CAVEAT: The information provided below is not intended to provide legal advice or create an attorney-client relationship. Please consult your attorney for legal advice.
Dear Gentle Readers,
I promised you a seat at the table of my family's revolution to become financially savvy, prosperous, and free. We held our second meeting of "Something to Think About: A Series of Family Talks," and, over Mexican food (Beef Enchiladas, Chili Chicken, Vegetarian Tamale Pie, Vegetarian Black Bean Soup) and white Sangria (Maso Canali pinot grigio, brandy, orange juice, sugar, triple sec, vanilla, citrus slices), we laughed and learned during our discussion of the first two modules of the Financial Literary section of the talks, which addressed credit and budgeting. I shared my bad credit stories (What do Oprah and I have in common? We both had our credit cards snatched and cut up by a cashier on orders of the issuer.), and we talked about changing our attitude towards credit -- it's a game, not a personal reflection -- and budgeting -- a budget is a spending plan, not a limitation.
We also started our family sou-sou, and with four couples and two individuals contributing $25 each, one couple who will be celebrating their 25th wedding anniversary on December 20th happened to get the first payout. We will meet monthly and contribute $25 each until each participating couple or individual has received a full $150 payout. A sou-sou isn't anything but a savings circle, as I wrote in my blog entry, "Got Sou-Sou?". It's the timing of receiving those savings that can mean all the difference.
Finally, we ended our meeting with what I called "The Department of Gentle Nudges: Encouragement from Your Elders to Reach Your Goals." We each went around the room and talked about the goals we're pursuing and need some uplifting encouragement for. Excuse me if I brag for a minute, but I'm just as proud as can be about what my family is doing. Two members of the group are going back to college, two are starting businesses, BMNB and I are studying for our real estate licenses, and two are looking to move up in the jobs they have. We applauded each other and gave each other advice, books, and, most important, encouragement.
Next month we meet to round out the financial literacy section by discussing retirement planning, investment and insurance. I don't know what will be on the menu, but I better make it good!
Below please find the agenda and module outlines.
Oh, and for those outside the family who have requested to Skype in, well, I don't think my family is ready to share all their personal business quite yet. But you'll still get the materials.
Here's to my family's revolution. And yours.
BWB
SOMETHING TO THINK ABOUT
A Series of Family Talks
AGENDA
December 3, 2011
5:00 pm to 7:00 pm
I. Prayer and Call to Order
II. Purpose of “Something to Think About”
· Knowledge: Share What We Know (mistakes and all), Learn What We Don’t
· Encouragement: Helping Each Other Reach Our Goals
· Action: Holding Each Other Accountable for Taking Positive Steps Toward Our Goals
III. Five Goals for The Family
· Financial Literacy
· Home Ownership
· Having a Career
· Educating Our Kids to Prepare Them for College or a Vocation
· Multiple Streams of Income
IV. Topics to be Covered Today – Financial Literacy
a. Financial Literacy
· Credit
· Budgeting
V. Starting Our Family Sou-Sou
VI. The Department of Gentle Nudges: Encouragement from The Elders to Achieve Our Goals
VII. Adjourn; Next Meeting January 7, 2012
Something to Think About
A series of family meetings
Financial Literacy
Module 1: Credit
Disclaimer: We are not experts or role models with respect to credit. We’re only sharing what we know. You will need to do more research on your own for additional answers or clarification.
I. First Things First: Credit is a game and a tool, not a personal reflection on you.
o Bad people have good credit, and good people have declared bankruptcy. The leading cause of personal bankruptcies is medical bills, not extravagant spending.
o Having good credit is simply a function of understanding how credit scores are determined and using that knowledge and money management to get and maintain a good credit, period. Learn how the credit game is played and play to win.
II. Why Good Credit Matters – Credit can affect the following:
· Employment. Employers are increasingly running credit checks to determine whether to hire
· More Credit. Lenders and credit card companies are increasingly using minimum credit scores to determine whether to extend credit.
· Insurance. Insurance companies use credit scores to determine what your rates will be.
· Banking. Some banks will not allow you to open a checking or savings account without a certain minimum credit score or if you have a record in ChexSystem for mishandling a prior bank account.
