Debit versus Credit

5 Reasons I Want To Be A Millionaire

If you ask just about anyone in the world if they would like to be rich they will more than likely respond in favor of wealth. No one actually wants to be poor. In fact some of us want wealth so badly that we’ll do almost anything to get it. Wars, murders, lies, deceptions, fraud – these are all (almost always) caused by the desire to achieve wealth. There’s no way getting around that. Not all of us are so easily compromising on our standards, however, as evidenced not only by the virtuous wealthy, but also by those who passed up on wealth because they were unwilling to compromise who they are and what they believe in.

I’m like everyone else really. I want to be wealthy, but I wish for this wealth for specific reasons. I won’t compromise on my methods of obtaining wealth either because that would compromise my reasons for wanting to obtain wealth. There are 5 reasons I want to be a millionaire.

1. I want to be free of debt and financially independent.

This reason for my desire for wealth predicates each and every other reason that I have. It’s important here to not confuse being “in the money” with truly being wealthy. So many people in the world appear to be wealthy but in reality are up to their knees in debt. I don’t want this. I want to be financially independent and by this I mean little to no debt and loads of cash or securities that are easily convertible to cash.

2. I want to have the power to choose to do anything I want to do.

If I wake up one morning and have a great new idea for a product or a business I want to be able to act on it. This will only be possible if I have the wealth necessary to do so. This also applies to holidays and even education. Some day I’d like to get a degree in electrical engineering. I want to know how circuits and all of those complicated electronic (and computer) parts function. Also I’d like to eventually see the world. Unfortunately travel is expensive and unless I can achieve true wealth I might never accomplish this goal.

3. I want to have a lasting impact on the world.

My wife and I are very charitable-minded. We’ve donated to several charities since we married two years ago and this is even as we try to support my education, save a downpayment for a house and build an emergency fund. So many people in the world have less than we do and even though we don’t have everything we want it feels wrong to not try to support those in need. One day I’d like to start my own scholarship fund and possibly even a charitable organization. In the meantime there are hundreds of fantastic charities which need monetary donations.

4. I want to be in a position to be able to support my parents.

If my parents ever need help in their retirement (with medical or monetary things) I’d like to be in a position where I can support them. They gave me everything that I ever needed for 18+ years of my life and I want to be able to return the favor. Likewise I’d love it if I could be in a position to help my family members out in times of crisis.

5. I want to be able to support my hobbies.

Let’s face it, we all have hobbies that we wish we could support. For me blogging is a hobby. I wish I could do it more, but I have to work and go to school. Of course there are also the less-productive hobbies. I like to play with tech toys – my MacBook Pro, HD TV’s, etc. These electronics are often quite expensive. I also like to play video games occasionally and they cost money as well.

What are your reasons for wanting wealth? Or are you already wealthy? If so, what do you do with your money, if anything?

September 8, 2008
How Your Credit Score Defines You
Remember in High School when you would worry about how well you would do on your tests, and how those scores would either make or break your college admissions and scholarships? It wasn’t the most relaxing thing to think about. Well now as adults we continue to be graded and assessed by our scores, only this time it’s not how well we do on tests, but how well we manage our finances. I am of course referring to the credit scoring system, and more specifically the FICO credit scoring system. For those accounting buffs out there, this acronym is not to be confused with the FIFO method of inventory management. For those non-accounting buffs (what do you mean you don’t like accounting?) please disregard my lame attempt at humor.

About the FICO score

If for whatever reason you are not aware of the FICO credit scoring system, then let me quickly explain. Credit scoring systems were created by lenders and other financial institutions as a way to grade risk. Basically they created mathematical logarithms (pretty neat stuff really) which take into account all of the data available on if you pay your loans on time, the ratio of your current debt to the debt available for your use, how often you apply for loans and credit and the length of time that you have had your loans and lines of credit. The FICO credit scoring system is used almost industry wide between lenders and other financial institutions. The FICO credit score can range between 300 to 850 points, with the median (meaning half over, and half under) FICO score of Americans being somewhere around 720 points. The FICO score is calculated and impacted by five different variables, which can be seen on the pie chart to the left.

The Fair Isaac Company (the maker of the FICO credit scoring system) has disclosed the following components (as also seen on the pie chart) of its credit scoring system, and their approximate weights.

