We live in an economy built on credit. When we apply for a new car loan, buy a new house, borrow to star a new business or even apply for a new job, good credits will go a long way to save you money and help landing you that new job!
So how does credit work and what makes good credit?
Credit is a measure of your financial strength and trustworthiness. It helps the banks who want your business getting to know you a little, at least your finances, and decide how risky it is that they might loose the money they loan you. Over the years the banks have done business with enough people and they’ve done the research on what risky behaviors that lead to a default look like. Exactly how they turn those metrics into a credit “score” is proprietary and here are some basics.
History of on-time payments tells the bank that you take your trustworthiness seriously and if they lend you money they are very likely to get the money back plus interests. Score!
Types of the credit also tell a story of your financial well-being. Routine payments to utilities like telephone, cable TV, gas, water garbage and electricity bills will add to your credit worthiness. School loans, car loans and credit cards issued by major financial institutions are also good. However credit cards issued by retails stores can suggest an excessive spending habit. Too many of these trade lines can weight on your credit score.
Length of each trade line also makes a difference. The longer you have maintained an account open in good standing the better it is for your credit.
Routine spending close to your credit line limit can suggest that your life style might exceed your affordability and therefore raises the risk of default and will bring down your credit score. Switch to another card for your daily spending if you purchased a big ticket item.
Never ever be late for a payment. Live within your means. If you must carry a balance on your credit cards look for ways to pay more than the minimum payment. If you are going to consolidate your credit cards keep the oldest cards with no annual fee open and close out your newer ones, especially if they charge a fee. Your credit card from college doesn’t know that you now have a hot shot career so call to update your income record and they’ll raise your limit. Note that some credit research company will actually bring down your score for each credit line limit increase request though this is quickly recovered by good payment history.
Stay below 30% - 50% of your credit card limit. Set up utilities bills under your name and then collect from your (trustworthy) roommates each month. If you are prone to over-spending do not set up automatic payment. Instead, set up a calendar reminder to pay your credit card each month. This will bring clarity to your spending habits and help prevent over-spending. Building good credit takes intended effort and time. Start early. Ask for help! If you are in debt seek help from a financial advisor or engage a debt relief company. Good luck and remember, life is good.
This article was written by Peter Mu, CFP®
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS) 20 Bicentennial Circle, Suite 100, Sacramento, CA 95826 Securities products & services and advisory services offered through PAS, member FINRA, SIPC. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Guardian, its subsidiaries, agents, and employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.
Image credit: http://en.wikipedia.org/wiki/House#mediaviewer/File:Ranch_style_home_in_Salinas,_California.JPG
2016-29509 Exp 10/18
Ah yes, a destination wedding. Who hasn’t seen those beautiful pictures?! White-sand beaches, lush coconut trees leaning over emerald waters, the beautiful bride and groom kiss silhouetting against a gorgeous sunset…you can literally breath the love in the air.
Until this week, and for being a guy who’s never married, I always thought that destination weddings are really expensive. First of all everyone have to fly over to the destination and the newly-weds are probably flipping the bill. Having heard countless complaints about how expensive wedding venues are here in California I can’t even imagine how much more it is at a resort on an island. Then there is the reception, the flowers, the rehearsals...all seems to cost a bundle.
All this changed when I got invited to a destination wedding at a beautiful resort in Punta Cana, the Dominican Republic. I realized my understanding on this topic was nearly entirely wrong.
First of all, paying for your guests’ travel is optional. You see chances are we all plan to travel to the tropics sometimes in the future. Mexico, Belize, Virgin Islands, the Bahamas, etc. If you plan far ahead of time people would just treat your wedding as their vacation anyway and accept that they can pay for their own travel arrangements - saving you a bundle.
Deals of the season. The Caribbean, South America and many parts of Mexico is the vacation destinations for “snow birds.” US and Canadian vacationers who crowd the beaches during winter season are no where to be seen during late spring and summer times. Our beaches and restaurants were nearly empty. Competition among the resorts meant that the prices were very reasonable. Some of the wedding guests booked their all-inclusive stay for two for about $1600 where the regular price runs about $4200 for the week. I thought that was CHEAP!
