Improving your financial well-being

In this section:

Stages of financial well-being:

Financially Dependent

  • Everyone starts here.
  • Your income (if any) does not support your lifestyle.
  • Your lifestyle is supported by parents, government or charitable handouts.
  • Many end up back here nearer the end of their life.

Financially Independent

  • Generally you trade your time for money.
  • Your income covers your monthly expenses.
  • A major expense (e.g. marriage, children, health problem, car troubles, etc.) are a big setback and may push you back to being financially dependent again.

Financially Secure

  • Still trade your time for money.
  • Income more than covers monthly expenses.
  • You have a financial cushion (6-12 months of savings) that can help you survive a major expense without falling back to being financially dependent.
  • Can begin to acquire assets (e.g. stocks, rental houses) that can work for you.

Financially Free

  • You are financially secure and your assets are working hard for you.
  • Your lifestyle is supported by income from your assets.
  • Working (trading your time for money) is a choice, no longer a necessity

Budgeting for financial freedom:

Budget to live off of 50% of your (pre-tax) income:

  • 20% taxes (you have no choice on this part)
  • 10% tithe (giving to church or supporting a charity)
  • 10% to pay down debt
  • 10% for investment
  • 50% for living expenses

[Once you’ve paid off all debt, add that 10% to investments instead.]

This may seem impossible at first glance, but with a little effort and commitment to sticking to a budget you can make it work. Do what you can to begin with, then try to reduce your living expenses little-by-little to be within that 50% of your pre-tax income.

For example, $15/hr x 80 hours per pay period = $1,200

  • Taxes withheld automatically (around $180-240)
  • Tithe: $120
  • Pay down debt: $120
  • Save for investment: $120

When you get a pay increase, resist the temptation to go out and spend more with each paycheck. Instead continue living within the same budget you already had in place but put the extra towards tithe, paying down debt and investment savings.

How to improve your credit score:

  1. Sign up for Credit Karma (http://www.creditkarma.com)
    • It’s free and does not impact your credit score.
    • It will give you credit scores from TransUnion and Equifax.
    • Make a mental note of your starting score. Your goal is to increase this gradually over time.
    • Log back into Credit Karma at least once a month to see how you are doing. (This will also help motivate you to keep going because you will immediately begin to see improvements in your score.)
    • Make a commitment to yourself – or your spouse – to make the minimum payment on all credit cards initially. You should be able to pay more later.
    • You are also able to get a free copy of your credit report from Credit Karma.
    • Identify and classify any delinquent accounts, as follows:
      1. Medical debts (sort from smallest to largest)
      2. Credit cards.
      3. Small balance delinquencies (e.g. less than 10% of your income; e.g. $120)
      4. Larger debts (more than 10% of your income; e.g. more than $120)
  2. For each of the small balance (non-medical) delinquencies listed in Credit Karma:
    1. Tell them that you’re trying to clean up your credit (don’t be ashamed, they will be pleased to hear that).
    2. Ask them how to make payments.
    • Your credit report should have contact information for each creditor. Call them:
    • Pay off each one per paycheck (using the 10% set aside for this).
    • If you can manage to pay off two smaller ones in a month, then do it.
  3. Re-check credit report via Credit Karma.
    • It may take up to one month for the small delinquencies that you pay off to show up as paid in full. The accounts will still be listed but if they show as paid in full then that is a good thing.
    • Repeat step 2 until you have no remaining small balance delinquencies.
  4. For each of the larger balance (non-medical) delinquencies:
    1. Tell them that you’re trying to clean up your credit (again, don’t be ashamed, they will be pleased to hear that).
    2. Ask them what is the smallest amount that you need to repay in order to clear the debt. Ask them if there are any finance charges/fees included in the balance that they may be able to waive? Note that they may only be able to waive finance charges from the last 30, 60 or 90 days depending on that company’s policies. If they cannot offer any reduction in what you owe, don’t push it. They don’t have to do this, but you won’t know if you don’t ask.
    3. Ask them if you can set up a payment plan and what your options are for making payments. Use the 10% of your paycheck already set aside for this to make these payments. The hardest part of this is having the discipline to stick to the payment plan. But you can do it since you should already have budgeted to set aside 10% of each paycheck for paying down debt.
    • Start with the smallest delinquency first and aim to pay that off completely.
    • As with the smaller delinquencies, your credit report should have contact information for each creditor. Call them:
    • Once you’ve paid off the smallest one of these, go onto the next.
  5. Re-check credit report via Credit Karma.
    • It may take up to a month for the delinquencies that you pay off to show up as paid in full. The accounts will still be listed but if they show as paid in full then that is a good thing.
    • Repeat step 4 until you have no remaining larger balance delinquencies.
  6. If you have any small balance medical delinquencies, pay those off next. This will further improve your credit and credit score. You can leave the larger medical payment until last.
  7. Next tackle the credit cards.
    1. DO NOT close down the credit cards you pay off with this balance transfer. Doing so could harm your credit score. It’s better to keep them open, even if you shred the card associated with the account to stop you using it.
    2. It’s easier to manage one card (with a low interest rate) with a higher balance than multiple cards all with different balances.
    • If you have multiple cards then call each credit card company (for which you already have an account) and tell them that you are trying to get your credit in order.
    • Ask them about any special promotions that currently have for balance transfers. You’re trying to find the one that will offer you the lowest interest rate.
    • Transfer all balances to the card(s) with the lowest interest rate.
    • After transferring balances, aggressively pay down the card with the highest interest rate. Your goal now should be to pay that off completely.
  8. Once you’ve done steps 2-7 your credit score should have increased significantly. Now you need to tackle the medical debt.
    • Again, start with the smaller balances and pay them off.
    • Then work up to the larger balances.
    • The more accounts that you pay off in full the better your credit score will be. [Don’t confuse having an account “written off” by the lender as being the same as paid off by you. They are not. In order to improve your credit score you must pay them off yourself.]
  9. At this point you should have paid off all of your debts listed on Credit Karma and your credit score should be heading up to the 650-700+ range. If may take a month or so for the updates to get reflected on Credit Karma. If any stick around longer than that call the creditor and make sure that they updated your account correctly (and not someone else’s – this seems to be a common problem with medical debt.)

Congratulations on improving your credit score!

Now what?

  • Try to limit applications for new credit to 1-2 per year and no more. Be aware that any time a company asks you for your SSN on a standard form, they are probably going to run a check on your credit – this is called a “hard inquiry”. Too many of these count against you. For example, getting a new cell phone, any sort of loan/credit (e.g. car, house, credit card, gas card, store credit card, signing a rental application, etc.) all result in another a hard inquiry on your credit.
  • Only charge something to your credit card(s) if you already have the money available (not including your investment savings) to pay it off in full at the end of the month. If you cannot guarantee this then don’t charge it. You could end up slipping back into debt.
  • Take the 10% of your income (for example, $120/paycheck) that you were using to pay down debt and add it to the 10% you are saving for investing. You should now be able to build up the amount you have to invest more quickly.