability to perform that function, or they think that someone else can do a better job. Unless the removal of the function has been accomplished to free you up for a more important function, it’s probably best to assume the worst.

3) You’re Company Has Been Bought Out

If your company has been bought out by a larger organization, there is an excellent chance that you – and many of your coworkers – will lose your jobs. It may not happen immediately, but there’s an exceptional chance that the axe is being sharpened.

Most companies involved in mergers will dedicate a lot of ink, emails, and stage presentations to assuring all staff that their jobs are safe. But don’t bet on it. One of the major reasons why businesses merge is to take advantage of economies of scale. That is, they will merge operations and eliminate excess staff from one or both entities.

If your company has been bought out, make sure that your radar is up, and that you’re now approaching your job as though you are a rookie who has to prove himself all over again.

4) You’re Increasingly “Out-of-the-Loop”

If you have recently noticed that there are a lot of closed-door meetings and private conversations going on in your department that don’t involve you, you may be a short-timer. This is particularly true if you have previously been part of the loop in most information exchanges.

All employees are excluded from a certain amount of information, but if you find that it is more common than not, something is getting ready to happen that you won’t be informed of – until it’s too late.

Sometimes information exclusion can affect an entire department. That probably means something negative is coming down the pike, and layoffs are a distinct possibility.

5) You’ve Been Re-assigned to a Job You Didn’t Ask For

Employers sometimes reassign employees in the hope that they will “take the hint” and leave the company. This is especially true if you have been with your employer for several years. The employer may be trying to engineer the voluntary resignation, rather than being put in the position of having to fire a long-term player, who may have the respect of her coworkers.

On the other hand, if you approve of the change – even though you didn’t request it – it may be an opportunity to thrive in a different capacity. If that’s the case, sit down and discuss the situation with your superiors, making it clear that you’re perfectly happy with the new position and harbor no ill feelings over the transition.

6) You’re Employer Is Losing Money – A Lot of It

These days, employers won’t sit much longer than two or three quarters in red ink before throwing the layoffs switch. If your employer is losing money, particularly a lot of it, you should never ignore this. This is especially true if the company becomes obsessed with cutting expenses, even little ones. I’ve seen companies go from cutting back on the coffee service to large-scale layoffs in less than six months.

This doesn’t mean that you should panic and prepare to jump ship at the first sign that the company is losing money. But it does mean that you should be aware that the situation has changed, perhaps radically, and you may need to have your parachute in good working order.

None of these events means categorically that your job is in jeopardy. But if any is particularly severe, or you see a combination of several, it will be time to prepare yourself and your finances for whatever may happen.

Source: http://moneysmartlife.com/signs-you-might-lose-your-job/

5 Financial Lessons Everyone Should Learn by Kindergarten

Kindergarten

We each grasp financial lessons at different points in our lives, but we're never too old -- or too young -- to start learning. Some lessons, however, are so basic that understanding them is nearly a prerequisite to financial survival. Whether you need a refresher yourself or are responsible for shaping a young person's relationship with money, here are five financial lessons everyone should learn by kindergarten.

1. Money Represents Labor

At its most basic level, money is just labor in physical form. Whether you worked for it using your mind or your muscle, the green stuff is the result of some form of effort. And without making your 6-year old mop the floor for a bowl of mac 'n cheese, there are ways to gently and positively make the connections between effort and financial reward.

Of course, the secondary value of this lesson is how it can alter spending behavior. The "aha moment" you want to encourage goes something like this: "If money is labor, then the things I buy with my money also represent my labor." Fully grasping that concept is the root of healthier spending behavior for life (and if you're like me, you know a shocking number of adults who still don't quite get it).

2. Spending Is Not the Same as Investing

Though each may drain our wallets and bank accounts for a period of time, spending and investing are entirely different animals. Dropping $3,500 for a leather couch is spending, but using that same amount to buy a good used car that will get you back and forth to work is investing. Think of it this way. If the item or service you're buying will provide some sort of tangible dividend (such as the ability to stay employed, advance in a career, sell at a profit later, etc.), it's an investment. If it doesn't meet that simple criterion, it's just plain old spending. If you haven't already, learn the basics of investing and put its power to work for you sooner than later.

3. Consumer Credit Is Dangerous

It may not seem this way, but every time we use a credit card, we're taking out a loan. Granted, it might be a mere $3.89 for a hamburger, but it's a loan. And let's face it, the last thing credit card issuers want their customers to do is pay off their balances every billing cycle (credit card companies have an endearing term for those who do -- "deadbeats"). They'd much rather have all those hamburgers, shoes, smartphones, and haircuts add up at a 17 percent interest rate.

