The Real Deal With Credit Scores.

You’ve probably heard of credit scores. You know that banks use them to decide whether or not to give you a loan and what interest rate to charge. But what really is behind the credit score? What’s not in the credit score? Does it really matter? And should the bank even use it? These are the kinds of questions that I asked when I learned about the scores. I’ve been asked these questions a lot over the years as well. I’ve found a lot of inaccurate and downright wrong information on the internet. Well, here are the true answers.


What is a credit score?

Your credit score is an estimated value put on your credit history. The FICO score is the most well know. It goes from 300 to 850. The higher the score the better record you have of paying your bills and not charging up your debt. So if you don’t pay your bills then your score will go down. Banks use this score because it is an easy way to get a general idea of how well you manage your debt and other bills.


What is behind the credit score?

The formula varies a little bit between different companies. The formula for the FICO score consists of 5 basic categories: credit length, types of credit, credit inquiries, payment record and debt utilization.

Credit length

This is how long, in years, you’ve been using credit. This is why many people say to keep your oldest credit card forever. Really, as long as you have a solid record for 7 years you probably have a long enough record to get and maintain a high score. So don’t keep an account if you don’t like it or it costs too much money. This is also only of medium importance to the credit score.

Types of credit

This looks at the different types of credit that you have. It helps your score if you’ve had several different types of accounts like a mortgage, a credit card and a car payment. It shows that you can handle multiple accounts at once. This is one of the smallest factors in the score so don’t go out of your way to get different types of credit just to raise your score.

Credit inquiries

This is how many times banks have requested your credit record. Having a lot of requests can lower your score. However, banks know that when you’re shopping around for a loan that you may have several requests. Because of that, several within a month only count as one. The concern here is if you’re applying for a new credit card every month. That will hurt your score. Like types of credit, this has only a small effect on your score.

Payment Record

Your payment record has a very large effect on your credit score. This is how good you are at paying your credit bills on time. Every time you’re late your credit score will go down. The later you are the lower it will take your score. The formula looks at it in 30 day batches. So if you’re more than 30 days late it’ll lower it a bit, 60 a bit more, 90 or 120 days even more. The goal here is to always pay on time. This will have one of the biggest effects on your score. And this is where you can have the biggest impact when you want to raise your score.

Debt utilization

Debt utilization is the other big part of your credit score. Here’s how it works. Say you have a credit card with a $1000 credit limit. If you only owe the credit card company $100 then your credit score will be higher than if you owe the credit card company $900. Basically banks want to see that you have credit and don’t use it.


What’s not in the credit score?

You may notice that your credit score doesn’t include your income. It also doesn’t include your net worth. It doesn’t look at how much money you have. It only looks at how much you owe other people. This has led to some interesting situations. People in their prime earning years have found that their credit scores have gone down. This is because your credit score only looks at what you owe. Some people reach their fifties, are making more than they’ve ever made, have large savings accounts because they want to retire, but don’t owe any money. They have paid off their mortgages and their cars and don’t need credit cards much. This results in a low credit score since they won’t have a lot of recent loan payments. Less debt like this means a lower score.


Do credit scores really matter, and should banks even use them?

This is kind of a yes and no situation. Credit scores do matter. They give a good indication of how likely you are to pay your bills. Banks have found that if you haven’t paid your bills in the past then you aren’t likely to pay them in the future. They’ve learned this the hard way over and over. The subprime mortgage crisis is a recent example. The loans were called subprime because the people getting the mortgages had bad credit scores.

But the scores only tell half the story. You can have a bad credit score, but still not be a credit risk. People that pay all their bills, save up for their purchases instead of taking out loans and don’t use credit cards can still be good credit risks even though they’ll have lower scores. That is one word of warning. If you follow the advice on this website, advice like save up for your car instead of taking out a loan, pay your mortgage off early, don’t use a lot of credit cards and always pay off the full balance, you won’t maximize your credit score. But you will be able to buy anything you want.

Banks should look at more than just the score to determine whether or not to give you a loan. That’s why they look at your income. If you want to borrow a lot of money, like to buy a house, they’ll also look at your investments and savings.


The bottom line is that credit scores are not the end all be all that they may appear to be. They are just a gauge on how well a person has paid their debt bills on time in the past. That only tells half of the story since the other half is whether or not they have the money and income to pay their bills in the future. is good source for information on how the FICO score in particular and credit scores in general work.

How you actually make money in the stock market.

How you’re told it works

You always hear in the media about people playing the stock market. You hear about people making it big by buying and selling at the right time. You also hear about day trading where people are trying to make money on the price difference of a few cents during the day. But is this really how true wealth is made in the stock market? No. It’s not. Actually a big NO. Sometimes it works out, but more often than not this is how people lose a lot of money in the market. It’s also why people think the stock market is just one big casino.


How it really works

You make money in the stock market from 2 things: appreciation and dividends. You make money because the stock price goes up and because companies pay dividends to their shareholders. How is that different than what I said before? Well, it’s in how you pick your stocks and what you do with them once you have them. I don’t actually like that term. I should say, it’s how you choose your investments.


Even though you can make money in the stock market by buying a stock and selling it when it goes up, true wealth is made when you buy a strong company that grows. Strong companies make more money than they spend. Since they make more money than they spend they can send some of that back to the stock holders. That’s one way you make money. The second is that since they make more money than they spend they can spend money on growing the company. This means that their profits will grow over time, the company will be more valuable and the stock price will go up.


How do you make that work for you?

