Like it or not, you are being judged. You might not even be aware of their existence, but there are three major credit bureaus that have been tracking your credit history. They use that history to create a numerical score (your FICO score). Based on this score, lenders will decide whether or not to lend to you, and at what interest rate. Employers may use your score and history to predict if you would be a reliable employee, or a security risk (take note, all yea looking for a security clearance!). And now more than ever, landlords are examining credit reports to see if you’re likely to be a reliable tenant. A lot is riding on one’s credit score, a fact made all the more galling because the actual formula for creating the score is not public.
But, it is what it is. The first step in taking control is to get your credit histories. Once a year, you can get a free copy of your credit history from each of the three bureaus. Use this site – http://www.annualcreditreport.com. It is the ONLY site that is specifically sanctioned by the U.S. government to give your free histories each year.
Once you get your three reports, carefully read through them and make sure you recognize everything. Is there any incorrect information? Have you had credit that’s not reported on the form? Is there an error? If so, REPORT it to the bureau! You can often do this online at the respective sites (Equifax, Experian, TransUnion). Do NOT be shy about fixing errors!
If you have negative marks on your report, contest them with the creditor. If that doesn’t work, dispute them with the credit bureau. For legitimate errors, you should always be able get them taken off eventually. Even negatives that are your fault, like late credit card payments, can sometimes be removed. You can ask the creditor to remove the mark as a courtesy. At Community Ladders, we’ve been successful in roughly 2/3 of our attempts to get these negatives erased simply as a courtesy. So, it is definitely worth giving it a shot!
This blog entry is part of our June newsletter offering advice to recent graduates.
Bill Varettoni is a financial planner and the founder of Community Ladders.
I will fully admit that effective budgeting is one of the most challenging things we do with our Members. It often takes the better part of a year to find a budgeting approach that fits the person and doesn’t feel too constraining. It involves a lot of trial and error, and there are no shortcuts.
However, I’d like to share with you one of the more powerful tricks in our arsenal – budgeting BEFORE you get the money. Our brains are generally not a supportive partner when it comes to budgeting – apparently hunter-gathers wanted to take what they could get, when they could get it. Our brains get a lot more upset about budgeting once we have the money in hand than if we earmarked it beforehand. I know this seems rather silly, but trust me – we’ve seen it time and again with our Members.
If you go from a period of relatively low income (read: in school) to a period of high income (read: any income), your brain goes nuts (the hunter-gather equivalent of stumbling across a freshly killed buffalo). The vast majority of people will spend ALL of their income – sometimes a bit more, sometimes a bit less. You are probably thinking to yourself that this won’t happen to you, but statistically it will. And it creeps up on you – you don’t even realize it. Purchases just seem to make sense, and are ‘needed.’ Advertising, ‘keeping up with the Jones,’ Target aisles, and instant gratification all contribute to the urge to spend everything. Fundamentally though, it is all made more probable by the hardwiring in our brains.
So, I urge you to make a budget before you get the money. At Community Ladders, we go through the same process with our Members before they get a raise or a bonus – the logic is the same.
There are a lot of different budgeting sites and software out there. What works varies markedly from person to person. We often use Mint.com with our members. It’s not perfect, but it has a lot of features we like. While we haven’t tried these, here are some free software ideas (here and here) and some dedicated budgeting websites (here and here).
Just remember that budgeting is not always easy, and it goes against our instincts. Community Ladders is designed to be an external partner that helps keep you accountable to your goals. If you’re not a Member, we urge you to enlist a trusted partner to help keep you accountable and on track.
This blog entry is part of our June newsletter offering advice to recent graduates.
Bill Varettoni is a financial planner and the founder of Community Ladders.
A key rationale for founding Community Ladders was to get young professionals excited about saving for retirement through vehicles like IRAs and 401k’s. Simply put, saving earlier (even by a year or two) can have a profound impact on the amount of money you’ll amass by the time you retire. Einstein may or may not have said that ‘compound interest is the most powerful force in the universe.’ Nonetheless, saving whatever you can right now beats the pants off of saving quite a bit more down the road.
Here’s a simple illustration – if you invest $5000 at age 18 and earn just 5% a year (roughly half the historical return of the stock market) on it until you’re 72, you’ll have $69,693. Delay that investment 10 years, and you’d have only a bit over $40,000. Now, imagine you invested $5000 each year; you’d have $1.3 million. Delaying your investments 10 years knocks that down to below $800,000. That’s some powerful compounding and a compelling reason to get started NOW! [We must admit that, unfortunately, that $1.3 million is not going to have the same purchasing power as it does now, due to inflation. But you can still see the point and the awesome power of compounding!]
