Getting Back Into the Black

I recently ran into a very important issue that I should have seen coming. When my bankruptcy was discharged in November I assumed that my lawyer had filed a re-affirmation agreement with the bankruptcy court to keep 2 of my credit accounts active. One was for my truck, currently our only means of transportation and the other for a Kay’s Jewelry card that we had applied for about 2 months before we decided to file. I went through my paperwork for the bankruptcy and I found the notice I had seen before about how I would continue to pay on them and keep the collateral for the credit. Not knowing any better, I thought that was the re-affirmation agreement. I found out I was very very wrong. As long as I pay the bills I can keep the items (truck and a watch) but they could no longer report to my credit report. I was livid to say the least.

I contacted American Honda Finance (the loan holder for my vehicle) and asked if the agreement could still be filed and told that normally, after 2 months have past its not possible to amend the bankruptcy. I also did not want to run the risk of re-opening it in-case the IRS decided to make a move on my newly established savings accounts.

My only remaining option of course was to refinance so that I could once again get the credit reported to start rebuilding my FICO score. I went to LendingTree to submit my application to several companies at once and I was very pleased that after submitting my info, even with my horrible FICO and the bankruptcy and a tax lien that I got an offer to refinance from HSBC and RoadLoans.com. The interest rate was only about 2% over what I was previously paying (my last rate was high because of some late payments when I was laid off in 2003) which I was actually surprised about.

Refinancing is going to cost about $400 more in the long term, but the benefit is that for the next 2 years while I’m paying on my truck, it will be reported and help my FICO begin the long climb back to having good credit.

One last note, my current loan was originally for a 7 year loan that was set to be payed off in October of 2011. With the extra payments that I’ve been squeezing in when I can, I’ve managed to move that date up to April of 2011 so far. I had planned on paying off the balance by Feb. 2010 and with the refinancing it will actually move that up to March 2010. There is a great calculator at YoungMoney.com that you can use to determine how much interest you can save and how much shorter your loan will be by making extra payments. Once the truck is payed off, I’ll be 100% debt free and every extra dime we have will go towards saving money for our first home down payment.

   The FICO score is the most commonly used credit score that lenders use to determine what kind of rates and credit you qualify for.  FICO scores range from 300 to 850.   Do you know what your FICO score is and what it means to you?   Knowing your score and working to improve it, can mean the difference between paying $1,678 for a $300,000, 30 year fixed rate mortgage or paying $2,680 a month.   I can think of a lot better things to do with $1,002 dollars a month than to give it to a lender to make up for my poor credit decisions.  

   Understanding your score   Here’s a quick rundown down of the scores.

Over 750 is excellent

720 to 750 is very good

660 to 720 is acceptable

620 to 660 is uncertain

620 and under is risky

Understanding how FICO is scored will let you know what you need to do to improve your score.  The biggest factor is payment history, it makes up 35% of your score.  Payment information on credit cards, installment loans, retail accounts, mortgages, etc.   Bankruptcies, tax liens, collections, judgements, late payments, etc make a huge impact on this part of your score.   They also look at how many late payments you have on file, how long they were late and time since they were reported.   The next most important category is the amount you currently owe creditors.  This makes up 30% of your score.   They look at the ratio between  the amount you owe and the amount you have available to you.  The higher this ratio, the better, meaning it’s best to carry low balances.  The length of your credit history counts for 15% of your score. They’re looking at time since accounts were opened and time since activity on the accounts.  New credit and types of credit used each make up 10% of your score. 

   How to optimize your FICO score

The most important thing you can do, is to pay your bills on time.  If you have missed payments, you need to get caught up and start paying them on time.  The longer you pay them on time, the better your score will be.  Paying off a collection will not remove it from your credit report.  It will still stay on your credit report for seven years.   Keep the balances on your credit cards low.  It’s better to pay down your debt on all of your cards then to move it to one card. Owing the same amount but having it on fewer  open accounts can lower your score.  Don’t open up a bunch of accounts that you don’t need, many experts say you only need a few credit cards to have a great score.  If you haven’t had your credit card or loan for very long, don’t open a lot of accounts at the same time.  New accounts bring down the average on your credit history length and can look risky if sign up for too many.  