The short answer is to buy a strong company when the stock price is currently less than what the company is truly worth. Ideally you read the company’s financial statements to find a company that is solid. Then wait for the price to dip. Buy the stock and hold onto it forever. This can work well with companies like Johnson & Johnson, Coca-Cola, and Exxon. The companies prices go up and down all the time, but the companies keep making money. Check out my post on Hubpages called Shortcuts to Finding Great Companies to Invest In. In it I talk about a few strategies to help save time for finding companies to invest in.

In that article I have three basic steps.

Step 1 Buy blue chip stocks.

These are companies that have been making essential products for years. Generally decades and sometimes a century or more. I recommend using the dividend aristocrats as a starting place for a list of stocks that meet this step. Another good source is Dave Fish’s US Dividend Champions spreadsheet. It’s available at This is a list of all the US companies that have been raising their dividends for at least 25 years.

Step 2 Buy companies that are paying their owners.

Stick with companies that are paying a dividend. And not just any dividend. Stick with companies that are paying a dividend in the 3% or more range and that have been increasing their dividend for at least 25 years. I also recommend making sure that they have been increasing it every year by more than inflation.

Step 3 Buy it on sale.

Buy the stocks when they are valued less than they are typically priced or worth. One method is to buy when their PE ratio dips. I like to watch for stocks to dip below their historic median PE ratio. You could also use the Gordon discount model to buy when the price is less than the price the formula indicates. A third option is to buy when the market capitalization is less than the value of the company’s assets.


These types of strategies help people make true wealth in the market. While you can buy a stock and get lucky in that it’ll shoot up one day, if you follow these steps you can more reliably create true lasting wealth in the stock market. A good resource is Benjamin Grahams – The Intelligent Investor. I recommend anyone that wants to buy individual stocks read this book at least once. The book is about different strategies to value a company and find a company that has a stock price that is less than the value of what the company physically owns. The concepts extend beyond that though, and can be used to find companies that are selling at a discount.

Five Ways Retirement Accounts Fund Your Retirement, and How To Maximize Them.

There’s always this goal of having enough money to not have to work again. Some people call it retirement. Some call it financial independence. Some people just call it freedom. But how exactly does that saved up money actually fund your life?


The common misconception is that you have this pile of cash, and you just spend it as you go. Hopefully you won’t spend it all before you die. But that is a misconception. That would require a huge amount of cash sitting in a savings account to fund the rest of your life. Especially if you wanted to retire early, or if you wanted to leave some for your kids. That also means that it can’t last forever. True financial freedom should be able to last forever. Theoretically anyway.


So how does your retirement account actually fund your life style? And how can it last forever? Well, there are five basic ways that your retirement accounts fund your life.


Dividends and Income

What it is

Dividends and Income are my favorite way to fund retirement. This is when you own a business and you get paid a bit of the profits regularly as an owner. For example, some stocks will pay a regular dividend every quarter. Coca-Cola has been paying a regular dividend for over 50 years. If you own shares of Coca-Cola then every three months you’ll receive a check from them. If you own enough shares of Coca-Cola then you could live off of the dividend checks that you receive. You can also pass those shares on to your kids and so on.

How to maximize it

The most common way to maximize this is to buy stocks in solid companies that are paying a higher dividend. REITs tend to pay higher dividends and sometimes utility companies do as well. Don’t be too swayed by really high dividends though since they can indicate that the company may be having problems. Do your due diligence and investigate the company.

A less common, but potentially more profitable way to do this is to start your own company and hire others to run it for you. Or buy into an existing one. This can give you a share of the profits without having to do the work. This can require a larger initial investment in money or time, but it can pay off well.



What it is

Most people, even without investment accounts, make a little money this way. This is the money you get from having a savings account or a CD. This usually isn’t a lot of money, but with a savings account the principal is safe. You can also make interest money by making loans with companies like Lending Club, carrying mortgage notes, or holding tax liens.

How to maximize it

For retirement account purposes it is usually good to hold some money in a safe place for those years when the market goes down. A savings account or CDs are safe even though they don’t provide a lot of return. You can increase the return by using online savings accounts and watching for special deals. If you’re willing to take on a little more risk you can lend money using peer to peer lending, lend money independently, or buy notes issued by companies. These have the potential to make more money, but your principal money isn’t guaranteed.


Capital Appreciation

What it is

This is when stock that you buy goes up in value and you use the extra money to pay your bills. For example, you buy $5000 in stock, it goes up to $6000, and you sell $1000 worth to pay for living expenses. This same concept can work for real estate, stocks, and many other investments. It works best though for investments that you can sell any part of, like mutual funds. When it comes to things like real estate and stocks you generally can sell only whole parts at a time instead of just the appreciated value.

How to maximize it

To maximize this you need to maximize your capital appreciation. That means investments that are going up faster. This can be small, new companies, hot companies at the time, or starting something from scratch. Do balance this with risk though. The more potential to go up usually means the riskier it is. That’s why mutual funds can be a great way to grow and fund your retirement. It provides protection because your money is spread out between a lot of companies. You can also sell parts instead of individual shares of stock so it is easier to continue to grow. You won’t have to worry about selling your last share as much.



What it is

Annuities are where you pay an insurance company a large block of money and then they pay you a set amount for the rest of your life. A pension is similar except that it is usually funded by an employer over the course of your employment. A pension used to be an important way that people funded a retirement after working for 40 years. Ideally you’d work at a company for your career and then you’d get a pension from the company when you retired. Today there are very few companies that still pay a guaranteed pension. The federal government still does. As do several local governments. Only a handful of large companies still have the option for new employees. Most have transitioned to 401k type investments.