10% – The different types of credit used by you (revolving, consumer finance, and installment)

35% – Punctuality of payments (only impacts you negatively for payments more than 30 days past due)

30% – Amount of debt which is expressed as a ratio of current revolving debt to total available revolving credit (for example you have two credit cards with a $500 dollar balance between them and their total available balance is $4,000 dollars, this would give you a 12.5% percent revolving debt to available credit ratio)

15% – The length of your credit history (the longer, the better)

10% – Recent searches for credit and (if applicable) the amount of credit recently obtained

How do they really use this stuff?

Thanks to the Fair Credit Reporting Act companies must now inform consumers if they will be pulling their credit for any reason. Sometimes this is not made as clear as it should be, and often they do not want consumers to feel as if they have a choice, but such is not the case. However it is a fact that companies want to (and do) use your credit report and your score as a means to provide you with their products and services. For example most banks and other financial institutions will pull your credit when you open an account with them. This applies to savings accounts, checking accounts and then of course the obvious: loan applications. You should be made aware of this by your financial institutions, but things are not always done properly.

Do you have Auto, Home or Renters insurance? Have you received a quote for one of these products recently? If so, then there is a very strong chance that the insurance company pulled your credit when they offered you a quote. Many insurance companies use the FICO credit score, some use it and an in-house proprietary scoring system, and some only use their own in-house scoring systems.

Another use for the FICO (and other credit scoring systems) is for employers to screen potential employees. This is most common in careers where ethics and honesty are very important, for example any jobs in which you would handle cash or have any sort of security clearance to confidential information or items.

These are the three most common reasons for your credit to be pulled, although there are others. You are now educated on how FICO scores are calculated and a few of the reasons they are checked. Now it is your time to shine; do all you can to keep your credit score above the median score and you’ll never have to worry about not qualifying for the lowest loan rate, being approved for that new checking account, receiving a lower insurance rate or not being hired for that brand new security job. Instead you’ll be proud of your financial accomplishments, and your A+ credit score.
September 4, 2008
Why Lauren Willis Is Wrong About Money

I ran across an interesting article the other day which featured an interview with Lauren Willis, an associate law professor at Loyola Law School in Los Angeles. The name of the article is Why You Can’t Teach Money and it’s a question and answer session between a writer at Money Magazine and Lauren Willis. Lauren essentially says throughout the article that it’s dangerous to try to teach people about money. I’ll outline some of the points she has made and tell you why I think overall her argument is flawed.

Financial Education Doesn’t Work

Lauren came right out and said that what’s bad about financial education is that it doesn’t work. Following is the reason that she gave:

Sellers of financial products spend billions drowning out well-meaning messages to consumers from nonprofits or government agencies. Also, financial products are always changing – credit and insurance products have changed dramatically in the past 20 years – making it hard for educators to keep up.

She has several good points, but the overall message is flawed. The marketing departments of financial corporations are huge and they do literally spend billions of dollars a year trying to market their products to the consumer. Likewise financial products are changing. This can definitely present some challenges to financial education. It’s hard enough to battle a billion dollar marketing budget, but when you through constantly changing products it makes it very difficult indeed. However to assume that just because financial education is facing some very large obstacles to overcome does not make it okay to say that it just plain doesn’t work. That’s an end-all statement, one which I’m convinced is completely incorrect.

Don’t Even Bother Teaching The Basics

The next question asked of Lauren was in direct response to her opinion that financial education doesn’t work. The interviewer asked:

But aren’t basics such as budgeting always applicable?

Lauren’s response:

Teaching them is a waste of money. Studies show that sending people to either high school personal-finance classes or adult retirement seminars does not result in better financial behavior. It may do the opposite. Financial literacy classes give people the illusion that they can successfully manage their finances. So rather than seek help, they end up making worse decisions.

I’m interested to know more about these studies that show that personal-finance classes do not result in better financial behavior. If anyone out there has heard anymore on this then please let me know. “Studies” in and of themselves are generally a waste of time and quite often biased towards the end conclusion.

Some people who take financial literacy classes may be naive enough to believe that they can with 100% certainty manage their entire financial lives. Maybe some of us can. I think I’m smart enough to admit that I don’t know everything about everything when it comes to personal finance. I also believe that most people are more than willing to ask for help when it comes to subjects they are less-aware of. If this wasn’t the case then I wouldn’t have a single reader at this personal finance blog because no one would need advice, tips or even care what financial decisions others have made. Her point therefore is a moot point. People generally seek help, even when they have taken financial education classes.

