Isn't it important to establish credit though? RE: credit cards.

Aveda4 said...

Isn't it important to establish credit though? Can you do this through the use of a bank debit card which also acts as a credit card?


Money Prof:

Yes, you should establish credit but don't think credit cards are worth the potential problems. Bear in mind that almost everyone starts off saying they will pay the bill in full every month. In the beginning they do pay it off, but then an excuse comes up: The car needed repairs, I was "burnt out" I really needed that vacation ( I hate that one!!!!) , it's not my fault I had a dental bill, ( BTW it is your fault as those items should have been saved for in advance) etc etc. so only the minimum is paid that month.

Think about this: do you really think the millions of people who paid over $50 billion in finance charges last year thought they would pay that at the time they took out the credit card???

Do you think the average American that owes $8,562 plus interest in credit card debt thought they would owe that at the time they first got the credit card??

If you can prove to yourself you can be in the minority that pays it off in full every month then maybe you can take the chance. But............ "proving it" to me means having put 10% of your pay into a retirement acct. for at least a year or two, having 3 months pay saved in a "rainy day" fund, having at least the down payment saved for your next car. etc. Then your odds are pretty high you'll pay it off in full every month.

Instead of credit cards to establish credit, save a big down payment for your next car. With a large enough down payment you'll get the loan and a good rate without having credit cards. Also keep in mind other things also effect your credit: no bad checks on your checking acct., phone bill paid on time, utilities paid on time. Etc

So use a debit card instead of a CC for now...... Yes, of course the debit card comes off the "other" checking acct. NOT the "household" acct. (if you don't have this set up yet see the 2/27/05 post).

Credit Cards

Member writes:

I am going to be leaving my bank and I need to get a new CC as well. I have a few applications through the mail and I was wondering if I should apply for one of those or if I should get one through my new bank? If you know a good way to go about this it would be great. Thank you so much again.

Money Prof:

It doesn't matter much IF you're smart enough to NEVER charge. And you pay the bill in full every month. Most people will say get the one with the lowest rate.

My personal advice to you ( and I know what I'm talking about from seeing members and employees throughout the years get in trouble) DON'T get a credit card. Use a bank debit card instead.

You'll thank me time and time again for this advice in the future, when ALL your friends have thousands in CC debt. Email me every time you get the urge to get a credit card and I'll try to talk you out of it.

Repeat: DON'T get a credit card. Use a bank debit card instead.

For those members that already have credit cards. My advice: get the scissors out.

Scary Debt Stats
$1.7 trillion Total consumer credit.
$8,562 Credit card debt carried by the average American.
$50 billion Total finance charges Americans paid in 2001.
$1.6 billion Market capitalization of AT&T -- the entire corporation.
78% Percent of U.S. households deemed "credit worthy" by the lending industry.
1.3 million Number of credit card holders declaring bankruptcy last year.

Learn from other peoples mistakes.

There are three kinds of men:

The ones that learn by reading.

The few who learn by observation.

The rest of them have to pee on the electric fence.

Will Rogers.

Learn from other peoples mistakes.

Needs vs Wants- Quiz 2

This is not a repeat, it's a different member that needs some work on being able to tell the difference between "needs and wants":


Just found out that this member is thinking about buying new tires and rims( big bucks) for the new truck he's buying. I'm hoping that he's new, hasn't read all the posts yet and why he is still thinking this way is he didn't compute what that money would be worth in 36 years of having it invested.

Again, as I've said before many times, there isn't anything wrong with this just so you first have 3 months worth of expenses saved in a rainy day fund, you are putting money in an IRA monthly , and you have no debt. Then if you saved IN ADVANCE to buy the fancy rims for your truck............GREAT.

But if you say buy the rims on credit, then its BS.

Today's quiz: If rims & tires cost $2,000 and you invested the money & earned 8% compounded for 36 yrs, what would it be worth then?
You should be able to compute this in one minute, if not re-read the 2/17/05 post.
Email me the answer.

Quiz 1

Member with the lead out writes:

In a message dated 6/2/2005 6:52:38 P.M. Eastern Standard Time, X .com writes:

Also if you would like to quiz me on the blog feel free if i know or remember it i will answer it and if i dont i wont BS you ill just find the answer.

Money Prof:

Good idea ( you were the first one to suggest this) :

Most beginning investors don't have sufficient capital to properly __________ by purchasing individual securities. Investing in ______________ allows you to buy a professionally managed, _____________portfolio with relatively small dollar amounts. In addition, many allow you to take advantage of ___________ by investing at regular intervals.

If you were able to answer this without looking it up, good job. If not slow down a bit when reading the Blog. See answers on 6/2 post.

Take ( I meant MAKE) the time to be able to think over what your reading.

Fundamental Concepts of Successful Investing

Most of you may have already read this from A G Edwards online. Definitely worth a reread:

Fundamental Concepts of Successful Investing. Before you begin investing, it's helpful to understand some of the factors that will affect your investment decisions, such as:

Risk and Volatility
Liquidity
Time Horizon
Total Return
Diversification
Tax Consequences
Dollar Cost Averaging
The Value of Time

Once you understand these factors, you'll need to assess your current financial situation and develop your investment goals.

Risk and Volatility When most people think of risk in their investment portfolios, they think of price fluctuations in the open market (also known as volatility or market risk). However, many investors don't realize that even "safe" investments can be affected by the risk of inflation eroding purchasing power. With that in mind, you should be aware of the other types of risk you may encounter with different investments.