Location matters. New resorts in over developed areas use low low prices to attract newly-weds. When they have vacancies you’ll get a deal. Do some research and talk to a travel agent. She’ll know where to go.
Leverage your party. At our resort, a minimum of three night stay will get you a basic wedding package including a gazebo on the beach, some simple flower arrangements, champagne for everyone, an audio guy who rolls out the speakers and plays anything from your iPod and a full support staff for free. From there you can add fancier options such as pool side private dinner, excursions, party boats, DJs, photographers…to upgrade your package. Now remember, you are bringing a party of guests to stay at the resort and that means good business. I bet that if you just ask you’ll get more stuff for free.
The other great thing about being in an all-inclusive resort is that you’ll never have to pay for the food and drinks for your guests. We ran into another wedding party from LA and the young couple told us they had 11 guests. Instead of paying for a reception they simply made a reservation at one of the nicer restaurants – ate for free and had a great time!
Bring American Dollars and research currency exchanges. All the resorts will exchange for you but the rates are very different. Call them and your local bank ahead to see who gives you a better rate. Airports are the worse deals. Tip your service staff and shop with American Dollars will get you very good service and much better deal overall.
Vote with your dollars. Dominican Republic seems to be a country that has brought economic benefits from development of tourism to her people. We saw tax dollars supporting a new airport terminal being build, new 4-lane interstates, new hospitals, apartment buildings, new schools and countless other basic infrastructure projects. Comparing to neighboring Haiti which continue to be marred by natural and governmental disasters I genuinely believe in Dominican Republic’s effort to improve their economy. For all your social activists out there this can be a great option.
As I sit here on my return flight home, reflecting on my first Jewish-Mordovan-Romanian beach wedding and listening to Runaway Love by the Diamond Rings I can’t help but think that love really is in the air. Life is good kids. Whether you’ve already found the one or still sticking out like me, may all your dreams come true.
Best of luck on your wedding and Matsle Tov!
This article was written by Peter Mu, CFP®
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS) 20 Bicentennial Circle, Suite 100, Sacramento, CA 95826 Securities products & services and advisory services offered through PAS, member FINRA, SIPC. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Guardian, its subsidiaries, agents, and employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation. CA insurance license 0E19513
This material contains the current opinions of Peter Mu but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice.
Image credit http://commons.wikimedia.org/wiki/File:Palm_tree_at_dawn,_Patong_beach.jpg
According to the Living Balance Sheet, 29% of Americans have savings less than $1000, 56% have savings less than $25,000, 97% of baby boomers have not saved enough for retirement, and 55% of Americans have not saved one penny last year. Our credit card debt is at an all time high of $772 Billion dollars and college graduates collectively owe more than $1 Trillion in student loan debt.(1) To put that in perspective Greece’s national GDP in 2013 was $242 Billion and the national debt was $424Billion(2).
How could this be? How have we done so poorly in saving for the future? This two-part article explores some of the causes to this failed level of personal savings and what we can do to change.
Vague Goals. Your goals should be clear and measurable so you know when you’ve accomplished them. For example, “I want to do a better job saving money” is not a goal. It is a statement of intend. Instead, “I want to save $600 by Oct 1, 2015 for a new ski season pass.” would be a much better goal. It specifies the amount, the purpose and a time frame. This way you’ll know when you get there.
Underestimate the true cost of living. Few people can very accurately track all the money we spent. We eat out more often, spend more than we remember, loose track of pocket cash and fail to predict unexpected expenditures. Regardless the reasons most of us underestimate by 5-10%, some even 20%.
We feel that we “deserve nice things.” Personally I can totally relate to this. Behind the glamorous life style of Silicon Valley is this relentless culture of work-life integration. Smart phones, smart watches and push-notifications keep us mentally engaged all the time. Corporations’ insatiable appetite for efficiency pushes their work force to an ever-higher breaking point. For many, spending money becomes an outlet to deal with stress.