I believe that basics such as budgeting are definitely always applicable. It’s good to know the basics of personal finance. Otherwise you may be taken advantage of not only by finance companies but even by a financial advisor – someone who is supposed to be helping you!

Regulate, Regulate and Regulate Some More

Professor Willis knew that an argument against hers would be that if you don’t know the basics then you could very well be taken advantage of by an unscrupulous lender (sound familiar) or maybe an insurance salesman. She briefly covered this when asked by the reporter what we should do, if not teach people financial basics. Her answer:

Stop trying to turn everyone into a financial planner. Instead, try to get everyone to understand that the people selling you financial products often don’t have your best interests at heart. What’s more, politicians need to regulate financial products and make them into things that will benefit consumers, rather than expect education to be the cure-all it is not.

I agree with her that we should teach consumers that people selling financial products often (if hardly ever) don’t have your best interests at heart. This should indeed be part of any well-planned financial education curriculum. However I’m strongly against further regulation of financial products, at least to the point that she is recommending:

Sellers could be required to offer you a default product that is safe. Whenever you applied for a mortgage, for example, you would have to be offered a 30-year fixed amortizing loan.

While I don’t anticipate myself needing anything more than a 30-year fixed loan when I do eventually purchase my first home I think that an uneducated consumer (that knows nothing about other types of mortgage loans) who would benefit more from a 5-year ARM being sold a 30-year fixed right off the bat (due to federal regulation) would be downright silly and possibly disastrous to our financial system. Such intense regulation would cause serious damage to financial firms who would have to pass on the pain to the consumers in the form of lower savings rates, higher loan rates and higher insurance premiums.

More intense regulation is not the answer. Financial Education is. I completely disagree with her that it is pointless and a complete waste of money. It needs to be done correctly and it needs to be backed up by parents, friends and relatives. Instead of regulating where regulating need not be done (thereby making our financial system less competitive) why don’t we find more creative and effective ways of teaching financial education. It can work and it will work if we do it right.

To the credit of Professor Willis’ argument I will say that in the interview she seemed to imply (but never explicitly state) that she was not against financial education altogether but rather against government-sponsored financial education (such as The Economic Recovery Act of 2008).

September 2, 2008
The Carnival of Personal Finance #168
One Caveman’s Financial Journey is hosting the Labor Day edition of The Carnival of Personal Finance, highlighting the best personal finance articles around (and maybe even a few grilling tips). My recent article on Debit versus Credit, Cash In On The Economy’s Problems, earned “the choice steak” rating as an Editor’s Pick.

There are some fantastic articles in this week’s carnival. In addition to the Editor’s Pick articles, here are some that I found interesting.

Should I Open Up Multiple Credit Card Accounts for a Balance Transfer?

If You’ve Got $13,000 In Bad Credit Card Debt, Ask For Help

Don’t Invest In What You Know

10 Tips for College Freshmen: Financial Advice to Live By

There are some of my favorites. Make sure to check out the entire carnival. It’s hard to believe how much great information is packed into this edition of the Carnival of Personal Finance.
September 1, 2008
Get International Clients Sunday Blog Carnival

Happy Sunday everyone! Just a quick heads up to let you know that my post What I Learned In Mexico: Business Negotiation has been featured over at the Get Internation Clients Sunday Blog Carnival. If you haven’t read my post then I encourage you to check it out.

Another fantastic post, for those interested in the blogging world and driving traffic to your blog, is The Power of Using Guest Blogging to Get Targeted Traffic, posted at Catch the Posts.

Overall it’s a great carnival with some fantastic blog posts. I encourage you to check it out!

August 31, 2008
My Shiny New Bike and a 70% RoI

As most of you know school has started up once again. Considering that I am so close to ASU (about a mile one-way) I thought it might make sense to forgo driving to school in favor of either walking or riding my bike. It turned out, however, that my old bike (which had been sitting in the Arizona sun for four years) was in need of serious repairs. Rather than spend about $180 to have it repaired I decided to go ahead and pick up a new bike for the same price. With accessories and tax I spent a grand total of $242.03. This is what I got:

As far as bikes are concerned it’s a pretty decent ride. It’s quite comfortable, actually. It’s a Sun Rover. For the price it’s amazing, actually. I think. I got it on sale for $100 off the sticker price. That was exciting. The reason that I decided not to drive to school this year is because I did not feel it right to pay for a parking pass when I live so close to school now. So why not start riding my bicycle to school, I thought. I figured I could save myself a decent amount of cash, get some exercise and even cut down on my Co2 emissions.