Now, how to get started:
Employer Plans
Many employers will offer 401k (private companies) or 403b (non-profits) plans. This allows you to take money out of your paycheck and put it into an investment account. You don’t pay taxes on the money until you pull it out upon retirement. Many companies will match contributions you make, which is an AWESOME deal. In many cases it’s like earning an immediate 50% return on every dollar you put in. So much a fan of the employer match are we at Community Ladders, that even when people are saddled with loads of credit card debt we will often still contribute enough to a 401k in order to get the full company match.
IRAs
You can also save for retirement independent of your employer, through Individual Retirement Arrangements (IRAs). These are investment accounts that you directly control. There are two varieties. The first, the Traditional IRA, is a pre-tax account. This means that you get a deduction on your taxes (subject to certain exceptions) for contributing to the account. You pay taxes on anything you withdraw from the account once you retirement. For young people, we are especially excited about the second kind – the ROTH IRA. This is a post-tax account, meaning that you pay taxes on your contribution now (think of it like you are taking money out of your wallet to fund the account). Any money you pull from the account upon retirement is TAX FREE. Young people often have lower incomes (so their tax rate is not that high) and they have decades to accrue gains on investments that will be tax free upon withdrawal. It is for these (and a few other) reasons that we are so excited about ROTH IRAs.
An employer match in a 401k and a ROTH IRA are generally the best options for young people wanting to kick start their retirement savings. See for yourself with this calculator.
This blog entry is part of our June newsletter offering advice to recent graduates.
Bill Varettoni is a financial planner and the founder of Community Ladders.
As a planner, I’ve been surprised by the number of people with student loans who aren’t aware of the fact that there are multiple types of repayment plans available with federally-backed loans. Private loans, by contrast, do not provide much flexibility but may offer lower interest rates these days.
Most graduates are automatically placed into a standard 10-year repayment plan, which begins after a 6-month grace period following graduation. In most cases, paying loans off under this plan results in the lowest amount of total interest paid (simply because the loan is paid off in the shortest period of time). But, depending on what you do professionally, other repayment plans might make sense. The main repayment plans are:
- Standard (10-years with a constant monthly payment)
- Graduated (monthly payments that start out smaller and steadily increase)
- Extended (spreads out payment over 25 years)
- Income-based and income-contingent plans (monthly payments are capped based on your income, and if you can’t pay off your loans within 25 years, they are generally forgiven).
For calculators and more information, this is the most important site.
You can also choose to pay off your loans much more aggressively and finish sooner, and most newer loans don’t have penalties for doing so. This saves significantly on the total amount of interest you’ll pay. However, as a planner, I sometimes caution people about doing this. It’s not that I don’t like paying off debt (in fact, I LOVE it!). But, rather, putting so much money toward student loans may make it more difficult to achieve other goals (like home ownership) that require a pile of cash that’s a challenge to accrue.
Student loans will follow you everywhere, and generally cannot be discharged in bankruptcy. This often surprises people, so I tell them to think about their brain as the collateral asset. This has limited resale value when removed from your skull.
In certain cases you can stave off monthly payments. Service programs like the Peace Corps, unemployment, and financial hardship may qualify you for a deferment (in which the government pays your interest on subsidized – but not unsubsidized – loans) or forbearance (where interest accrues and adds to your principal regardless of loan type).
Future newsletters and blog entries will elaborate further on student loans. We just finished a month-long student loan modification drive with our Members, in response to a special consolidation program.
This blog entry is part of our June newsletter offering advice to recent graduates.
Bill Varettoni is a financial planner and the founder of Community Ladders.
You Can Afford Less Rent Than You Think
The rule of thumb in financial planning is that you shouldn’t spend more than 1/3 of your take-home pay on rent (that is, after taxes, pretax benefits, and retirement savings). In many areas, this is actually quite doable. In other areas though, like Washington D.C., it’s often difficult for a young professional to afford a place in a desirable location within the city.
