Monday, January 21, 2008

Sorro's Financial Manifesto 1.0

One interesting thing that has happened as a result of the recent hammering of the stock market is a good part of my financial strategy. After we got another talking to in church, combined with the anemic savings rate in the US (the median net worth for those under 30 is just a shade under $8,000) I thought I ought to share my strategy here. Keep in mind that, as with all disclaimers, I am not a financial adviser. I'm just a guy who is doing quite well for himself and would like to see others do that as well. With that in mind, I give you my Financial Manifesto.

1. Credit is king.
What do I mean here? I certainly don't mean go out and max yourself into oblivion or use credit unwisely. I mean that the single most important thing you can have from a financial perspective is good credit. While a lot of people talk about having a good cash position, and that is very important, having a good credit position helps out that cash situation. With good credit you can get lower rates on everything from a mortgage to credit cards to installment loans. This means that you can keep more of that cash in your pocket. Here's the best ways that I have found to obtain and grow that credit.
A. Credit cards. I know a lot of people are very against credit cards and think they are the Devil's tool. Those people are one of two things: misinformed or unable to control themselves. If you can control your spending, a credit card is one of the best things you can have. There are a ton of free ones out there that give you rewards for spending what you otherwise would. Which card you choose depends on what rewards you want, anything from cash back to airline miles to points good for gift certificates at your favorite store. Some of the best free ones are the Costco American Express card or the Nordstrom Visa card. If you want airline miles, usually you have to pay for them. Companies/cards to avoid include American Express charge cards and CapitalOne cards. The reason for this is because they report a $0 line of credit to credit agencies. If you have a balance of any kind on them, it can hurt your credit in that all-important credit available:credit used ratio.
B. Installment loans. These can include things like cars or pianos or any good where you don't have access to a revolving line of credit. A lot of times you can get these as a promo deal where it's 0% interest and or no interest/no payments for x length of time. These are great tools to get a bigger ticket item. If it's 0% interest, it's a no brainer to apply for the credit and use it in whatever way you need to in order to get it paid off without penalty. You don't pay any extra and you get the credit history. If you're paying some interest, try to get this paid off early. That looks great to creditors, even if it costs you a little interest.
C. Mortgages. These are the big kahunas and the last step towards establishing good credit. You won't get a good mortgage rate, especially right now, unless you are a prime lendee. This means low risk to the lender and they define that as having a good credit score (from building up your credit earlier with other loans), not borrowing too much (ideally no more than 80%) and using a reasonable product like a 15 or 30 year fixed rate (try that with a Jumbo loan - around $500,000+ or with an unconventional product like an ARM or interest only mortgage and you could be in trouble).

2. Live within your means.
This should be easy, but clearly it's not. I know a lot of people who get themselves into serious debt trouble because they can't do it. For some people it's toys. Toys are great and a lot of fun. I have my fair share, but the key is to get them after everything else is taken care of. If I'm borrowing on my credit card and can't get that paid off, I shouldn't go buy a nice car or a big screen TV. One thing that my generation is particularly bad at is waiting for fulfillment. We leave our parents' houses and expect to have everything we had there. So we go buy a house, fill it with nice stuff, and don't worry about the bills. What we should do instead is (usually) get an apartment, get secondhand appliances, and slowly replace them and/or move into a purchased house as our salaries get bigger.

3. Don't risk what you can't lose.
I got a house call the other day from a rep from World Financial Group. Now I think they are appropriate in some situations, but invariably they want you to refinance your house into an interest only loan for a much larger amount to then turn around and invest in an actively managed fund through them. Active funds are great, but to cash out my debt in the one asset that I want to keep no matter what happens is foolish. Come to find out that the stock market commenced its nose dive a scant 2 weeks after that meeting and I'm looking like a regular savant. I don't mind putting cash into the market, indeed, I have a lot of money in mutual funds, index funds, and stocks. At the same time, if it all drops to zero it won't destroy me.

4. Teach your children well
Part of the reason we can't save and budget is our parents didn't do a great job teaching us. Schools haven't either. They taught us that you can buy things and that things make you happy, but they didn't really teach that bankruptcy kills your credit for 7 years, that compound interest is the single most important formula to learn for financial success, tools for success in the stock market (including that incredible and relatively safe way to leverage your buying power, options), or that even with credit you shouldn't spend more than you make. These are things that everybody should know, but not many people do. With this knowledge, you can rest assured that you and your children will go out into the world ahead of the vast majority of other people out there.

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