Unrealistic reliance on mental strength instead of a system and structure. Creating a Savings means a change in our (spending) habit and it is by definition not natural. Initial enthusiasm and excitement will fade over time. Without a system and structure to serve as a continuous reminder of our mission will only create stress and will not produce our desired outcome.
As a result, many families start on the journey to create savings but ultimately give up. After repeated failed attempts we start to lose trust in ourselves and choose to become overwhelmed by the daily demands.
This absolutely does not have to be the case. You must approach this with the intent of creating a new habit and not conquering a goal. I have taught many people a simple system to achieve this. Read more about it in Part II of this article.
This article was written by Peter Mu
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), OSJ 20 Bicentennial Circle, Suite 100, Sacramento, CA 95826, 1-916-379-0200. Securities products/services and advisory services are offered through PAS, member FINRA, SIPC, Financial Representative of The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. Pacific Advisors, LLC. is not an affiliate or subsidiary of PAS or Guardian. Insurance Products offered through One Pacific Financial & Insurance Solutions LLC, DBA of Pacific Advisors, LLC. Pacific Advisors, LLC. is not a registered investment advisor. CA insurance license 0E19513
This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice. Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.
Links to other sites are provided for your convenience in locating related information and services. Guardian, its subsidiaries, agents, and employees expressly disclaim any responsibility for and do not maintain, control, recommend, or endorse third-party sites, organizations, products, or services, and make no representation as to the completeness, suitability, or quality thereof.
The Living Balance Sheet. The Living Balance Sheet® (LBS) and the LBS logo are service marks of The Guardian Life Insurance Company of America (Guardian), New York, NY. © Copyright 2005-2017 Guardian
2. The World Bank. http://data.worldbank.org/indicator/NY.GDP.MKTP.CD
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#2017-43108 (Exp. 7/19)
In order to be successful at creating a new habit you must not rely on will power alone. You must have a dependable system that is structured to bring clarity and feasibility. That’s what I am going to teach you here.
Divide your saving goals into Wealth Building and Purposeful Spending and clearly define them as the following.
Wealth Building is strategic wealth accumulation with asset classes that will someday generate an income when you no longer wish or able to work. Examples include:
- Cash to purchase a rental income property.
- Permanent life insurance premiums.
- Retirement savings.
Purposeful Spending is essential and discretionary purchases you deem necessary to sustain a good life. These can be long term or short term. Some examples are,
- Down payment for your primary residence.
- College tuition for children.
- Potential medical spending for a parent.
- A vacation
- Anticipated car repair.
- A new pair of skis.
-Certain amount of Discretionary spending.
Implement a banking structure that supports these goals. You should have THREE bank accounts and here is how they work.
Create a Wealth Account to hold your Wealth Building Goals and direct deposit all your income into this account. In actuality this is a checking account but we will label it “Wealth Account.”
Label your savings account “Purposeful Spending” and allocate from your Wealth Account certain amount each month towards your goals. This account also serves as over-draft protection.
Label a second checking account “Personal Operations.” Schedule bi-weekly transfers from your Wealth Account to cover your current living expenses. Live within your means. Any remainder will create a savings in the Wealth Account.
Continuous maintenance is key. Monitor closely your “Personal Operations” account to prevent overdraft. Each time you get a pay raise split the additional money to reward your hard work and increase your savings. This way your savings will grow as you make more money.
If you have a business you can use a very similar structure to manage your operational and strategic expenses.
We save because for most of us we have mastered living a good life today and the real challenge is living this good life for the rest of our lives. I have taught many people this simple system to create savings but SIMPLE does not mean EASY. Changing a habit takes time but it can be done. Talk to your Financial Professional and define your goals. This will be a very uplifting conversation.
