Poor Student No More

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

I have applied for and received two credit cards since I’ve been in college. The first I got during freshman year when I purchased some of my text books off of Amazon. There was a special offer (anyone surprised?) that lured me in — it gave me $60 off of my purchase. I could basically buy the books I needed for free.

WRONG.

The special offer wasn’t applicable until after I received the card in the mail. So I paid for my books out of my checking account and after receiving the card, tucked it away for about a year.

I never used the card until one weekend when I went back to New York for the premier of my sister’s documentary. I left my cell phone in my car along with my debt card. Once I arrived at the movie theater, I paid the cab fare with that credit card. This is where it all began.

Honestly, if I had never started using that credit card that day, I probably wouldn’t have gotten another one. I applied for my second card this past March to ensure I had overdraft protection on my checking account. Then I started paying for doctors’ appointment fees, prescriptions and gas on this card. Then it spilled over to dinners and scented candles for my room.

When you purchase items on a credit card, you end up paying much more for them in the long run. Is a $40  framed photograph of Marilyn Monroe to hang on your college room wall really worth the $300 you will end up paying for it over the 4 years it takes you to pay off your credit card? Didn’t think so.

It was a slippery slope, and I tumbled down head first. My balances are not outrageous, but high enough that I have to make monthly payments on these cards. This is not helping my plight to get out of debt — only making it much longer and more difficult. A few weeks ago, I had finally had enough — the cards faced death by scissors.

I always try to pay more than the minimum payment each month, but sometimes cannot afford to because of that particular month’s earnings. Paying more than the minimum payment improves your credit score and will pay off your card in less time, but make sure you do not short yourself for the month’s other expenses. Pay more when you can.

Consolidation is definitely an option, but be careful. Check the interest rates, terms and any other possible options you may have (refer to the earlier post on consolidation).

Stop using the cards — If you can’t pay cash, don’t buy it. Unless of course it is necessary for your survival.

Come up with a payment plan and try to stick to it for as many months as possible. It’s ok it you can’t follow the plan every now and then, but make sure you budget for your credit card payment plan as often as possible.

Credit isn’t evil and it’s not even a bad idea –  unless you are a college student. Remember what happened to the U.S. economy at the end of 2008? Don’t get yourself into a situation in which you are calling your family and friends asking for an economic bailout.

One more tip — if your credit cards are higher interest than your student loans, pay these off first. Pay off your debts in order of interest rates (highest to lowest).

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.

I remember one day in my first year economics class at NYU, my professor was talking about deciding to purchase something based on individual preferences and perceptions.  He used the example of paying for college, explaining that in most cases it is a good decision to incur the debt of paying for college because it will increase the value of your skills, therefore increasing your prospective income.  The future value of that college education would be greater than the debt you would incur in the present - meaning that you could pay off the debt quite easily.  He added on to the end, “and NYU students have an advantage because they often have much higher salaries than most.”  He described this kind of debt as “good debt,” - an investment.

I loved this.  I loved that it justified my decision to take out a giant student loan to go to NYU and live in the big city.  I loved that it calmed my anxieties about incurring such a large debt at the young age of 18.  But, I kept thinking of how I could have bought a quaint house with the same loan I took out for college, and wondered if it was really the right decision.

What I have learned from reading Rich Dad, Poor Dad, my research and my discussions with my financial guru friends is that a college education isn’t necessarily “good debt.”  This concept relies on making an investment that will have high returns in the future - increasing your value and wealth.  However, this is an incomplete definition.

The investment should provide you with tools to increase your passive income.  The way my professor explained it, you would still be working for a monthly salary, not gaining passive income that would increase your financial stability.  Therefore, that debt would still be a liability instead of becoming an asset.  Monthly income is not considered an asset.

Now, I am not saying that you shouldn’t go to college.  The education you receive can be vital and extremely valuable.  But I highly suggest organizing your goals for your career and researching your desired career.  How much, on average, will you make?  How quickly can you work your way up a pay scale?  How quickly would you like to pay off your debt?  What kind of payment plan will that require?  Does that work with your monthly salary?

The value of your college education should be weighed with your intended career choice.  And instead of working to pay off your education, find ways that you can make your college education work for you.  Find means of creating a passive income with your talents and strengths.  Then, you can pursue your desired career without selling your soul for healthcare or a monthly salary.  You can be more selective in which jobs you pursue and have more control over where your career goes.

So, if you decide to go to college, do not simply accept that it is a “good debt.”  If you do not educate yourself about your personal finances and find ways to apply your education to build your passive income and financial stability, it is NOT a good debt.  It will only remain a liability that influences your choices, both in life and your career.

Why don’t they teach this in college?

Revenue made to date: $5.18

big milestone! Also, I had my first site visit directed from a google keyword search!