The RoI On This Thing Is Fantastic!

I ran some numbers on my bicycle “investment” and came up with a Return on Investment of 71%! I spent a total of $242.03 and I should save somewhere in the neighborhood of $343 over the next two semesters, until graduation. To figure out my savings I looked up the cheapest parking pass at ASU ($280) and figured out how much in gas I’ll be saving by not driving to school over the next two semesters (about $63) and added the two together. Not bad eh? $100 return on a $240 dollar purchase.

Does anybody out there bike to work, school or anywhere else as part of your daily commute? Leave a comment, I’d love to find out!

August 29, 2008
Never Lie To Your Insurance Company

The purpose of insurance is to prevent financial disaster in the event of a loss. If your home burned down to the ground today, would you have the $300,000 you would need to rebuild it? Probably not. That’s where insurance steps in – it’s a transfer of risk. When you pay your premiums, your insurance company pools all of the premiums together to pay out the claims and expenses, transferring the risk from yourself to the insurance company.

It is never a good idea to obtain insurance under false pretenses.

It is never a good idea to obtain insurance under false pretenses. I work for an insurance company and I’d like to explain what happens when you do. I have had situations where an insured called with one story and was declined coverage, only to call back (and talk to a different rep) with a different story in order to obtain the coverage. Why would you do that? At the time of the loss, there is going to be an investigation. If your insurance company discovers your lie, the claim will be denied, the insurance company will refuse to do business with you in the future, and you could even be prosecuted for insurance fraud. If you’re honestly using your car for pizza delivery, don’t call your insurance company and tell them you’re not. When you hit someone and the big pizza delivery sign is on your car, your claim will be denied (and if you’re lucky, that’s all that will happen to you). Why pay money for coverage you don’t really have?

Don’t Be Like These People

I’ve seen so many situations where people have lied during the claim process. You do NOT want to do that. It is a bad situation. Claims departments have special investigators they call in when a claim is suspicious. One thing (dumb) people like to do is light their vehicles on fire when they can’t afford their payments anymore. They figure they can collect on the insurance, and all their problems are solved. Well, a toasted car is a huge red flag for the insurance company. Why would a thief burn your car? They don’t. So the special investigators are going to check your finances. Oh, you’re struggling a little? Oh, you don’t have both sets of keys to your car? There will be a trail of clues, and you will give them enough rope to hang you with. Pretty soon you’ll owe money on a toasted car and the insurance company won’t be helping with any of that.

You have to be willing to go pretty far to commit that kind of insurance fraud. But even small lies can choke you. One woman (who happened to be a Realtor) had a water loss to her vacant home. You lose certain coverages once your home is vacant for a certain amount of time; it’s a way insurance companies mitigate their risk. Well, she was denied coverage. Once she heard that, she changed her story. The insurance company investigated, and they ended up denying her claim, canceling all of her policies, and going after her Realtor’s license.

Rates Are Important, But Not Enough To Risk Everything With

A lot of people are concerned about their insurance rates….until they have a loss. Once they have a loss, then the concern is centered on the amount of coverage. You need to make sure you’re adequately covered in case disaster should strike. Cheaper premiums are not worth it in the long run. Insurance companies do something called pricing to risk. They figure out how much of a risk you are and charge you accordingly. It’s why people with DUIs pay higher premiums than those of us who don’t drive drunk.

…don’t misrepresent your situation. It could end up costing you a lot more than it’s worth.

Insurance companies that only write personal lines of business have to stay away from certain risks because they can’t price for them. Such as an employee driving your vehicle. If you have a large enough business that you let an employee drive your vehicle, go get commercial coverage now. Commercial coverage is dang expensive, but it’s what you need. If you lie to your insurance company, don’t come crying to me when you have a claim, because they turned you down for a reason. They declined to insure you because whatever you’re doing is just not covered. Why would an insurance company offer you insurance for something they won’t cover? They wouldn’t. So don’t misrepresent your situation. It could end up costing you a lot more than it’s worth.

August 28, 2008