Financial Literacy Insights with Guardian Life
In preparation for April’s Financial Literacy Sessions on Retirement Planning and Investing Basics, here is a recap of the key financial concepts we have learned so far.
In March, NWNY hosted two Financial Literacy Sessions on Consumer Credit and on Budgeting & Cash Flow Management. During these sessions, Guardian Life financial service professionals provided individualized advice and US-specific financial knowledge. Equipped with these tools from our March sessions, we entered this April (Financial Literacy Month!) prepared and aware of the connectedness between our health and financial well-being.
In preparation for the next two Financial Literacy Sessions on Retirement Planning and Investing Basics happening next week, we wanted to highlight some of the key financial concepts and tips that participants have learned so far. Each session of this series serves as a building block for understanding how to best navigate the nuances of the US financial system. Understanding consumer credit’s role in how our financial responsibility is perceived and how to optimize our cash flow from month to month leads us on the path to planning for retirement and accessing investment opportunities.
In stark contrast to other countries, financial success in the US is dependent mainly on accruing debt! Indeed, debt is an essential component of US economic culture. As counterintuitive as it may seem for many of us, in the US we must take on debt and manage it. This way, we become visible in the eyes of financial institutions.
In our first session, Digna Figueroa unraveled consumer credit for us and explained why we are perceived as invisible without credit. A strong credit score provides access to significant savings on interest rates for big-ticket loans; better terms and availability for loan products and credit cards; insurance discounts; more housing options; and security deposit waivers on utilities. Therefore, it is necessary to start building credit.
In the beginning, building a credit score requires patience as it takes approximately six months. Credit score ranges vary from 300-570 (Poor), 580-669 (Fair), 670-739 (Good), 740-799 (Very Good) to 800-850 (Excellent). Any credit score between 740 and 850 (Very Good and Excellent) is considered strong.
Here are a few tips to get there:
- Never buy anything you cannot afford, any missed payment stays in your credit history for a long time.
- Be aware of your income and your expenses.
- Do not apply for too many credit cards as each application for a new card affects your credit score; two credit cards are more than enough, especially in the beginning.
- Use your credit card(s) regularly but make sure you do not use more than 30 percent of your card limit.
- Do not pay back the entire amount of your credit but most of it; do not pay it back immediately but at the end of each month (before the due date).
- Avoid overdraft and late fees.
- Always check your credit by periodically requesting a credit report and keeping an eye on your credit history. There are three credit reporting agencies in the US. These are Equifax, Experian, and TransUnion. You can get all three of your free annual credit reports and extensive information about them on the official site of AnnualCreditReport.com, which is the only one backed by federal law. In addition, Experian offers free access to FICO® Score.
On the other hand, the more the money you earn (assets) outweighs your debt (liabilities), the closer you are to financial stability and success. During the first two sessions, we learned that liabilities are “something that takes money out of my pocket.” Assets put “money in my pocket” instead. “Rule One. You must know the difference between an asset and a liability and buy assets,” Robert T. Kiyosaki wrote in Rich Dad, Poor Dad.
Terry Scipio suggested that we follow a simple but efficient formula when prioritizing cash flow:
- Understand your assets and monitor how they change throughout time. Expenses should be entirely based on them, and adjust if they change.
- Based on assets, set proper insurance protections in place.
- Commit to saving 20 percent of income annually. The long-term goal is to save the money we usually earn in 6 months-1 year every 3-5 years.
- After securing our savings, pay down short-term debts (e.g., credit cards, car payments).
- Allocate a portion of savings to retirement and/or education. The priority between these two allocations depends on personal preferences and circumstances.
- Pay down long-term debts (e.g., mortgages, student loans).
Once we start collecting credit, it is necessary that we know how we are going to pay it back. In this case, we can safely find a balance between borrowing and repaying and feel confident in preparing a financial plan to track our spending. “Before the session, I was afraid of getting into debt,” said a participant. “Now I am comfortable having a plan to spend and save.”
