Poor Student No More

Student debt, credit cards and any other liability can pose a serious threat to personal finances because of interest rates. We seem to be bombarded by the phrase “interest rates” in business, financial and economic news — but what does it all mean, and what kind of impact will it have on your personal finances?

Let’s start with a basic definition: An interest rate is the price a borrower pays to use money from an external source. They are normally expressed as a percentage of the loan amount (Ex: My credit card has an annual interest rate of 13.8%). Another way of thinking of interest is the difference between the amount paid back to the lender and the original amount loaned. Interest rates create profits for lending companies.

The Federal Interest Rate

• Federal Funds Rate - The interest rate at which private depostitory insitutions (banks) lend federal funds to other banks. The Federal Open Market Committee (part of the Federal Reserve) sets the target interest rate (nominal interest rate), which is what is meant when it is reported that the Federal Reserve increased or decreased the interest rate. The effective interest rate — the weighted average of all interest rates in lending transactions between banks — falls within a range of this target interest rate. This rate affects short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit available, and a variety of other economic variables.
• Generally, interest rates charged by private lenders to you are largely based on the federal interest rate.

How can your interest rate change?

• The economy changes - in general, if the economy slows, interest rates go down to increase lending and borrowing.  If the economy grows, interest rates generally go up as there is more demand for loans.
• The lower your credit score, the higher your interest rate. Check to see if you have a variable interest rate (most loans do) — this means that they can change the interest rate at any time. MAKE SURE YOU DON’T DEFAULT AND KEEP YOUR CREDIT SCORE UP!
• These two factors play into determining interest rates the most — Macro and Micro causes — the state of the national economy and the state of your individual economy.

How can you lower your interest rate?

• Consolidate — consolidation can often decrease the total amount of interest you are paying, but be wary! Make sure you are proactive in reading the terms and conditions of your consolidation.
• Pay more each month — even just a few dollars a month can add up to a huge savings in the long run. Don’t short yourself though. Make sure you can afford what you are paying.
• Debt forgiveness — sometimes students working in the public service can have a portion or all of their debt forgiven. The most common example of this is the Peace Corps. However, this does not always apply to private loans.
• Talk to your lender — often, this is your best resource. Sometimes you can negotiate a lower interest rate or find out if there are any special benefits that you are qualified for. So pick up the phone and talk to a loan officer.

Please note — all Federal loans taken out after July 1, 2006 have a fixed interest rate.

Current interest rates:

• Stafford Loan (subsidized undergraduate) — 5.6% for loans disbursed from July 1, 2009 - June 30, 2010
• Stafford Loan (subsidized graduate/professional) — 6.8% for loans disbursed from July 1, 2009 - June 30 2010.
  
• Stafford Loan (unsubsidized undergrad/grad) - 6.8% for loans disbursed from July 1, 2009 - June 30, 2010
• Stafford Loans disbursed after July 1, 2006 - variable but will never exceed 8.25%
  
• PLUS loan (disbursed before July 1, 2006) — variable but will never exceed 9%. Currently 3.28%
• PLUS loan (disbursed after July 1, 2006) — 8.5% fixed
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Building credit is no easy task — especially when you think that the only way to do it is to get a credit card or a loan, as this can very easily trap you in a never-ending cycle of debt (see previous post on credit cards).

Let me start with a question: What exactly is credit?

Credit is recognition of a person’s ability to fulfill his or her financial commitments based on previous actions. It provides a rating standard for lending companies, banks and other financial institutions (a credit score). They can estimate how likely you are to pay back your loan, mortgage or other liability. Your credit score helps to determine your interest rate and whether you get the loan at all. Credit is imperative if you plan on buying a house, applying for a credit card, applying for any loans, and even getting insurance.

So what exactly are the best ways to build your credit?

First, you should know exactly what your credit report looks like. You do not have to pay for this! Under the Free File Disclosure Rule of the Fair and Accurate Credit Transactions Act (FACT Act), the three nationwide consumer reporting companies — Equifax, Experian, and TransUnion — must provide you with a free copy of your credit report once every 12 months. But you have to ask for it!

These three companies do not provide your credit score for free. You must pay an additional fee for this.

A “good” credit score is usually anything above 620. But of course, it all depends on what you are applying for and who the provider is. Usually, if your score is below 620, the provider will require further inquiry into your credit report. This does not necessarily mean that you won’t get the loan, but it does mean you will have a higher interest rate.