Social Security falls into this category as well. You pay into it over the course of your working life. When you reach retirement age the government pays you for the rest of your life. In this case it is based on how long you worked, the age you retire and the amount you put in.

How to maximize it

If your employer doesn’t have a pension option then your options are to either switch to an employer that does, make more money so that you pay more in Social Security taxes, or save money to buy an annuity. Your best options to maximize it though are to double dip. By that I mean pay into Social Security and get an employer that pays a pension. That way you can collect both. You can also save money to buy an annuity as well. Just make sure the employer is large enough that they will be around when you retire. If you buy an annuity make sure that you buy with a company that will likely be around for a long time.

There isn’t much protection for either of these if the supporting organization goes out of business. Annuities typically pay in the 2% range so you may be better off with dividends or other investments.



What it is

This is the money I talked about at first. This is the actual money that you put into your retirement account. I don’t recommend using this if possible. This is usually the money that is working to make you more money. However, this is your money. And you won’t have any use for it when you die.

How to maximize it

Since this is the money that you put into your savings and retirement accounts you can maximize this by saving more. To do that you may need to make more. You can check out my post Way Too Many Ways to Make More Money for ideas.


These are the key ways that retirement accounts fund your life. Dividends and interest are usually the ones that can make you more money in the long run and help you create a legacy for your descendants. An annuity or a pension can provide you with lifetime income, however you are dependent on the company that controls them staying in business and well-funded. They can also be less stressful during market down turns.


How do you plan to use your retirement accounts to fund your retirement? Do you plan to use your money other ways?

The True Value of Social Security

The other day I posted a short article on HubPages called Can Social Security Turn A Meager Retirement Account Into A Million Dollar Portfolio. In it I talked about what Social Security is really worth when it comes to planning for your retirement. Below I talk a bit more about Social Security and using it in your retirement planning.


In its simplest form Social Security is money that the government sends you when you’re old to help you pay your bills. The Social Security Act that sets that up covers a number of social welfare and insurance programs, but for today we’re going to focus on the retirement benefits.


How Social Security works, in a nut shell

When you get paid by your employer some of that money is taken out for Social Security. It’s one of the many taxes. You end up paying 6.2% of your income to Social Security for all money you make up to $118,500. Your employer pays 6.2% of your income up to $118,500 to Social Security as well.


That money is used to pay the Social Security benefits of retirees and people on disabilities. Anything left over is saved in reserve by the Social Security Administration (SSA). When you reach retirement age the money current workers are paying will go to pay your benefits. That amount of that benefit is based on a formula set up by the SSA. It is based partially on how long you worked about how much you paid in.


The problem

For the most part this has worked fairly well. Unfortunately, now the SSA is paying out more than the taxes it’s bringing in. Estimates vary, but at the current rate the SSA will use up all of its reserves in the 2030s. That means that if nothing changes benefits will have to be reduced after that date.


It’s not all bad

Over the years policies have changed. It’s pretty much guaranteed that policies will change again to make sure that Social Security still exists in the future. So even if you have decades until retirement age you will most like still receive benefits.


So what’s it worth?

So then the question is what is it worth? Well, when you calculate how much money you need to have saved to retire you look at how much you need per year. Then you figure out how much you’ll need to have in your retirement account to make you that much every year. For this example we’ll follow the 4% rule. The 4% rule says that you can safely withdraw 4% of your retirement account the first year. And maintain that same amount each year adjusting for inflation. So let’s say you need $40,000 per year to live off of. To figure out how much we need to retire to have $40,000 we divide the 40,000 by 0.04 (4%). 40,000/0.04 = 1,000,000. So to safely withdraw $40,000 each year you will need to have $1,000,000 in your retirement account to retire.


So how does Social Security play into this? Well, once you reach retirement age Social Security pays you. According to the SSA the average Social Security payment last year was $1,335 per month. That comes out to $16,020 for the year. So that means that since Social Security will cover $16,020 of your $40,000 you won’t have to actually save the entire $1,000,000. Using the 4% rule how much is that $16,020 worth? 16,020/0.04 = 400,500. The average Social Security retirement benefit of $16,020 per year is the same as having $400,500 in your retirement account. That’s nearly half of the amount that you need to save. That also means that the average worker in America has a retirement nest egg worth about $400,000 thanks to Social Security.


So what do you really need to save?

That means that if you want to live off of $40,000 per year in retirement, and you count on Social Security, you really only need 1,000,000-400,500 = $599,500. Social Security could be half of your retirement account.


A truth to remember

I don’t want to stop you from working to reach your maximum goal. Social Security is pretty reliable, but the government can change the program at any time. That means the benefit could be reduced, either through legislation or because it doesn’t have the funding. But don’t discount it completely.


Do you plan to use Social Security? How do you account for it in your retirement planning?

Why Do They Get Paid More? Part II Person to Person

This is a question that comes up a lot. Sometimes it’s more in the form of “Why do they get paid more than me?” or “Why does one profession get paid more than another?” There are several answers to this question. There are several ways you can use this information to get paid more for the work you do. My last post talked about why one profession gets paid more than another. In this post I’ll talk about why one person might get paid more than another person. Even if they work at the same company doing the same job.


There can be several reasons why a person might get paid more than another person even if they appear to be doing equal work.