Inflationary risk, also known as purchasing power risk, is the decline in the purchasing power of dollars over time, so that even the "safest" investments can leave investors with substantially less purchasing power. For example, assuming an inflation rate of 4% for the next 10 years, if you have a $100 today, 10 years from now inflation will have eroded that $100 so that it is worth only $68.

Investment or credit risk is the possibility that a company backing a security will not be sufficiently profitable to remain in business.

Interest rate risk is the fluctuation in the prices of some investments, such as bonds, due to changes in prevailing interest rates. When interest rates rise, new issues of bonds come to market with higher yields than older securities, making those older bonds worth less. Hence, their prices go down. When interest rates decline, new bond issues come to market with lower yields than older securities, making those older, higher-yielding bonds worth more. Hence, their prices go up. As a result, if you have to sell your bond before maturity, it may be worth more or less than you paid for it.

When considering your own risk tolerance, you should understand that investments associated with higher risk typically offer higher reward potential over time. A key factor to successful investing is to identify how much risk you are willing to assume in exchange for potential investment gains.

Liquidity A "liquid" investment is one that can be readily turned into cash if you need the funds on short notice. Investments can vary greatly in their degrees of liquidity. Money market funds and savings accounts are very liquid; so are investments with short maturity dates such as CDs. But if you're investing in such accounts as an IRA, employer's retirement plan or custodial account for longer-term goals, liquidity is not an issue.

Time Horizon Different investors have different time frames in which to achieve their investment objectives. Generally, young investors with long time horizons should be able to assume greater risks because they have more time to offset any losses with the higher return potential of investments with greater risk. Older investors, however, often choose to reduce risk because they have less time to recoup losses.

Total Return All investments provide one or a combination of two different types of returns to investors: income or growth. Income is the interest or dividends earned from money market funds, CDs, bonds and certain stocks. Growth is the price appreciation of a security. The total return of an investment is the combination of income and growth realized over a given time period.

In selecting investments based upon their expected total return, you should understand which portion is generated from income and which from growth. Usually, the greater the reliance on income, the lower the market risk but the greater the long-term purchasing power (or inflationary) risk.

Diversification Building a diversified portfolio with securities spread across different investment classes can help you avoid the risk of having all of your eggs in one basket. By mixing industries and types of assets, you spread your risk. A particular market condition may have less impact if your portfolio consists of a wide assortment of securities than if you purchase only one type of security.

Most beginning investors don't have sufficient capital to properly diversify by purchasing individual securities. Investing in mutual funds allows you to buy a professionally managed, diversified portfolio with relatively small dollar amounts.
In addition, many mutual funds allow you to take advantage of dollar cost averaging by investing at regular intervals.

Mutual fund investing involves risk. Your principal and investment return in a mutual fund will fluctuate in value. Your investment, when redeemed, may be worth more or less than the original cost.

Tax Consequences Not all investment returns are subject to the same taxation. The dividends you earn on stocks and any capital gain, or profit, you have when you sell are taxable in the year you collect them. Your dividends are taxed as ordinary income, but long-term capital gains are taxed at a maximum federal rate of 20%. (A gain is considered long term if you owned the investment for more than a year.) Short-term capital gains are taxed at your ordinary tax rate.
You're not taxed on any unrealized gain, or increase in the value of your investment while you still own it. Some tax-advantaged investments (such as most municipal bonds) offer federal- (and possibly state-) tax-free interest. Some municipal bonds may be subject to the alternative minimum tax. There are also vehicles (such as IRAs and annuities) that provide tax-deferred or even potentially tax-free growth, enabling you to postpone taxation until you access your funds.
Mutual fund dividends and profits on mutual fund distributions are taxable (unless held in a qualified retirement account), but no tax is due on the increased value of a fund until you sell it. The capital gains incurred by the fund when it sells shares of stock in the fund are passed through to you annually regardless of whether you sell your mutual fund shares.

Dollar Cost Averaging Dollar cost averaging, the practice of committing a fixed amount of money to an investment program on a regular basis, is a popular practice with many long-term investors. By investing a set amount regularly (usually monthly or quarterly), investors are able to avoid the pitfalls of trying to time market peaks and valleys. Also, because the dollar amount of the investments is set, investors who practice dollar cost averaging buy more shares of a stock or mutual fund when they are less costly and fewer shares when they are more expensive. Like any investment strategy, dollar cost averaging doesn't guarantee a profit or protect against loss in a declining market. Because dollar cost averaging requires continuous investment regardless of fluctuating prices, you should consider your financial and emotional ability to continue the program through both rising and declining markets.

Value of Time The design of your portfolio should take advantage of time and conform to your personal objectives and risk tolerance. The earlier you begin to invest, the longer you can benefit from tax-deferred compounding in certain investments. With tax-deferred vehicles, you don't pay taxes on your returns until you begin making withdrawals, usually at retirement. However, withdrawals before age 59 1/2 are subject to a 10% IRS penalty (certain exceptions apply).

To understand the importance of tax deferral, compare the growth of a $10,000 investment in a tax-deferred account with the growth of the same amount in a taxable account. Assuming an 8% return and a 28% federal income tax rate, after 30 years you would have accumulated a nest egg of $100,627 in a tax-deferred account, compared with $53,659 in a taxable account. Even if you take out your entire investment in one lump sum and pay taxes on that amount, you will receive $75,251. This example is for illustrative purposes only and does not reflect the return on any particular investment.

Email me that you have read the above post.

Reread the 2/27 Post

Please slowly reread the 2/27/05 post: "Two checking accounts-Budget".

If you have no debt., have saved 10% of your pay for more than one year, and don't believe in using credit cards ( debit cards are OK) then don't reread the above, take the day off. You deserve it. :)