Archive for July 2013

How Credit Scores Are Calculated

Many people know their exact credit score. If it is great, they wear it as a badge of honor of their financial prowess. “My credit score is 814,” they will say quite proudly.

Others who have a more colorful experience with credit, will wear it as a badge of dishonor. “My credit score is in the toilet,” they say with a glum look.

The fact is that credit scores are only a measure of how well a person can manage debt and contractual financial agreements.

Credit scores are calculated using these data points:

  1. Type of credit issued [Revolving debt (credit card) or Installment debt (anything with payments and a pay-off – car loan, boat loan, student loan, etc.]
  2. Age of the credit relationship
  3. Amount of credit one can obtain (total of all credit limits)
  4. Amount of credit one has consumed (percentage of total credit limit)
  5. Payment timeliness
  6. Requests for credit (“hard pulls” of credit)
  7. Outstanding judgments

Look at the list again. Does it include any relationship to how much money one might have in a savings account? Or any connection to a person’s net worth?

Here’s the fact: You could be a millionaire and have a terrible credit score.

How? By having zero credit relationships.

While a great credit score is more desirable than a terrible credit score, it is not the best indicator of financial success. Choose instead to make financial decisions about what best increases financial margin and net worth!

Do I Have Enough Money To Retire?

“Do I have enough money to retire?”

This is one of the top questions I receive. It is usually asked by someone who is deciding when to retire, and they want to be financially prepared.

Let’s define retirement from the perspective of most people.

retirement date n. that moment when a person ceases to earn money and begins living on money from other sources – sources which include social security, pensions, retirement savings plans, and other investments.

Let’s back to the question – “Do I have enough money to retire?” The hidden message behind the question is, “I don’t want to run out of money and end up eating dog food to survive.”

Here’s the rough step-by-step calculation I use that can help you answer this question:

  1. Determine your monthly guaranteed income (social security, pensions, annuities, rental income, business income, etc.)
  2. Determine your monthly expenses (include savings for known upcoming non-monthly expenses like Christmas, vacation, car repairs, house repairs, annual insurance premiums, etc. Be sure to include even longer term expenses such as vehicle replacement and major appliance replacement.
  3. Subtract #2 from #1. This will determine your “monthly financial gap” (if one exists). If you have no gap, congratulations! You are in great financial shape. If there is a monthly financial gap, continue to step #4.
  4. Multiply the “monthly financial gap” by 300 – This is your “projected investments required” to provide enough income for the gap.
  5. Add up the total value of all of your investments – retirement savings plans, stocks, mutual funds, etc. and compare to the number calculated in step #4. If the total value of your investments meets or exceeds your “projected investments required,” you are in the financial position to retire!

Here’s an example:

Suppose Tom and Mary are preparing to retire. They are eligible for Social Security monthly payments of $2,875. They also have a small pension that will pay $300 per month. Their monthly expenses, including savings for short and long term known upcoming non-monthly expenses, are expected to be $4,500 per month. They have saved up $450,000 in their retirement savings plans – 401(k), 403(b), and Roth IRA.

Let’s use the steps to see how much they need to have saved to retire well.

  • Step 1  Monthly guaranteed income is $3,175
  • Step 2  Monthly expenses are $4,500
  • Step 3  Monthly Financial Gap is $1,325
  • Step 4  The “Monthly Financial Gap” is multiplied by 300 which provides a “Projected Investments Required” of $397,500
  • Step 5  Because they have have $450,000 in their RSPs, they appear to be in great shape!

A few notes:

  1. This is a rough calculation. I encourage any person who is preparing to retire to meet with a retirement specialist to walk through individual needs.
  2. It is appropriate to understand taxes to ensure that money is utilized in the most tax-efficient manner. Using the services of a retirement specialist and CPA can help with this.
  3. Ensure that appropriate insurance is in place. This includes consideration of long-term care insurance and life insurance policy analysis.
  4. This calculation essentially assumes a 4% nest-egg growth rate that provides necessary income and preserves capital.

LIVE ON-LINE EVENT: Managing Finances With A College Student

I recently had the opportunity to teach parents of incoming college students about how to “manage finances with their college student.” I am honored to say that the talk was extremely well received, and the parents gave incredible feedback.

This made me think of you, the readers of this blog. Chances are pretty high that you either have a college student, will have one some day, or you know someone who has one in their household right now.

Because of this, I’ve made the decision to teach this powerful content “FREE OF CHARGE” in a LIVE ON-LINE EVENT on Thursday, August 8th, at 8:00 PM Eastern (7:00 PM Central).

If you have a college student in your life, you don’t want to miss this great opportunity. Here are just some of the subjects that will be covered:

  • Importance of budgeting
  • Credit scores
  • How to handle credit and debt
  • How to manage student loans
  • Establishing clear financial arrangements with your student
  • Plus much more!

Here are the details:

  • DATE  Thursday, August 8th
  • TIME  8:00 PM Eastern Time
  • WHERE  On-line live event
  • COST  It’s free!

Space is extremely limited, so be sure to reserve your place now by clicking the link below. Once you register, you’re spot will be reserved and the link for the live on-line event will be sent to you. You will also receive a reminder just before the event goes live.


A Financial Tip That Could Change Your Life

Let’s face it. Many people are stuck financially. They have no idea where their money is going. All of their money just disappears with little to nothing left each month. They see big expenses coming their way (car repair or replacement, paying for college, house repairs, braces for their children’s teeth, etc.) and have no idea how they will pay for them.

I know the feeling.

The good news is that one financial tip could change your life! It certainly changed mine.

Here’s the tip:

Think like an owner.

When I changed the way I thought about money, it completely changed how I managed money. I’m confident it will do the same for you!

Here are some key ways my mindset changed:

  1. In the past, I viewed my paycheck as an opportunity to spend money. As an owner, I view it as an opportunity to invest money.
  2. In the past, I viewed my paycheck as an exchange for my labor. As an owner, I realize that income only happens when I add value to others in such a way that they will pay money for my efforts.
  3. In the past, I thought the only way to produce income was to work for it. As an owner, I see that income can be produced in many ways – even as I sleep!
  4. In the past, I felt that my income was limited to my paycheck. As an owner, I see that income from my paycheck can be used to produce income elsewhere.
  5. In the past, I felt that my 401(k) was a diversified investment. As an owner, I realize it was diversified within the stock market, but it was all in the stock market. I diversified my investments to include real estate and small businesses.

When you think like an owner, you will become an extremely valuable employee because you will work differently. No longer will you be able to “just do my 8 hours and get out of here at my J-O-B.” Instead, you will be driven to create value for your customers and grow your company’s business! People who think like owners get pay raises, promotions, and may even have the opportunity to launch a business or division of their own!

Are you thinking like an owner?