Rather than saying ‘no’ to living in a desirable place whose cost exceeds 1/3 of your disposable income, we at Community Ladders sometimes say ‘yes’ so long as the increased rent you pay is clearly linked to other areas that you will cut back and save on. It is vital to your both your brain and your odds of success that this is seen as a tradeoff. Ideally, that tradeoff should be established before you move in. Once you are locked into your lease, your monthly expenditure becomes fixed, and you are more or less trapped (but, it’s still worth a shot to try to lower your rent!). That’s why establishing this tradeoff, and making that conscious choice, is critical.
To help you in the process, there are ‘how much can you afford’ calculators and sites like Zillow and Craigslist that can give you an idea of what local rents are like. At Community Ladders, we believe in a systematic approach to the search, such as this checklist provided by a friend of our Community.
The economy and housing market being such as it is, in some areas it may make sense to consider actually purchasing a home rather than renting (see this rent vs own calculator). There’s a lot that goes into the decision to purchase a place, but even among our Members we have explored buying a place with people just out of college.
And please, please, please – read your lease entirely before signing. Twice!
This blog entry is part of our June newsletter offering advice to recent graduates.
Bill Varettoni is a financial planner and the founder of Community Ladders.
In today’s employment market, it may seem like ‘any port in the storm’ while you try desperately to avoid any mistakes. But that doesn’t necessarily mean you have to accept the initial job offer package. Even in better times, I seldom met friends or colleagues who even attempted to negotiate for their post-graduation job (I joined the Peace Corps, and alas, negotiation wasn’t an option). Most graduates don’t know that salaries are often negotiable. Those who are aware of the flexibility fear that the employer will rescind the offer because they seem ‘ungrateful’ for the opportunity. Point taken – if you are truly desperate or this is your absolute dream job, you may need to bite the bullet and take what’s initially offered just to be on the safe side.
If you’re willing to give negotiation a try, you may be able to respectfully negotiate for a higher salary or other benefits. To give yourself a fighting chance, you will need to steel yourself into not accepting right away (in the moment, this is harder than you think). You’ll also have to think ahead of time about what you value besides salary. Since times are tight, an employer may not be that flexible in terms of salary. But they can sometimes control non-monetary items: number of vacation days, telecommuting options, flexible hours, education and training time allotment, etc. Well-established negotiation theory emphasizes these secondary items as a key component of satisfactory agreements.
Finally, make sure you are leveraging your previous work experience, even internships. For instance, I personally, as well as with our Community Ladders members, have successfully used previous internship employment to count toward time-in-service for federal vacation accrual.
Courage!
This blog entry is part of our June newsletter offering advice to recent graduates.
Bill Varettoni is a financial planner and the founder of Community Ladders.
Marriage and Money by the Numbers
So, we at Community Ladders have been huge proponents of couples openly discussing money issues (witness our previous blogs and newsletters, and the February recruitment drive). We also sometimes work with each partner independently on issues precisely because people are coming from different places. I don’t want to belabor the point, but working with couples is one of the most important things we do at Community Ladders. It’s also one of the more challenging situations for us as financial planners (working with people who are divorced or getting divorced is – quite tellingly – often easier).
In the spirit of getting couples on the right track, we wanted to pass around this short article and the associated (and frightening) graphic below.
- Be sure to get free copies of your credit reports at annualcreditreport.com. Fix any errors on your report and contest negatives, as EMPLOYERS, lenders, and some apartment rental places will check your credit scores.
- Make a budget before you get your first salary. Psychologically, it’s easier to set aside money before it’s in your bank account instead of waiting until after you get paid.
- Find out when you have to start repaying your student loans and realize there are multiple options, not just the default your lender gives you.
- Your rent shouldn’t be more than a third of your take-home pay—choose a new place wisely.
- Get a Roth IRA now, it’s the most awesome thing you can do for retirement (after a 401k match), and remember that an employer match starts your “retirement fire.”
- Remember, salary can sometimes be negotiated, so be savvy about your first job offer!
Community Ladders will be at the UMD Entrepreneurship Invitational tomorrow on March 30th. Details below:
When: Friday, March 30, 12-2 PM
Where: Stamp Student Union, in front of Colony Ballroom, 2nd Floor, University of Maryland, College Park
Community Ladders is donating two planning sessions to American University’s Public Interest Charity Auction. The Equal Justice Foundation, run by students at the Washington College of Law, raises money to support students who work in unpaid public interest internships in the U.S. and abroad.
For more information go to http://www.wcl.american.edu/secle/founders/2012/20120329a.cfm . If financial planning isn’t your thing, there should be plenty of more exciting things to bid on 😉