· Renting. Landlords and property management companies use your credit report and/or credit scores to decide whether to rent to you. (Note: Joe and I have routinely looked at potential tenants’ credit reports in deciding whom to allow Joe’s property management company to rent out his townhome.)
· Student loans. Bad credit can keep you from getting student loans.
III. Basics To Know About Credit
a. The difference between a credit report and a credit score:
o A credit report is a report listing your creditors, your credit limit and how much you owe each credit, how many payments you’ve made on time or late, and any debts that have gone to collection agencies, among other things. Credit reports are generated by credit reporting agencies (CRA’s).
o A credit score is a number reflecting your credit-worthiness based on what is in your credit report. Although credit report agencies have created their own credit score, the credit score used most commonly is the Fair-Isaac Company, Inc. score, or FICO score. Everyone has three FICO scores – each is based on the information in their credit reports from each of the three credit reporting agencies.
b. What are credit reporting agencies and who they are:
o A credit reporting agency, or CRA, is an organization to which lenders, credit card companies, and other creditors report information about your payment history on accounts you hold with them. The CRA in turn provides this information to organizations you are seeking credit from (lenders, credit card companies, cell phone companies) or people you are attempting to do business with (landlords, utilities, etc.)
o The three main CRAs are Experian, TransUnion, and Equifax. And they don’t get the same information from all your creditors, so the FICO scores based on their credit reports for you may be different.
So, here’s how it goes:
Info on how
you pay your bills credit reports FICO Score
Your creditors----------------->CRAs---------------->Fair, Isaacs--------------->lenders
c. How your FICO score is determined (from the MyFICO.com website):
o Payment History: 35%
§ Account payment information on specific types of accounts (credit cards, installment loans, finance company accounts, mortgage, etc.)
§ Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
§ Severity of delinquency (how long past due)
§ Amount past due on delinquent accounts or collection items
§ Time since (recentness of) past due items (delinquency), adverse public records (if any), or collection items (if any)
§ Number of past due items on file
§ Number of accounts paid as agreed
o Amounts Owed: 30%
§ Amount owing on accounts
§ Amount owing on specific types of accounts
§ Lack of a specific type of balance, in some cases
§ Number of accounts with balances
§ Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
§ Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)
o Length of Credit History: 15%
§ Time since accounts opened
§ Time since accounts opened, by specific type of account
§ Time since account activity
o New Credit: 10%
§ Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
§ Number of recent credit inquiries
§ Time since recent account opening(s), by type of account
§ Re-establishment of positive credit history following past payment problems
o Types of Credit Used: 10%
§ Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)
d. What’s A Good FICO Score?
o 700 is the standard score at which you qualify for lower interest rates and mortgages.
IV. How To Get Credit
o Secured Personal Loan: You can ask for a secured personal loan from your bank. A secured personal loan is a loan in which you deposit the amount you want to borrow with the bank as savings you are not allowed access to and then pay it back. Once you pay the loan back, the amount you deposited as savings becomes yours. If you fail to pay the loan, the bank takes the savings.
o Become an “Authorized User” On Someone Else’s Account: You can ask someone who has a credit card to become an authorized user on his or her account. FICO considers the payment history of authorized users in determining their FICO scores. However, if you or the owner of the account fails to pay on time, it will affect both your credit scores.
o Get A Co-Signer: If you can’t get credit on your own for a car, a credit card, etc., having a co-signer may allow you to qualify if you wouldn’t otherwise qualify. However, if you fail to pay, the co-signer becomes obligated to pay the debt and both your credit scores can be ruined. Quite frankly, I wouldn’t co-sign for anybody but Jesus, but that’s just me.
o Store Credit Cards: It’s common knowledge that department stores have lower standards for extending credit than other kind of credit issuers.
