Today we close out the six-part series, Hot Six for the Summer, and if you’ve been following along, you are now ready to graduate from our summer long credit boot camp. You now know the importance of your FICO score and the factors that influence it. You’ve reviewed your budget and identified areas where you can reduce your monthly expenses. You’ve committed to using a strategic approach to eliminating debt. You are developing fiscal savvy. I know you will do well as you continue to work toward financial freedom, but as we close this door, let me leave you with a few pieces of practical advice to help you on the road ahead.
Avoid Unnecessary Debt
This should be common sense, but I’ve seen too many people fall back into this trap once they have cleaned up their credit. My work in adult continuing education leads me to believe that this happens because we tend to be oriented toward short-term goals. You know how it is: we think that if we go through a process and jump through some hoops, we will hit our target, and then we can check a goal from our ever-growing to do lists. People are good at tackling obstacles, but oftentimes inept at learning from past mistakes.
Once you have cleaned up your credit, treat it as a blank slate. Don’t go out there and start buying stuff just because you have thousands of dollars in available credit. Don’t go out there applying for new trade lines just because you now have a 720+ FICO score. The reality is that if unchecked spending led to your past credit issues, it will take some time for you to reprogram your brain to use credit responsibly. Toward this end, consider putting yourself on a cash only diet for a year to avoid accruing unnecessary debt.
Never Carry a Balance
That’s right: NEVER carry a balance on credit accounts, as this will result in you paying interest, thus returning you to the doldrums. I believe that you should not charge anything that you cannot pay for with cash on hand, unless it is an emergency.
Cash on hand is money that you have available in discretionary income at a given moment in time. It is not money that you can borrow from yourself by paying a bill later, nor is it money that you lend yourself from next week’s paycheck. It is the money that you have right now. If you see a nice flat screen TV on sale at the mall for $500 and you have $500 in your checking account to pay to for it, by all means, whip out the American Express and splurge, provided this purchase comes from the 10% allowance you set for yourself (see “Pay Yourself First”). Also keep in mind that finding that TV on mega sale for $500 when it normally costs $800 does not constitute an emergency. You will not die if you don’t buy it.
Consider the financial impact of purchasing this TV with a credit card and paying only the monthly minimums. Let’s say that you don’t have $500, but you do have a credit card with a $1000 limit that has a 14% interest rate. Bankrate’s credit card calculator shows that if you make a monthly minimum payment of interest plus one percent of the balance, it will take you 43 months and $136.91 in interest to pay off that television. Definitely not worth it when you consider that discounted consumer goods are usually aging products, and also that you have exceeded 10% utilization on your credit card, which will likely lower your FICO score.
Establish a Cash Reserve
According to StatisticBrain, as of July 2012, the average American household has $3,800 in its savings account. This may or may not sound like a lot depending on your situation, but I believe this establishes a solid baseline number for you to use as a fixed savings goal for your emergency cash reserve. Most financial pundits will tell you to bank at least six months of living expenses for your reserve (I actually advocate for 9-12 months in the event you become unemployed or underemployed), but this can be a daunting number, even under modest living conditions. If you’re able to live on $1000/month (which includes housing expenses, utilizes, food, and transportation), you would still need to save $6000 to meet their recommendation. For someone starting out, take baby steps to bring your cash reserve in line with the US average, and then over time step things up until you reach at least six months of living expenses.
I’ve always been a fan of fresh starts. I love the promise of a new year, the optimism of a birthday, the sun rising on a Monday. There is nothing more refreshing than to look at today as a new day, a blank canvas onto which I can paint my ideal reality. Today is tabula rasa. Use what you have learned to control your financial future.
I hope this series has been as helpful to you as it has been to me, personally.
Just one of ‘fatboyfavs’