Upon deciding to officially pay off all of my student loans and be free of the financial restrictions of debt, I made a budget.  This wasn’t the first time I’ve made a budget by any means, but this was the first time I included my income.  Crazy, I know.  Turns out, my monthly cashflow was in the negatives after I paid all my expenses.  So I knew I had to cut back on what I was spending in college.  I could no longer pretend to live a life full of expensive drinks (or cheap for that matter), sororities, and brand names (or any new clothes).  I quit my sorority months ago, as it was not providing enough value for its cost.  But where was that extra $1,500 per semester going?  I lived paycheck to paycheck and still never seemed to have enough.

So, I got smart.  I rearranged my budget and cashflow so that instead of the extra money that I got from my scholarships paying for extra, frivolous things, I paid my rent first.  The scholarship money is passive income, meaning that it is an independent source of income that is guaranteed each semester without having to “work.”  With that passive income, I needed to pay my expenses for my needs first (rent, utilitiy bills, books for school, etc).

With the money I earned from my job, I am able to pay my interest on my student loans and food, but that’s really it.  So while all of my friends go spend their money on alcohol and sorority dues, I am getting smart about how to budget my money so that I know I can always pay what I need to pay.  But this isn’t enough to get me out of debt.

The goal learned from Rich Dad Poor Dad: Create a passive income greater than your monthly expenses.

As of now, I have not reached that goal.  My monthly expenses are about $800, but my passive income (if broken down equally into twelve months) is only at $400.  This is why I started this blog - to create passive income for myself eventually.  If I can get my passive income greater than my expenses, I can use extra money that I earn to start paying off my loans.

Pay more than just the minimum balance due (AKA the Interest Rate)?!?! CRAZY, I know.  But it’s how you build great credit and get out of debt.  Spending money on frivolous things that you can’t actually pay for out of passive income will only create more debt.  Paying off your student loans will be much more difficult in the future if you spend now.

I’ve been writing about the plans and information related to student loans and the debt they create.  This basic level of knowledge is of course vital to creating a plan to get out of debt.  But the knowledge means nothing if I can’t apply it.  So, how am I actually going to make money?  Here are the details:

1. Set up a Wordpress account.  This provides an easily accessible way to publish my blog.
2. Create a Google AdWords account.  This tool allows you to research keywords, including how many searches they get per month.  This can help guide which words to tag and emphasize on your blog for search optimization.  You want as many people as possible to see your site, so choose key words and phrases that have a high search volume, but are still relevant to your topic.
3. Buy a domain name from GoDaddy.com.  Come up with a name that is easily remembered, catchy and highly related to your information.  Cost: $7.89 for a year.
4. Get hosting for your website.  It’s relatively cheap and easy and makes your website more manageable and accessible.
5. Create a Google AdSense account.  This is how you get relevant ads on your blog.  It tells you how much money you make and it’s free!
6. Create a Google Analytics account.  This tool allows you to track your website traffic.  It has tons of awesome reports, like how many different countries your visitors come from (I’m already up to three!)
7. Start writing.  The more content you have, the faster you will get indexed into the search engines.
8. Market your blog!  This is so important.  If no one reads your work, you will provide no value, and your goal will not be reached.  You can use social media, like facebook, twitter and stumbleupon.
9. Keep writing and marketing.  Money will not come quickly.  It will take some time to make your first substantial amount of money.  Probably months of work.

I’ve made $2.96 to date, but do not plan on quitting anytime soon.  I’ve still got $39,997 to go!
Most Recent Posts:

• October 17, 2009: Student Debt in Politics (1 Comment)
• September 16, 2009: A visceral emotional response to my debt. (2 Comments)
• September 16, 2009: Video Post 3 (4 Comments)
• September 9, 2009: Interest Rates and Debt (No Comments)
• September 2, 2009: How To Build Credit (2 Comments)

I began reading Rich Dad, Poor Dad based on a recommendation from my boyfriend.  Before reading this book, I despised money — I hated the inequality it created, the manipulation it took to get it, the corruption it perpetuated, and the waste it produced.  However, this book granted me the ability to change my opinion greatly.  The main theme: Make your money work for you, don’t work for your money.

Based on this book, the constant financial discussions with my entrepreneur boyfriend and my own financial struggles, I realized that I needed to figure out how to earn a passive income before I graduated.  I want the financial independence to follow my passion in life — I do not want to be limited by debt and the need for a steady paycheck and health care.  I made the decision to take action and began thinking about and discussing my options.  I knew I had to act quickly.

So here’s my action plan for getting out of debt within 12 months:

1. Create a website designed to provide info on my own personal journey out of student debt.  Provide value to others in a similar situation.
2. Through website traffic and advertising, generate income.
3. The better my blog, the more traffic.  More traffic = more income.

Sound simple?  It is.  If you want to get out of debt and start earning a passive income (an income that eventually becomes guaranteed without you having to work), there are so many ways to do it.  First, brainstorm ideas for a product or service that provides some value to others.  This is the most important part - it must provide some kind of value that others demand. Find a medium to transfer that value to others and begin your work.

In my personal case, I decided that student debt, loans and consolidation would be my particular topic.  There are probably thousands upon thousands of other students who, just like me, don’t really know the impact debt can have or how to get out of it for that matter.  Then, I decided that the best way to explain this process was to chronicle my own journey through a blog on my own website.