This article was written by Peter Mu
Image is credited to Daniela Cuevas, www.danielacuevas.com Public domain, free for commercial use. http://thestocks.im
Sketch diagram is created by Peter Mu
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A 401(k) plan is a popular way to save for retirement. It is sponsored by an employer and everyone in the company is incentivized to participate in the plan. If you participate in your company's plan, I want to first recognize that you've taken an important step towards securing a good retirement by saving money today. Saving money isn't easy and despite all the distractions, you've made it happen. Congratulations!
There are many great features of a 401(k) plan that make it an important component in retirement success strategies. Contributions are automatically deducted from each paycheck, which is very handy for those who struggle with the discipline of saving. Contributions are deductions for current year's income tax. This reduces exposure in the top marginal bracket. Company match also sweeten the deal.
However, the 401(k) plan is also heavily regulated and restricted by the IRS, making it unfit in many situations. This article explores some of these instances when over-reliance on 401(k) plans does not make good financial sense.
When you have not sufficiently protected your todays. As matter of principle, your financial house today must be protected first, fully, and forever. The further along you've come, the longer you've been building your fortune the more important this is. All the major areas, including car, home, liability, long term care, disability, medical, legal, and your full human life value should all be properly protected. Unexpected life events happen to everyone. Some are concerned about the additional cost to achieve full protection. Do not take this unnecessary risk. Other strategies can be used to replace any lost income in retirement due to protection costs.
When you are short on liquidity. In my practice I recommend families having short-term savings equal to 6-18 months of expenses. You can use cash, money market, life insurance cash value or other easily accessible sources. This money provides safety and liquidity, and allows you to quickly react to unexpected changes or opportunities in life. Among many things, when determining the appropriate amount, you should consider how long you realistically expect to find another equal or higher paying position, should you loose your job. A generous home equity line should not be used as a substitute as it increases your monthly mortgage payment and is susceptible to recall.
When saving for retirement is in competition with down payment for your first home. Young professionals ask me this a lot, "how am I supposed to manage a down payment when everything else costs so much?” This is especially true in the Bay Area where housing prices are among the highest in the nation.
A primary residence is more than just a house. It's a place you call home, raise a family, entertain your friends and create wonderful memories. For many, owning a home still symbolizes the realization of The American Dream. It's a milestone that recognizes all of your hard work and all of the sacrifices that you have made throughout the years. In my opinion, if you have to make a choice between funding retirement and buying a first home the latter should be prioritized.
When you are carrying short-term debt like credit card or certain student loan. Paying down an 8% loan is better than investing with an 8% return because there is no risk! Short-term debts with high interest rates are significant roadblocks to wealth building. The sooner you pay them off the better.
When you only have income-tax deferring type of financial instruments. These include 401(k) plans, IRAs, Deferred Compensation Plans and others. In retirement, income from these sources is taxable as "ordinary income.” Lack of tax diversification could expose you to an increased liability if tax rate rises in the future or if you desire higher income and improved life style in retirement. What a dilemma that is! Tax-free sources of retirement income should be considered.
Lets shift the paradigm a little and consider the psychological effect of maxing out a 401(k). According to The Living Balance Sheet® a savings rate of 15% serves as a prudent starting point to building s secure future. For many highly compensated professionals in Silicon Valley, maxing out a 401(k) gives the illusion that enough has been done and that the market itself is going to get the job done given enough time while ignoring the risk. This is a grave misunderstanding of how wealth building works. Robert Merton, a recipient of the 1997 Alfred Nobel Memorial Prize in Economic Sciences and a professor of Finance at the MIT Sloan School of Management, explores more on why the common approach towards saving is all wrong. His ideas are collected in the article The Crisis in Retirement Planning published in the July-Aug 2014 edition of the Harvard Business Review.
Saving for retirement is s critical component in your financial life, regardless where you are today. Start a conversation with a financial professional, learn from the experience of those who came before you, think critically, and act decisively.