   Why the Fico score is important to us

  One of the biggest goals my husband and I have is to buy a house.   We want to make sure we do it the right way.   Rebuilding my husband’s credit and establishing my credit has become an important process.   Due to our credit mistakes and my husband’s bankruptcy, we are estimating that will take two years to get our credit where it should be.   There are no easy fixes.   It takes a very short time to damage your credit and a fairly long time to rebuild it.    We could get a mortgage in a few months but we’d be paying so much more that it would be a dumb, illogical choice.  So, instead we will continue to put money into our savings accounts to use as a substantial down payment when our credit will get us a good rate.    Be informed, don’t pay more than you have to.   Get your score and more information at www.myfico.com.  You may have heard something about a new credit scoring system.  It’s called VantageScore, but at the time of this article, FICO is still the most widely used.  

My wife and I were going to the farmers market the other day to pick up our weekly supply of fruits and vegetables. We prefer to utilize the farmer’s market for these items since we know the items are grown locally and usually taste better than the store bought equivalent. Along with the fact that its usually cheaper, it is just a trifecta of benefits.
Getting back on topic, the only downside to the farmers market is that its a cash only interaction. As we pulled up to the parking I realized I did not have any cash on hand. I set about trying to find an ATM. Normally, anytime I need to get cash out I will either take out extra cash during a grocery store purchase or stop at the ATM at my bank. I ended up going to a small corner market to use their ATM. $1.75 ATM fee later and I had my $20 to spend on fruits and veggies.

Ever since we’ve started living under our budget I’ve really started watching every penny that goes in and comes out of our accounts. I was shocked after a few days when I see a $2.00 charge pop into my online banking application as an ATM fee for using an out-of-network ATM. $3.75 in charges for withdrawing $20 of my own money.

That is an 18.75% charge for withdrawing my money.

I know a lot of people that withdraw money from the ATM regularly, and if they are not using their own bank’s ATM those charges can add up quick. Talking with a friend and showing this to him he realized he was spending $20 a month on ATM fee’s alone. That is $244 a year he’s paying to access money that is already his. I don’t know about you, but I can think of a lot better things to do with $244 a year than pay fee’s to access my own money.

A few ways to save yourself from those fee’s:

1. Always use your bank’s ATM or in-network ATM’s. You can usually check your bank’s website to find out where their ATM’s are located.
2. Use your ATM card to make a purchase at a store and then withdraw extra cash at the time of paying.
3. If its possible, write a check!
4. Plan out your cash expenses every week. Take out enough cash on the weekend to cover any expenses you may encounter where paying with a card is not an option during the week.

   Let’s face it, everywhere you turn, someone is offering money advice.   Since my husband and I have straightened out our finances and gotten serious about saving we’ve read and watched countless people giving advice.  It can be a little overwhelming and a lot confusing.  Here’s a few things we’ve learned while wading through the swamp of financial advice.

   What works for someone else, might not work for you.  I was recently reading about a twenty-something who started investing  5 years ago with 1000 in mutual funds and now it’s grown to over six figures.  That sounds fantastic, doesn’t it?   During those 5 years, this person invested 65% of their salary and they were living rent-free with their parents.   Obviously, that’s an outstanding way to get huge results if you don’t have any bills to pay, but it’s not very practical for most of the people we know.  I have to admit, I chuckled a little when I read that this person has stopped contributing for the time being, now that they have rent and other bills to pay.

   Percentages can be misleading.  This example is taken straight from the Suze Orman show last night.  She was talking about how percentages are talked about so often when it comes to investing but that most people really don’t know how they relate to their money.   She gave two examples and asked which one would make the most money with 10,000 dollars to start with.  Example 1- You are guaranteed to make a 80% profit the first year. The second year, however, you are guaranteed to lose 50%.  Example 2- You put the money into money market savings account, and are guaranteed to make 5% profit both years.   Most people asked, choose option 1, which is the worst choice.  Upon first glace, it looks like you would still be ahead by 30% but here’s how it breaks down.  The first year you would have 18,000 but then the second year when you lose half, it would knock you down to 9000.  That’s an overall loss of 1000 dollars.  The second option at the end of two years would add up to 11,025.  I’d rather make 1,025 than lose 1000!

   Research all of your money decisions.  By now, we all should know that impulse spending is bad, the same is true of taking someone’s advice without investigating further.   It’s not just that it makes you vulnerable to scams, but it might not be good advice for you.   There’s been a lot of conflicting information and advice given about much talked about tax rebates to come.  One blog at a major website that I’m not going to name has written several articles about what you should do with your money and the advice has changed significantly from one article to the next.   I’m guessing there would have been less confusion if the author had waited to get more information about the subject.  