Different companies.

Different companies pay differently. This can mean that you’ll get paid differently than someone doing the exact same job with the exact same results and the exact same skill set at another job. This is one reason some people change jobs a lot. A common example is government employment vs the private sector. The government typically doesn’t pay as much for the same type of job as a private company would. But this same idea is seen between companies. If you see this as a problem then look around at other opportunities. Perhaps you can find a company paying what you want to be paid for the work you want to do.

Different pay structure.

Sometimes the dollar amount might be different, but so will the other benefits. For example, one person might be paid more per hour, but not have medical benefits. Once they purchase medical insurance they end up with the same amount of money. You don’t see as much of this within one company, but different companies have different policies. Upper level employees, like management, also have more room to negotiate benefits. Find a company that has the benefits that are important to you so that you can maximize your return for the work you do.

Not really the same work.

Many times it can appear that work is similar. But it may not be. For example, one employee may have to deal with more difficult people. Or their work load is more stressful. Or they may be working on other projects that are not always apparent. They may also have more responsibilities. If you want to increase your pay you can take on more work or different work. The simplest thing to do is to ask your boss what you need to do to get a raise. This could be more work, more responsibility or a different project.

Different skills and training.

This is not always obvious, but many times different pay is the result of different training. This is one of the most common reasons that two people and especially two jobs will pay differently. One example where this isn’t always easy to see is in fields that don’t require advanced degrees. You only need a bachelor’s degree to be a school teacher. However, schools prefer their teachers to have a master’s degree and will pay people with a master’s degree more. Everyone would benefit by have more school and more training. Employers want their employees to be highly trained and highly educated. Employers are willing to pay employees more when they have more training. You can increase the amount of money you make by increasing your skills. Get more training. Employers value this so much that many times they’ll even pay for the advanced training. Talk to your boss to see if this is an option.

The hiring process.

Sometimes the pay discrepancy is in the hiring process. Perhaps when one person was hired the company had a different pay structure. Or maybe the company needed someone more at that time, so they were willing to pay more. It could also be that there weren’t very many candidates available so they may have needed to pay more to get a good one than at other times. One candidate may have negotiated better as well. If you want to maximize your pay search for jobs when your skillset is needed, but not readily available. When you receive an offer, negotiate with your potential employer.


Sometimes it just comes down to performance. Many times one employee outperforms another employee. Employers hire people to perform a job. Employers are willing to pay someone more if they do the job better. This could be anything from showing up on time and willing to stay late if needed to bringing in more sales or creating more product. If you want to increase the amount of money you make, outperform. Do your job better than anyone else.


Knowing these reason will help you use them to your advantage. You can gain a new skill set and show your new employer that that skill set is valuable. That will help you maximize your pay.


Are these things you’ve considered when trying to raise your pay? How has it worked? What are some other things that affect pay?

Why Do They Get Paid More? Part I Profession to Profession

This is a question that comes up a lot. Sometimes it’s more in the form of “Why do they get paid more than me?” or “Why does one profession get paid more than another?” There are several answers to this question. There are several ways you can use this information to get paid more for the work you do. This post will talk about why one profession gets paid more than another. A later post will talk about why two people in similar jobs or at the same company might get paid different amounts.


Let’s start with why one profession gets paid more than another. Consider teachers. They are vitally important, but they are not paid very well in this country. Why do they get paid so little? The short answer is supply and demand. According to the National Center for Education Statistics there are about 3.5 million teaching jobs in the US. According to the Bureau of labor statistics teaching jobs are expected to grow about 6%. Now back to the National Center for Education Statistics. There are more than 250,000 education degrees being awarded each year. That means that there are more teachers coming out of school each year than there are new teachers. This actually includes people leaving the profession and teacher turnover. Since there are more people than there are jobs, employers don’t have to pay as much to get someone that is qualified. Since the demand for new teachers is low, but the supply is high there are people willing to work for less money just to get the job. That drives down the pay.


The other side is areas where it is hard to find someone that is willing and able to do the job. For example, chemical engineering at the height of the last oil boom. A chemical engineering degree is difficult, and time consuming to get. There are not many people who have one. During the oil boom a lot of companies needed chemical engineers and there were not very many people coming out of school with that degree. This meant that if a company wanted to hire someone they had to offer more money than the next company. This drive up pay for the industry.


Supply and demand drives a lot of the reason that different jobs pay more than others. Jobs that are easy to do or require little responsibility do not pay much because it is easy to find someone that can do it. It is easy to find someone willing and able to flip burgers. It is easy to find someone that can sweep floors. It’s not as easy to find someone that can be a manager. It’s much more difficult to find some that has a specialized skill set like chemical engineering. This also applies to jobs that everyone wants or no one wants. It’s easy to find people that want to be congressional interns, and those are unpaid jobs. It’s tough to find people willing to clean up crime scenes, so those jobs pay well.


So what can you do about it? The simple answer, pick a profession that pays well and that there are not enough people doing. Sometimes this can be easier said than done. But just because you don’t have a knack for chemical engineering doesn’t mean that you can’t get paid the same. Look at your skill set and find jobs that match that. Look for the higher paying jobs. Or if there is a job that you want, gain the skills to do it. For the highest paying jobs this usually means a college degree, but it doesn’t have to. It might mean doing a different training program. Or it might mean following someone that currently does what you want to do to learn the job. The key point is to gain a skill that employers are willing to pay for. A skill that not everyone has. Don’t chase the money, though. Make sure the path you choose matches your interests or you might end up in a job that you regret. The other option is to be willing to do a job that others don’t want to do.