Teach your kids the dirty secrets of credit cards. Tell them about the evil geniuses that lurk behind the magnetic strip. You know, the ones who conceived the evil formula of convenience + frequent use + low minimum payments = long-term debt and high returns. Create a bedtime story about an overspending prince who became a pauper because of plastic. It's a cautionary tale for the ages.

4. Wants and Needs Aren't the Same

When I was a kid, I desperately wanted a green plastic toy box shaped like a large frog. I don't remember the brand name, but I do remember wanting to own one so badly that every fibre of my 40-pound body nearly vibrated with green-plastic-frog-toy-box desire. I never got it. Kids want things with such wild enthusiasm that it's difficult for them to distinguish what they want from what they need. Had I been asked way back when I'm sure I could have made a case why that frog toy box was essential to my survival - because it certainly felt that way.

But at any age, being able to clearly distinguish wants from needs is an essential skill. Why? Because we live in an economy that's made a science of confusing the two. Indulgence and denial aside, it's the identification that matters and it's the first step of being able to live within our means.

5. Money Can't Buy Happiness, but It Can Buy Choices

The value of money rests not in its ability to make us happy, but to buy us options in life. An authentic, well-financed choice is a rare bird these days. Many of us feel like we have choices because we're presented with so many options as consumers every waking minute. But to me, most of these sorts of choices feel low-value - "trinket choices" manufactured purely to encourage spending. Only the most financially disciplined can afford to exercise a potentially life-altering choice like switching careers, moving across the country, starting a business, or retiring early. This level of choice gives us the power to reinvent ourselves at any stage of life.

Granted, these are only five lessons in a long list of financial fundamentals. But together, they form a great foundation for building security and wealth. If you're still learning, let your curiosity motivate you. And if you're helping a young person learn, be patient and avoid instilling a sense of fear about money. Remember, the real power comes from understanding that money is not mysterious, wealth is not always the result of dumb luck, and financial security is within our control.

What financial lessons did you learn early in life? Who taught you and how? Which ones are you still learning?

7 Ways to Build Your Credit Score Without a Credit Card

Credit Score

Unless you have a ton of cash at your disposal, you’ll probably need credit at some point in your life. Whether you’re buying a home, car or big-ticket luxury item, the first thing that most lenders typically look at is your credit score.

If you have limited or no credit history, you’ll need to begin building your credit and boost your score before you apply for a major loan. Unfortunately, many believe that opening and using a credit card is the only way to go.

Here are a few alternatives to help raise your credit scores without the magic plastic:

1. Ask companies to report on your behalf

Do you have any recurring bills that you pay on a monthly basis, such as rent, utilities, cable, or a cell phone? Try giving the providers a call and request that they report your account activity to the three major credit bureaus, TransUnion, Experian, and Equifax.

Do this only if you have responsible payment habits, as payment history accounts for 35 percent of your credit scores and can have a significant impact if there is not a lot of other data in your credit reports.

Also, bear in mind that these companies are not obligated to report to the bureaus, and your request is simply a favor that they have the right to deny.

2. Become an authorized user on another credit card

Of course, there are pros and cons of becoming an authorized user. If the cardholder has a strong credit background, two thumbs up for you because signing on as an authorized user will enable their stellar behavior to improve your credit profile somewhat (perhaps not as much as you think). But, if things are the other way around, your credit scores could take a hit.

Either way, if you opt-in and have a change of heart, the information will quickly vanish from your credit file when you request to be removed from the account.

3. Open an account with a credit union and take out a small personal loan

Some credit unions have restricted membership and limited accessibility, but credit unions generally offer financing options at lower interest rates than traditional banks. To give your credit score a boost, apply for a small personal loan.

If your request is denied, inquire about a secured loan in which your money, say, a certificate of deposit or savings account, will be used as collateral. The request will more than likely be approved because the risk to the institution is minimal. And you may have to pay a tad bit of interest, but the rate usually beats what’s available in the credit card world.

4. Apply for an installment loan

Installment loans paid in a timely manner over an extended period of time build your credit scores because they show creditors that you are a responsible borrower. The types of credit in your file make up only 10 percent of your score, but the impact has the potential to be 

Retailers sometimes offer promotional installment loans to customers with little to no introductory interest for a limited period of time. If you have the cash on hand, it may not be a bad idea to take this route. But be sure that you have the total sum of cash available upfront to make timely payments and eliminate the balance before the interest kicks in.