V. How To Ruin Credit
o Don’t pay your bills
o Don’t pay your bills on time
o Allow unpaid bills to go to collections
o Allow collections to become judgments
o Co-sign for someone or allow someone to become an authorized user on your accounts and that person fails to pay or pay on time.
o Agree to pay a bill that’s in collections and beyond the statute of limitations – it starts the statute of limitations all over
o Don’t use credit at all. Not having any credit is the same as having bad credit because your FICO score has no credit information to score you on, so you end up with a low FICO score, which is the same as having bad credit.
o Max out your credit cards. Charging up to or near the limit of your credit cards lowers your FICO score.
VI. How to Rebuild Credit
o Dispute inaccuracies on your credit report. CRAs aren’t diligent about making sure the information on your credit report is accurate. Disputing someone else’s bad credit information on your credit report can improve your credit score. You can get a free copy of your credit report from annualcreditreport.com.
o Dispute true but bad information on your credit report that’s more than seven years old.
o Start getting new credit (see Section IV above).
o Consider NOT paying any accounts that have gone to collections unless you are threatened with being sued. Once an account goes to collections, paying it will not remove the account from your credit report unless you negotiate with the collection agency to do so. Even then, you would have to enforce the agreement.
o Pay off your existing credit cards by choosing the one with the lowest balance or the one with the highest interest rate first. Pay one off, take the money that would go toward that account and pay off the next.
o Check your credit reports and FICO scores annually to make sure good information is showing up on your credit reports and inaccurate, bad information isn’t.
o Seek credit counseling.
VII. How Not To Use Credit
o Don’t use credit to raise your standard of living. If you depend on credit to make it through the month, at some point you will run out of credit.
o Don’t ignore the annual percentage rate (APR) you’re paying for credit. The higher the APR, the more money it will take to pay off the debt.
o Don’t use credit as a substitute for savings.
o Don’t make only minimum payments. It will take you longer to pay off the balance and it will cost you more in interest.
VIII. Resources
o Online resources
§ Creditboards.com. Everything you want to know about getting and repairing credit is there.
§ Liz Weston’s personal finance column on MSN.com (http://money.msn.com/common/commentary.aspx#weston)
§ MyFico.com.
§ Equifax.com (Equifax Credit Reporting Agency)
§ TransUnion.com (TransUnion Credit Reporting Agency)
§ Experian.com (Experian Credit Reporting Agency)
§ Annualcreditreport.com
o Resources provided in hard copy
§ “Don’t Ignore That Debt Collector,” Liz Weston, MSN.com, http://articles.moneycentral.msn.com/SavingandDebt/ManageDebt/dont-ignore-that-debt-collector.aspx
§ “Debt Collector Call Script,” http://www.fair-debt-collection.com/Disputing_Collections/collector-call-script.html
§ “7 Fast Fixes for Your Credit Scores,” Liz Weston, MSN.com, http://articles.moneycentral.msn.com/Banking/YourCreditRating/weston-7-fast-fixes-for-your-credit-scores.aspx?page=1
§ “7 Nasty Credit Myths That Won’t Die,” Liz Weston, MSN.com, http://money.msn.com/credit-rating/7-nasty-credit-myths-that-will-not-die-weston.aspx
§ “Understanding Your Credit Score,” http://www.myfico.com/Downloads/Files/myFICO_UYFS_Booklet.pdf
§ “Fixing Credit Report Errors,” myFICO.com, http://www.myfico.com/crediteducation/rights/fixinganerror.aspx
§ “Credit Report Rights,” MyFICO.com, http://www.myfico.com/CreditEducation/Rights/CreditReportRights.aspx
o Suggested Reading
§ Glinda Bridgforth, “Girl, Get Your Credit Straight”
§ Liz Weston, “Your Credit Score: How To Improve That 3-Digit Number That Shapes Your Financial Future (4th ed. 2011)
Something to Think About
A series of family meetings
Financial Literacy
Module 2: Budget
Disclaimer: We are not experts or role models with respect to budgeting. We’re only sharing what we know. You will need to do more research on your own for additional answers or clarification.
I. First Things First: A budget is not a limitation; it’s your plan for how you intend to manage your money on a monthly basis. Everything runs on budgets – businesses, governments, non-profit organizations, colleges, you name it.