How do you see this in your own career?

The Power of Index Funds.

The other day I talked a little bit about investing in my Intro to Investing post. In that post I talked a little bit about what investing in the stock market is and some basic things you should know before you start. One of the things that I mentioned was index funds. These are a great way to get started in investing. They offer a great way to protect your money and still see growth in the long term. Today I’ll go over what they are and how to use them as well as why you would want to.


Mutual Funds

First, index funds are a special type of mutual fund. A mutual fund is an investment that just combines the money from a lot of investors, then uses that money to buy a bunch of different investments. Mutual funds usually have a theme. For example, there are mutual funds that invest in tech stocks. Those funds collect all the money from people that want to buy in. Then they use that money to buy stocks in companies like Google, Facebook, Apple, and other technology companies. There are also mutual funds that invest in healthcare companies, banks, utilities and just about any other type of investment you can think of.

Mutual funds are run by professional money managers. They evaluate the different investment options and buy and sell to meet the fund’s goals. Typically this means that the fund managers evaluate the profitability of different companies in the fund’s theme to find the best way to allocate the fund’s money to both maximize the potential profit and minimize the risks.


Mutual funds have several advantages. The two greatest are security and expertise. Mutual funds typically invest in a large number of companies at once. In many cases hundreds or thousands of companies. This is very difficult to do when you are just starting out and don’t have millions of dollars to invest. This type of diversification can protect you in the case where one company goes out of business. If you can only buy three stocks if one company goes out of business then you could lose a third of your money. However, if you have a mutual fund that owns stock in hundreds of companies then the loss of one company won’t be noticed as much since the growth of the others will typically offset the loss. The mutual fund managers are typically experts in their field. They know a lot about the industry that they are investing in. They also know a lot about the companies they are investing in. They stay current on industry trends and read the financial reports published by the companies. This makes them uniquely qualified to pick appropriate investments in their industry. This can help because they will have a better understanding of how a company is making their money as well as the future prospects that company has. This means that they can more wisely pick how they will invest the mutual fund’s money.


There are a few disadvantages to mutual funds. They can offer a false sense diversification, and they can grow less than other investments. While mutual funds invest in a lot of different companies and offer security against one company failing, mutual funds don’t offer protection against the group failing. For example, if you owned a mutual fund invested in oil stocks and the gas price drops then the price of the mutual fund will drop as well. So the fund protects you from the failure of one company, but not the drop in an entire sector. You can protect yourself from this by investing in more than one type of mutual fund. And it may be a good idea to sell the fund entirely if an industry is going away. The other major disadvantage is that they may grow slower. This is because not only do all the high performing companies make up for the low performing companies, but the low performing companies do drag down the high performing ones. So, by investing in a mutual fund you will have a lower return than if you invested completely in the high performing companies. The problem with this is that it is nearly impossible to predict who the high performing companies are 100% of the time. It’s also impossible to know when to sell and move on to the next company. Most people will accept slightly lower returns for the protection of diversification.

Index Funds

Index funds are a special kind of mutual fund. Like mutual funds they invest in a lot of different companies. The thing with index funds is that they tie themselves to a particular index. For example, there are S&P 500 index funds. These funds simply buy each of the companies in the S&P 500 using the same weighted average that the index uses. This means that the fund will go up and down pretty much matching the index. And since the S&P 500 has historically gone up and average of 9-10% a year, your investments will too.


There are several advantages to using index funds. In addition to the advantages of using mutual funds the biggest advantage of using an index fund is cost savings. Since index funds track an existing index the fund managers don’t need to do extensive research on companies, or spend as much time on managing the investments. They simply buy the stocks based on the index. Since most of the time-consuming work is done for them the fees for index funds are typically very low. The reduced fees result in greater profits. Most actively managed mutual funds have fees that are many times the amount of the index funds. The returns on index funds are also more reliable. Since many indexes have been around for a long time it is easy to see how the indexes have grown on average. This is a good indication of how the index fund will grow.


Index funds do have some disadvantages. The main disadvantage is that index funds track very large trends. This means that they rarely see big growth. So while growth will be more predictable than most other funds the growth won’t be as high as some funds. Index funds are also tied to what is in the index. Even if a fund manager knows that a company is doing poorly they can’t sell the stock as long as it remains in the index. For example, during the dot-com boom and bust the Nasdaq was heavily technology companies. So a Nasdaq index would have been heavily invested in technology stocks. As the bust happened any Nasdaq index fund would have held onto the stocks of those failing companies until they were removed from the index. An actively managed fund could have sold those stocks earlier.


When it comes down to it mutual funds in general and index funds in particular are great investments for first time investors. This is where I wish I had started years ago when I first started investing. Instead, I bought several random stocks I thought looked good. Most lost money. If I had invested in an index fund like the S&P 500 then it would have gone up and down over the years, but in the end would have grown 9-10% per year.


Index funds allow you to invest in a lot of companies which protects you from any one company failing. It also lets you see more predictable growth with your money. You don’t have to worry about trying to read a company’s financial statements. You don’t have to worry about picking the right company among the thousands of companies selling stocks. You just have to pick an index that historically grows. One example is the S&P 500. These are the 500 biggest companies in the US. Companies like Apple, Coca-Cola, and 3M. There are several index funds that track this index. Another is the Russel 2000. This index tracks small companies. They tend to have higher growth, but they are also more volatile. So you’ll see lots of dips and lots of spikes. For new investors and people who don’t want to spend their time studying financial reports this is definitely the way to go.