5. If you’re a student, take out a federal student loan

A credit check is not required to obtain a federal student loan. All you need to do is fill out the Free Application for Federal Student Aid (FAFSA), and you’re all set. Since it is an instalment loan, it can help boost your credit score.

But don’t get the loan and blow through the money. Instead, aim for one that is subsidized and deposit the money into a safe interest-bearing account so the funds will be available when repayment starts.

6. Research peer-to-peer loans

Companies such as Prosper and Lending Club offer peer-to-peer loans in an environment where borrowers are connected with individual investors. The interest rates are usually lower than those of traditional financial institutions. And the lenders are eager to loan unsecured funds because the return they derive is competitive with other investments. (See “4 Things to Know About Peer Lending.”)

Most of the peer-to-peer lenders report to the major credit bureaus.

7. Try an alternative credit score

By reporting your payment history to an alternative to the big three credit bureaus, you can create a nontraditional credit score. Check out a service like Payment Reporting Builds Credit, known as PRBC, to learn more about how an alternative credit score service works.

Do you know of any other ways to improve your credit score without using a credit card? 

Source: http://www.moneytalksnews.com/7-ways-build-your-credit-score-without-credit-card/?all=1

The 3 Key Retirement Numbers You Need To Know

Retirement

Retirement means different things to each of us. As you consider your vision for retirement, there are three key numbers to keep in mind; you’ll want to discuss them with your financial adviser if you have one:

Your Withdrawal Rate

This could be your most important retirement number. Your withdrawal rate is the amount you will be taking out of your investment portfolio each year.

Nothing has a bigger impact on your retirement strategy than this number since it can help determine how sustainable your retirement strategy will be. If you choose a number that’s too high, you may run out of money; if the number is too low, it could mean you are being unnecessarily frugal and not living the life you want.

So what withdrawal rate makes sense for you? The answer is: it depends.

As you consider what makes sense for you, start with these questions: How many years will you spend in retirement? Can you be flexible with your withdrawals and not automatically increase your spending each year if you don’t need to? Can you cut back on years of negative investment performance?

For example, we believe a 4% withdrawal rate may be a good starting point, but this assumes a 25-year retirement and the ability to be flexible with your spending if needed. In reality, your personal withdrawal rate will probably differ based on a number of different variables such as your age, how long you expect retirement to last, your asset allocation, and your spending habits, among other things.

Additionally, this rate isn’t something you set and forget — it should be reviewed each year.

The more years you plan on spending in retirement and the less expense-flexibility you have, the more conservative your withdrawal rate should be. This leads us to the second number:

Your Reliance Rate

Your reliance rate is simply the percent of your retirement income coming from your investments. While your withdrawal rate helps determine the sustainability of your retirement strategy, your reliance rate helps measure the sensitivity of your retirement strategy.

For example, say you’ll need $50,000 a year in retirement. If $40,000 will be coming from your portfolio and $10,000 will come from outside sources, your reliance rate is 80%.

As your reliance rate increases, so does your sensitivity to market fluctuations. Regardless of their withdrawal rate, people who rely on their portfolios for 80 percent of their income are probably more sensitive to market declines than people who rely on their portfolios for only 20 percent.

A higher reliance rate means that market declines may have a greater effect on your strategy unless you can be flexible in your spending and maintain a lower portfolio withdrawal rate.

If you are relying on your portfolio for the majority of your income, ask yourself some questions: How flexible are you with your spending? Can you spend less, if necessary, during the inevitable short-term market declines? Also, can you consider other options to increase your income from outside sources? If you can, this could not only reduce your reliance rate, but also the withdrawal rate from your portfolio over the long-term.

And this leads to the third key retirement number:

Your Age for Claiming Social Security

A full discussion of your Social Security options is beyond the scope of this article, but it’s important to understand that your Social Security benefit is an incredibly valuable retirement asset. The decision about when to take Social Security not only affects the amount of your benefit but also your spouse’s potential survivor benefit.

You can start taking it as early as 62 or wait as long as age 70. The more you delay receiving the money, the bigger your benefit will be.

Since your Social Security benefit is unaffected by market performance, it can be the foundation of your retirement income strategy. But it shouldn’t be considered in isolation.

So before you decide when to take Social Security, be sure you evaluate all your options and their effect on your retirement strategy.

Together, these numbers can be used to help ensure that you are better positioned to achieve your vision for retirement.  It’s also important to remember they will probably change over time, so be sure to revisit them so you can stay on track.

By addressing these numbers, you can turn your focus to a more important one —  the number of things you want to accomplish in retirement.

Source: http://www.forbes.com/sites/nextavenue/2015/03/13/the-3-key-retirement-numbers-you-need-to-know/