   Make sure your information is current.   Just like we’ve seen in the stock market, things can change quickly in the financial world.  And new laws can have negative effects, like the “kiddie tax” on Uniform Gifts to Minors Act.   The “kiddie tax” was put in place to prevent high income families from giving  unearned income to their children as a way to lower their taxes.   Unfortunately, these changes now make this a bad choice for college funds. 

   If it sounds too good to be true, it probably is   This bit of advice never goes out of style.  If get rich quick schemes worked, we’d all be wealthy by now.  Most people know enough not to be fooled by the Nigerian email scams but bad advice isn’t always that easy to spot.   Hence, the subprime mortgage crisis, a lot of people and financial institutions who should have known better ignored the warning signs.

   Brokers and financial planners are not your friend.  This is not to say that they are all bad, but they aren’t to be trusted blindly either.   There are always stories of people who have lost their life savings because of taking bad advice from so-called experts.  And according to Smartmoney.com  and talked about at Freemoneyfinance.com, many brokers give bad advice.  

The first step for my family to get our spending under control and to start saving money was to determine where our income was being spent. It took about 2 hours total to get all of this information and then get it down into an easy to read format.

1. Calculate your income after taxes, this includes any paychecks you receive along with any other sources of income.
2. Make a list of all of your expenses. Anything you spend money on monthly needs to go on here. examples: rent/mortgage, gasoline, insurance, online services, groceries, dining out, etc.
3. Take all of the expenses you have written down and divide them into two categories. Discretionary (you dont HAVE to spend this money but you do) and Non-Discretionary (money that has to be spent: groceries, rent, gasoline, etc)
4. Add up your monthly expenses and subtract that total from your monthly income. If you end up with a positive number then you are already on the right track. If you have a negative number, you are spending more every month than you make and are forcing yourself further and further into debt.
5. Make adjustments to your spending to increase the surplus you have after all your bills are paid. This may include not stopping for a latte every morning or reducing the amount of channels on your cable bill to get a lower bill, or even something as simple as taking food to work for lunch instead of dining out every day.
6. Lastly, you want to make sure you review your budget every month. Keep track of your expenses for a month either through your bank’s online services, a notebook, or whatever system works for you. After a month of living on your budget, compare your actual expenses to projected expenses and see what area’s need more work.

Once you have yourself trained to live within the budget you have created you can start planning how you are going to save your surplus and what goals you want to set for yourself.

I have several financial goals I want to hit before the end of the year. 

 My #1 goal is to pay off at least half of my truck balance.  Its at a 10% interest rate and is not due to be payed off until 2011, if I can keep up with my aggressive payment schedule (an extra $2400 - $3600 this year) I can get it payed off by 3rd quarter of 2009.  It would save me about $800 and cut my loan term by almost two years.

My other goals are:

Emergency Fund: 4000
I’ve never had an emergency fund because I never knew I needed one until I set out to to take control of my finances.

New Baby Savings: 3400
My wife found out last month that she may be pregnant.  We’ll get the official word from the doctor next week.  In anticipation of that, I am putting the money directly into an ING savings account at the beginning of every month.

 Every other dime we have will be going into a savings account for our first home purchase some time in the next 3 years.  I need to start rebuilding my credit score before I can apply for a home loan, so I figured I may as well be ready once my score is where it needs to be.

Kiplinger.com has a great article that shows the three simple steps to starting down the path of financial security.

Three Simple Steps to Financial Security - Kiplinger.com

• Save for a rainy day - There are two ways to buy what you want in life: cash or charge. The very definition of financial security is being able to buy what you want on your own terms.
• Be prepared for an emergency - Even the best-laid financial plans can get derailed by an unexpected cost
• Invest for retirement - Your immediate and short-term needs are easy to focus on. However, it’s not so easy for young adults to take this third step seriously.

I’ve been living paycheck to paycheck for a long time now. Even when I had all the excess income, I couldnt find enough ways to spend it.

Ever since my bankruptcy discharge I’ve been spending a large amount of time on several personal finance blogs trying to get ideas on how to save money every month and eventually grow my net worth.

Our situation is similar to alot of other families in the country. You could sum us up pretty well by saying that we have no assets other than my 401k, my bank balance, and the value of my truck.

I use a great spreadsheet from Flexo at Consumerism Commentary (I’ve modified slightly for my needs) to keep track of my networth. I’ve got several that I use for different aspects of our financial tracking that I’ll be sharing over the next few days or weeks.