Do you invest in index funds? What do you think about it?

How to Deal With Bills You Can’t Pay.

A lot of what I’m talking about on this site only works if you have more money coming in than going out. That’s really the only way finances can work successfully. Like I talk about in my post The Three Money Rules and How to Follow Them, you can’t become financially secure unless your income is more than what you’re spending. So what do you do when all of your bills for the month add up to more than what you make? Well, first there are some things that you shouldn’t do, then there are some things that you should do depending on how bad your situation is, finally there are some things you should do to dig yourself out of that hole forever.


This post is for when you’ve already canceled cable and other things you don’t need. This post is for when you’re trying to keep the lights on and food on the table.


What you shouldn’t do.

  1. You shouldn’t take out a payday loan.

This is one of the worst things you can do. Payday loans have ridiculously high interest rates. They really aren’t designed to be paid off. They’re designed to keep you in a cycle of paying more and more until you can’t afford to pay. Not all companies that offer payday loans are unscrupulous like that, but there are many that are.

  1. You shouldn’t charge more on your credit cards.

This can be difficult, but adding more to your pile won’t help you pay your bills in the long run. It might be a short term solution, but usually by this point that option has passed.

  1. Don’t pull money from your retirement accounts.

Many times people will pull money from retirement accounts to pay for debt. This can hurt you more in the long run than the bad credit from not paying your bills. The money in your retirement account will continue to grow. Money in your retirement account is usually untouchable by creditors even in bankruptcy. Make this a last resort.


What you should do.

  1. Look at your expenses.

Most likely by this point you’ve already done this, but it doesn’t hurt to repeat it. Cut out anything that is extra. You don’t need cable. You don’t need a gym membership. You need food to eat and a roof over your head.

  1. Pay the essentials first.

Pay the most important things first. Shelter and food. Always make your rent or mortgage payment if possible and put food on your table. It is very difficult to find new housing if you are evicted. And if you don’t eat you won’t be healthy enough to make things better. Being sick can also increase your costs.

  1. Prioritize your bills.

Some bills are more important than others. Look at your bills and determine what is most important. Make sure those get paid first. Pay the rest as you can. Here are a few suggestions to help you prioritize your bills. Pay for your needs, then your secured loans, then your unsecured loans with any money left over. Pay for your home first. Make sure you have money for food. Then make sure you can pay for utilities like electricity and water. Then pay for any secured loan on something you can’t live without. Secured loans are loans where the bank owns the item until you pay it off. This might include your home or a car. After that, pay your unsecured loans. These are the things like credit card bills, student loans and personal loans. The things where the creditor can’t take anything away from you for not paying.


If some of them are particularly old. For example, if you have a credit card loan that you haven’t paid on in several years. That should be put at the bottom of the list. Unpaid credit loans that haven’t been paid in 7 years are required to be removed from your credit report.

  1. Contact your creditors.

Creditors are businesses. They want to make back the money they loaned you. If you call them ahead of time and tell them that you can’t make the payments, but are willing to pay them back they may work with you. Most banks have departments dedicated to working with people that are having trouble paying their bills. When you call them tell them that you can’t pay the bill and tell them what you can pay and ask them what they can do. They may be willing to change the interest rate, change the payment schedule, temporarily suspend payments, or many other things to help you out. The key is to start talking to them early.

  1. Determine what’s not worth paying.

If you truly can’t pay all of your bills you may have to pick what you can give up on. Make sure you pay for things you can’t live without; home, car, food, utilities. Most anything else may hurt your credit, but won’t hurt you. Unsecured loans, like credit card debt, are easily the first to go. If you don’t pay them it will hurt your credit, but they can’t take your things away.

  1. Consider bankruptcy.

Bankruptcy can be a scary thought, but it can also solve a lot of problems. Bankruptcy can allow you to renegotiate payment schedules, adjust interest rates and even delete some debt. It is also cheaper and easier to do than most people think. You will need to talk to an attorney, but it can help you reorganize or completely eliminate much of your debt. It all depends on your situation.


How to dig yourself out.

  1. Create a budget.

The first step in digging yourself out and getting on the road to financial security is to set up a budget. No matter what brought you to this point, whether it was a job loss, medical emergency or some other event you will need to set up a new budget for your current situation.


Look at how much money you’re making. Then list all of your expenses. Write down how much each one is per month. If they aren’t the same each month then estimate what you think it will be. I recommend estimating high just in case. I also recommend having a line item for “Other” to cover all those little things that just come up. And be sure to add a line item for “Savings”.

  1. Develop a plan.

When setting up your budget start developing a plan to pay your bills and put money into savings. The savings will help prevent this type of situation in the future because it will give you a cushion. Look at things like how long it will take to pay off the debt with what you pay each month. As part of your plan, adjust the numbers in your budget to find something that works.

  1. Bring in more money.

There are a lot of ways that you can bring in more money. If a job loss caused the problem with paying the bills then a new job may be the priority. Until then there are a number of other ways you can start to bring in more money. Either temporarily or as a permanent side gig. Things like a second job, side work, or even doing online surveys can help. See my list Way Too Many Ways to Make More Money for some ideas.


Not being able to pay all of your bills in a month can be very stressful. It can be easy to let it get the best of you. It’s important to try and take a step back and look at your situation. Find comfort in education and planning. If you develop a plan then you can get the important bills paid and have a way to deal with the things that won’t get paid. Good luck.