II. Why Budget?
o A budget helps you reduce stress by planning for the unforeseen
o A budget helps you know how you really spend your money as opposed to how you think you spend your money
o A budget helps you plan to achieve financial goals like saving for a downpayment on a house, going on vacation, or planning for retirement
o A budget helps you plan for retirement by giving you an idea of how much you would need to earn in retirement to maintain your current standard of living
o A budget will give married couples and children a realistic idea of how much it costs to run a household
o A budget helps you prioritize how you spend your money according to what is important to you
o A budget helps you communicate to others why you can’t give or lend them money, e.g., “I’m sorry, but my budget won’t allow for it.” What they hear: You’re broke. What you’re really saying: “I have a plan for how I’m spending my money, and you’re not in it.”
III. Budget Basics
o A budget is an ever-changing document. Budgets change when your priorities change (e.g., you add children to the family). It’s okay to adjust your budget. In fact, life requires that you do.
o You will probably not follow your budget to a T, and that’s okay. Give yourself some wiggle room in your budget.
o If you don’t budget in some fun, you will be miserable. A budget that is all sacrifice will be hard to keep.
o There are many ways to budget and many budgeting tools. Find the ones that are right for you.
IV. Budget Methods
o The 50/30/20 method: Determine what your next take-home pay is. Budget 50% of that for needs, 30% of that for wants, and 20% for savings.
o The “Pay Yourself First” method: Put away 20% of any paycheck in savings; use the rest for operating expenses but don’t touch the savings except for emergencies.
o The “Forecasting” method: Examine your bank statements for the last year. Set up categories of expenditures (e.g., mortgage, car payments, car maintenance, etc.). Assign each expenditure to a category. Total up the amount of expenditures for each category for the year, divide by twelve. The amounts you get are your month budgets for each category.
o The “Envelopes” method (YNAB): Assign a certain amount of your take-how pay to particular spending categories, or envelopes, such as savings, groceries, car payments, rent, etc. If you overspend in one category/envelope, you can borrow the money from another category/envelope but you have to replace it.
o The “Track Your Spending” method: Keep track of your spending for a month and base your budget on your actual current spending.
o The “Make It Automatic” method: This is a twist on the “Pay Yourself First” method. David Bach says in his book, “Start Late, Finish Rich,’ that people are lousy at budgeting and that’s why the government gets its money first by taking it from you before you get the rest of your paycheck. Bach says you need to do the same thing when it comes to budgeting for retirement – have 1/8 of your gross income deducted automatically from your paycheck and put in a 401(k). This method can also work for your personal savings – have your savings deducted automatically from your paycheck before you pay anyone else.
V. Resources
o Online resources, software, and apps
o The Dave Ramsey website has lots of tools for budgeting, http://www.daveramsey.com/category/tools/
o David Bach’s website, Finish Rich, helps you inventory where your money actually goes, http://finishrich.com/free_resources/fr_worksheets.php
o You Need A Budget (YNAB) budgeting software http://www.youneedabudget.com/
o Mint.com – free online money management, https://www.mint.com/
o Quicken – money management software
o Microsoft Excel – because sometimes all you really need is a good spreadsheet
o Mvelopes – envelope budgeting money management software, http://www.mvelopes.com/
o EEBA, free iPhone envelope budgeting app
o Suggested reading
o Glinda Bridgforth, “The Basic Money Management Workbook”
o Judy Lawrence, “The Budget Kit”
o Resources provided in hard copy
o YNAB Handbook, http://www.youneedabudget.com/book/
o Dave Ramsey Basic Quickie Budget, http://www.daveramsey.com/tools/budget-forms/
o Dave Ramsey Irregular Income Planning Budget, http://www.daveramsey.com/tools/budget-forms/
o Dave Ramsey Monthly Cash Flow Plan, http://www.daveramsey.com/tools/budget-forms/
o David Bach’s “Where Does Your Money Really Go?” Worksheet, http://finishrich.com/pdf/worksheets-step3.pdf
o David Bach’s “Find Your Stuff” Financial Inventory Worksheet, http://finishrich.com/pdf/worksheets-step1.pdf
o David Bach’s Financial Inventory Worksheet, http://finishrich.com/pdf/worksheets-step2.pdf
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