Things that lower your credit score:

• Late payments - pay your bills on time!
• Maxing out your credit card - keep the balance at no more than 35% of the credit limit!
• Closing credit cards - don’t close the account, just cut up the card and never use it again!
• Opening a lot of credit cards in a short period of time - Don’t let Banana Republic or Gap sell you on those in-store credit cards. It may signal that you are a credit risk!

Things that raise your credit score:

• Check your credit report very carefully and look for any inaccuracies. Write a letter to the consumer reporting company explaining the inaccuracy. Sometimes these companies make mistakes and it can unnecessarily lower your score.
• If the info in your report is all accurate, then only time will raise your credit score. Negative information can stay on your credit report anywhere from 7-10 years.
• Pay your bills on time. No questions asked.
• Try to pay more than the minimum payment on credit cards or loans. Prioritize paying these off in order from highest interest rate to lowest interest rate.
• If you don’t have sufficient accounts on your credit report, try applying for a credit card with your bank. Credit cards are not a bad thing if you use them with caution and care.

Building good credit is extremely important for your financial future. Don’t let careless mistakes lower your credit score!

Peace, love and loans

Jess

How to make your own financial statement:

This is going to be the very, very basics of making your own personal financial statement.  Reading Rich Dad, Poor Dad inspired me to do this, and though it is an extremely simplified version of the common financial statement prepared by an accountant, it is a simple reminder of your goals and how to get there.

There are only four simple categories that you should absolutely list in your first financial statement: Income, Expenses, Assets, and Liabilities.

Income: List all income that you receive monthly from your work.
Expenses: List all of your monthly expenses.  These are the things that you must pay money for each month like rent, utilities, food, alcohol (if you are the average college student), cell phone bill, etc.
Assets: Things that put money into your pocket. Should be forms of passive income that are secure.  Example: Poor Student No More.
Liabilities: Things that take money out of your pocket.  A mortgage or rent, credit card bills, fruit of the month club.

These are EXTREMELY simplified definitions, but they certainly keep it simple and get the job done.  I’ve found that keeping it simple keeps me focused on my ultimate goal: grow my assets larger than my liabilities (in monetary value) and make my passive income greater than my expenses.

So, put these into four columns and start listing your items with descriptions and amount ($).  Total up the values for each column.

Next, make a prospective financial statement for exactly 1 year after.  What do you want this sheet to look like?  Be sure to keep it realistic though! Work with what you have, but don’t sell yourself short either!

Post both of these statements somewhere where you can see them every day — your wall, mirror, in your closet, on the fridge — and every month make updates on your progress.  As you go along, you’ll find out what works, what doesn’t, and how to optimize your progress.

Don’t freak out if you don’t reach your goals in 12 months! Keep working and figure out why you didn’t hit that goal.

After you reach your 12 month financial plan goals, start setting longer term goals — 3 years, 5 years, and 10 years.  These will be less detailed, but very worth it in the long run!

Peace, love and loans,

Jess

Assets and Liabilities

I recently finished reading Rich Dad’s Guide to Investing, the follow-up to Rich Dad Poor Dad that provides an in depth look into the worlds of business and investing. The book provides substantial and valuable insight into not only the philosophies of the rich, but specific practices and tools to use as well.  I highly recommend this book to those who wish to change their way of thinking and move toward a life of financial freedom and independence.

One of the greatest lessons I learned from Rich Dad’s Guide to Investing is that you do not have to acquire assets through purchasing them.  You should, in fact, learn how to create your own assets.  This got me thinking of my own assets and liabilities on my own personal financial statement.  My assets column doesn’t really have anything in it, and while I stared at that blank column, I felt absolutely worthless.

So, I decided to start thinking about the potential assets I could create and how I could turn the ideas into realities, no matter how crazy or outlandish they seemed. I also found during this process that I do have assets now that I should list.  I started filling my assets column and it now looks like this:

Education - knowledge of international relations, conflict resolution, and development
Passion
Work ethic
Perseverence
Creativity
PSNM (Poor Student No More)

The first six are not putting money into my pocket as of now, but I always want to remember what my REAL assets are. Those characteristics will be the driving force behind my financial success.

My suggestion is to look at your personal financial statement at least once per month and each time, have a short brainstorming session in which you write down ideas for creating assets. Most importantly, you do not need an already existing amount of money to transfer ideas into tangible assets. Use your intellect, experience, creativity and character to find a way to make it happen.

My liabilities column heavily outweighs my assets column in terms of monetary value, but I know that this is only temporary. Don’t sell yourself short and realize what your true assets are — then take it and run with it.

My goal by May 2010 — grow my assets column bigger than my liabilities.