Anything I missed? What other things are important when you can’t pay all of your bills?

Five and a Half Accounts You Need and When You Need Them.

To be successful with money in this day and age you need to have some accounts. These accounts make it easier to buy things, get loans and even get a job. Exactly which account you need depends on where you are in your financial journey and what you want to accomplish.


First I would recommend that parents get their kids a savings account. It helps kids learn to save. It also helps keep money from burning a hole in their pocket since some of it will be sitting safely in a savings account they can’t access without their parents help.


A few things to keep in mind with these accounts. Don’t pay fees. Bank accounts don’t have to have fees. There will always be rules to get out of the fees. Ask about them before you open the account. Go to a different bank if you need to. All of these accounts can be opened without having to pay fees. You just may need to look around a little.


  1. A savings account.

I recommend everyone get a savings account. This is where all your extra money goes at first. Anything you don’t need day to day and month to month. This will make it harder to waste the money on little things throughout your day. Your bank will pay you a little bit of interest when you have money in your savings account. It’s better to collect interest than pay interest. You can also access the money easily, though most banks will limit the number of withdrawals each month to between 3 and 6. When you have a job, put a little bit in there every month. While you’re just starting your financial journey you should build this up to about $1000. That’s enough to cover a minor emergency if you have one. So it will give you some cushion.

  1. A Checking account.

Get one of these with your first paycheck. Having a checking account starts to build your record with the bank. It also gives you a safe place to store your money and services like check writing, ATMs, money transfers, and debit cards. Always track how much you have in your checking account. You can do it manually or use a service like Intuit’s Never pull out more money than you have in the account. This is called an overdraft. Banks charge high fees when you do that. It also makes it harder to get a loan if you have too many overdrafts.

  1. Certificate of Deposit.

Certificates of deposit or CDs are similar to savings accounts. You put money in and the bank pays you interest. CDs, though, are for a set time period. They pay a little bit more in interest than a savings account, but you generally can’t access the money during that time period without losing some of the interest. For example if you by a 1 year CD you might get 1% interest. If you don’t touch that money for the full year you will get the full interest. If you pull the money out early you may lose some of that interest in an early withdrawal fee. So the trade-off is higher interest, but less access to your money.

I recommend get a CD after you have you savings account fully funded and you have extra money that you want to save. Or if you want to save money for a purchase and want to make more in interest before buying.

  1. Credit Cards.

Credit cards are very powerful. They can be very dangerous if you don’t use them properly, but they can also make buying things cheaper. They also can build your credit. This means that if you use them responsibly they can make it easier to get a loan later. That loan may be cheaper if you show that you have a track record of paying you bills on time.

I recommend that you not get a credit card until you don’t need one. Your finances are under control and you don’t spend more than you make. Then use the credit card for expenses and pay it off every month. This way you can earn cash back points that will actually be valuable. Remember, cash back on a credit card isn’t valuable unless you pay the credit card off in full at the end of each month. Credit cards can also make purchase online easier and safer. Another benefit of credit cards is that they typically come with buyer protection.

The exception is true emergencies. Getting a card for emergencies can be wise, but only if you don’t use it for anything else. If you have a tendency to buy things you don’t need on a credit card that you can’t afford to pay off at the end of the month then you shouldn’t get a credit card. If you feel you need one for true emergencies, like breaking down in the middle of nowhere on vacation, then make sure you can’t use it when you don’t need it. For example, put it in a block of ice in the freezer until you’re going on that road trip.

  1. Brokerage Account.

This is a more advanced topic. A brokerage account will allow you to buy stocks and mutual funds. This can be a great way to store and gain wealth. It can also be a great way to lose everything. Before starting investing learn to research companies and investments.

I recommend opening a brokerage account when you have a fully funded emergency fund. Also, be ready and willing to read financial plans and prospectuses. You’ll want to understand what you’re investing in and how they will make you money before risking your own hard earned dollars.

And A Half. Savings Account 2.

I recommend having a second savings account. Work to get to one month’s worth of expenses saved up in the first one. So if you spend $2000 a month on housing, utilities, food, transportation, etc then save up until you have $2000 in your first savings account. Then open a second savings account. I recommend using an online bank for the second one. They usually pay higher interest and it’s a little harder to access the money. This second savings account will be your emergency fund. Put whatever helps you sleep at night here. Most financial experts recommend you have enough money to cover 3 to 6 months’ worth of expenses. Some recommend enough to cover a year or more. This is the money you’ll use if you lose your job and can’t find one for a few months. So make sure it has enough to cover however long you think it’ll take you to find another job if yours disappeared unexpectedly. Between my first savings account and my second one I like to have 6 months of expenses saved up. That way if I lost my job I would have 6 months to find a new one. Most likely I could find a new one within six months. As we saw during the 2008 recession sometimes it takes longer.

You may consider opening other savings accounts for different goals. Maybe a savings account just for vacation. Or one to pay for gifts. That way you can save up for these things instead of putting them on a credit card and paying interest.


Are there other accounts that you would consider key accounts? How do you see these accounts?

The Problem of Debt and How to Get Rid of It.

Americans are being crushed under debt. We borrow money to buy the things we need. More often than not though, we borrow money to buy the things we want. According to NerdWallet the average American household has over $15,000 in credit card debt. That doesn’t even include a car loan or a mortgage. And credit card debt isn’t cheap. The average interest rate on a credit card is 18%. It can go even higher.