This article is written by Peter Mu
Photo image is created and copyrighted to Peter Mu
#2015-11727 Exp. 10/17
Does home ownership still mark a significant milestone in realizing the American Dream? In my financial practice, I am beginning to notice a trend that more people are electing to rent instead of buy a home. The most common reasons I hear include housing prices are too high, payments are too expensive, or life is to be lived today because you only live once. There is some truth in those reasons but I hope to make a case for owning your own home that goes beyond common knowledge.
1. The economics of inflation is on your side. Inflation refers to the graduate increase in prices and deteriorating buying power of money. There are variety of social, economical and political reasons that cause inflation. The Bureau of Labor Statistics publishes CPI, or Consumer Price Index, to keep track of inflation. This chart(1) below indicates that inflation has been observed consistently in recent history. I am sure you have all learned about the story that a loaf of bread cost some 25 cents back in the day and that the first Ford Mustang only cost $2,368 in 1964 and a 2016 model will set you back $25,000.
Bringing the focus back to real estate. Consider that the real cost of borrowing is the mortgage rate you pay minus the rate of inflation. The higher rate of inflation the lower the cost of borrowing. Suppose your mortgage payment is $3000 each month. The buying power and the economic impact of that money will be less and less each month through out the entire 30 year term of that mortgage. In today’s prolonged low interest rate environment borrowing on a fixed term for a long period of time means it’s very advantageous to own real estate.
2. Owning real estate diversities your overall portfolio. Educated investors recognize the value in diversification among different asset classes to reduce investment risks. Having the appropriate mix of asset classes improves the chance of reaching your investment objectives while minimizing volatility. Today we are observing a lot of uncertainties around the world. Russian’s involvement in the Syrian war, sanctions and negotiations on its oil export, Greece’s continued requests for bailout, UK’s election to exit the EU, the migrant crisis in Europe, the daily drama in the Chinese equities market, the souring economy, Zika virus outbreak, and the looming environmental challenges in Brazil leading up to the 2016 Olympic games…the list goes on. As investors react to these worries plus the created volatilities in the equities market, it sure feels pretty great that at least one asset you own, the home you live in or your rental portfolio is seeing some consistent appreciation.
3. Diversification is also critically important when it comes to retirement income.As a professional financial advisor I can’t emphasize enough that saving in your 401(k)s alone isn’t enough and that you must create alternative sources of income for retirement.
You might have heard about the “4% rule” used by many financial professionals to calculate retirement income based on an asset value. The idea is that if your assets can be invested in a safe place that produces a 4% rate of return, you can spend that money without compromising the principle and next year there will be another 4% earned and thus the model is perpetual. For example, if you have accumulated $1,000,000 by the time of retirement, at 4% it will earn $40,000 each year for you in retirement as depicted in the chart below.
Can you always get 4%?
I didn’t get 4% in 2008. Or 2011, or 2000, 2001, 2002…
You see your retirement expenses do not reduce accordingly just because the market has a down year. For all those retirees whose portfolios suffer a setback during a market correction, it is often not possible for them to maintain the integrity of the principle. When that happens, there is less to capture the rebound in the market and the portfolio inevitably begins to shrink.
Real estate properties can produce income and it is rather uncorrelated from the equities market. Rent is a diversified source of income even if the market is down it can still bring the owner a lot of reassurance during uncertain times.
Lets not forget the emotional reasons to own real estate, pride and joy of home ownership, realizing the American dream, never have to pay rent again…and yes, there is the interest payment tax deductions. Whatever reason it might be for you, I hope this article makes the case that it is worth the effort to own a home. I know that it is not easy and many other things demand our cash flow. Child care costs a ton, new iPhones we all want, private schools and lets not even mention college. However, I hope you find the courage and the discipline to save for your down payment and take actions toward becoming a home owner. Start your journey by consulting with a real estate professional and your financial advisor.
This article was written by Peter Mu
1. Produced with The Living Balance Sheet, data source Bureau of Labor Statistics. http://www.pacificadvisors.com/peter_mu/financial_balanceImage is public domain, free for commercial use. http://thestocks.im
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