Now, what does that actually mean? First, let’s look at how credit cards work. We have to go back to high school math for this. Say you buy a new TV for 500 dollars. You put it on a credit card with 20% interest. Most store credit cards have even higher interest. And, for this example say you have a minimum payment of $25 per month. That would be about typical. How much will that TV actually cost you, and how long will you have to pay for it?


Just to make sure we’re clear on words. Interest is what the bank charges you to buy that TV for you and let you pay them back over time. The longer you tie up their money the more they charge you. Principal is the amount you actually borrowed. So in this example it’s the $500. In most loans you pay the interest and a little bit of the principal each time you make a payment.


If there was no interest the math would be easy. You would divide the 500 by 25 and you would get 20 months. Now with interest it will take a little longer. Generally interest is calculated every month. The bank will usually divide your interest rate by 12, since there are twelve months in the year and that’s how much interest you pay that month on whatever is still owed. So, if you owe $500 and your interest rate is 20% per year then the bank will divide 20%/12 and charge you 1.67% interest that month. 1.67% of 500 is $8.33. So before you can even pay towards the 500 you have to pay that interest of $8.33. Typically the bank doesn’t charge interest the month you make the charge, though. So you generally don’t start paying interest if you pay for all the charges you made that month.


Here’s a little table showing the month, payment that month, the amount owed before the payment is made, the amount owed after the payment is made, the interest added, and the amount that will be due next month.


Month Payment Total Owed Before the Payment Total Owed After the payment Interest Added For The Month Total Owed Next Month
1 $25.00 $500.00 $475.00 $7.92 $482.92
2 $25.00 $482.92 $457.92 $7.63 $465.55
3 $25.00 $465.55 $440.55 $7.34 $447.89
4 $25.00 $447.89 $422.89 $7.05 $429.94
5 $25.00 $429.94 $404.94 $6.75 $411.69
6 $25.00 $411.69 $386.69 $6.44 $393.13
7 $25.00 $393.13 $368.13 $6.14 $374.27
8 $25.00 $374.27 $349.27 $5.82 $355.09
9 $25.00 $355.09 $330.09 $5.50 $335.59
10 $25.00 $335.59 $310.59 $5.18 $315.77
11 $25.00 $315.77 $290.77 $4.85 $295.61
12 $25.00 $295.61 $270.61 $4.51 $275.12
13 $25.00 $275.12 $250.12 $4.17 $254.29
14 $25.00 $254.29 $229.29 $3.82 $233.11
15 $25.00 $233.11 $208.11 $3.47 $211.58
16 $25.00 $211.58 $186.58 $3.11 $189.69
17 $25.00 $189.69 $164.69 $2.74 $167.44
18 $25.00 $167.44 $142.44 $2.37 $144.81
19 $25.00 $144.81 $119.81 $2.00 $121.81
20 $25.00 $121.81 $96.81 $1.61 $98.42
21 $25.00 $98.42 $73.42 $1.22 $74.65
22 $25.00 $74.65 $49.65 $0.83 $50.47
23 $25.00 $50.47 $25.47 $0.42 $25.90
24 $25.00 $25.90 $0.90 $0.01 $0.91
25 $0.91 $0.91 $0.00 $0.00 $0.00


So by having the loan you end up paying more. You pay a total of $100 in interest. Your $500 TV ends up costing you a little over $600. That’s 20% more. The loan also ties up $25 of your money every month for 24 months. Even on months that you have something more important to pay for.


So, next time you want to buy something with a credit card think about how long it will take to pay it off, and the extra interest you will pay. Is it worth the extra money in interest?


So what can you do about it? Ideally plan ahead. If you know you are going to buy a $500 TV put $25 a month in a savings account every month. Then when the account reaches $500 you can buy the TV. This way you get it for cheaper. You can also skip a month when you’re tight on money, or if something else comes up. You can’t skip a month with the credit card.


But what do you do with the debt you already have? There are several strategies that you can use to get rid of it. The first step to each of them is don’t add anymore debt to the card. You can see more details in my post Strategies to Pay Off Debt. Below is a summary of what you can do.


Step 1. Don’t add any more debt to the card.

This is probably the most important step. If you stop adding to the debt you can pay it off. If you continue to add to it you may never pay the debt off. You will simply pay the bank more and more interest making the bank owners richer and yourself poorer.

Step 2. Always pay at least the minimum payment.

The minimum payment usually covers the interest and a little bit of the principal. It’s also the least amount that you can pay and keep the bank from getting upset. Paying this amount each month will keep your account current. Many credit cards will raise your interest rate if you don’t pay this. So missing it may cost you even more money.

Step 3. Pick one card and put your extra money to it.

This is how you start to get rid of the debt. Pick one card. This could be the card with the highest interest rate, or the card with the highest balance, or the card with the lowest balance, or even the card with the company you like the least. However you decide to do it, pick one card to pay off first. Put all your extra money to it and pay the minimum balance on your other cards. As soon as this card is paid off switch to the next card and do the same thing.

Step 4. Don’t add any more debt to the card.

Once a card is paid off don’t add more debt to it. That would only continue the debt cycle. Instead think of all the extra money you’ll have left over once you pay off the cards.


That’s the four, really only three steps to getting rid of the credit card debt. The hardest part is the discipline to stop using the cards and to pay extra each month. If it’s truly important to you to have a strong financial future then you can do it.


What strategies do you use to pay off your credit cards? Any strategies to keep yourself from using your cards?