Making Smart Financial Decisions as a Young Adult (Part 2)

Hi everyone! It’s been a while and I trust that you are all doing well. In the second edition of Financial Friday, we will be discussing in depth the keys young adults should consider in relation to buying insurance, investing, building and maintaining a healthy credit.

The subject of insurance can be dicey especially because the need it for varies from one individual to another. It always makes sense from a financial standpoint to acquire insurance against calamities, including losses, accidents and death. Consider a scenario where the breadwinner with dependents- his wife and kids- dies; such a situation can pose a huge burden on his survivors to make ends meet thereafter. To avoid such a disaster, it would be smart to secure life insurance to protect one’s family. The importance of life insurance cannot be understated since it has such a huge impact.

There are two schools of thought regarding the topic of investing, which are: active and passive investors. The former try to take advantage of the stock market or outsmart others by spotting out underpriced securities or intelligently timing the market to notch bigger returns than other players in the investment field or risk-taking game. The latter, on the other hand, accept whatever returns the market offer its players. Active and passive mutual funds have higher and lower expenses respectively. In addition to that, there are fees associated with each type of mutual fund, meaning the active funds underperform its passive counterpart on the average.

It comes as no surprise that based on research, it is not the easiest task to predict the outcome of which active investors outperform other players in the market. It makes a lot of financial sense for investors to diversify their stocks, which in some respect acknowledges the saying: “Do not put all your eggs in one basket.” Mutual funds are the most cost effective way for investors to diversify their basket of funds. Index and asset class funds are usually the least expensive mutual funds, with more diversity when it comes to shares.

Building and Maintaining a Healthy Credit
It is very critical for individuals to understand the impact their respective credit scores can have on important financial decisions such as renting an apartment or securing a mortgage on a new home. It also has the potential to determine if a borrower can gain an ideal interest rate for a personal or auto loan, and even credit cards. Currently, as part of the hiring process for jobs, some recruiters even take a look at the credit scores of their potential employees before they are given offers. No matter how bad or terrible an individual’s credit score may be, the good news is that there are ways to bump it up. The following are five ways to help boost credit scores.

Understanding the Score
The most basic step to get out of a credit score rut is simply to understand or have an idea of where one stands so that the necessary steps can be taken to fix the issue. In the United States, there are three credit reporting bureaus- Experian, TransUnion and Equifax- that offer a free credit reporting every year. Each bureau has a different calculating metric based on the available financial information they have at any point in time, hence their respective scores may vary slightly. Nonetheless, the Fair Isaac Corporation (FICO) method is an accurate measure based on all three.

The most important factor creditors take into account is borrowers credit risk or the chance that they may not pay back their loans. The scale for measuring risk starts at 350, which is considered the highest risk, while 850 is the best rating possible. The higher the score, the more appealing borrowers are to lenders. A score of 700 is considered to be in good credit range.

Correct Any Errors
After a thorough review of your annual credit report, ensure it is error-free. Possible errors could stem from amounts owed to lenders, previous addresses or even social security numbers (SSN), which could have a negative connotation, and in the worst scenario, mimic identity theft. Based on the Fair Credit Reporting Act, there is a 30-day window to address any errors. A certified mail must be sent to the reporting agency and the lender to settle any dispute. While this is a tedious process, it is highly recommended to correct credit score errors.

Pay Down Any Credit Balance
Pay down or pay off any credit balances that you may have on your credit cards. In addition, keep in mind that it is not recommended to exceed 30% of your total credit limit on all your cards, as anything counter to that could drop your score. Your total number of credit cards also affects your credit score, so while it may cross your mind to divide your expenses on your various credit cards, lenders take that into consideration and may potentially drop your score. Financial advisors preach against employing such a strategy.

After paying off your balances, keep your cards open, and adopt the strategy of using one or two main credit cards with their balances under the 30% limit. This tactic helps to keep your credit utilization ratio in check, which is based on your available credit versus your total credit threshold. Keep a low revolving credit, as this shows lenders that your are living within your means.

Make Timely Monthly Payments
Payment record is a central part of your credit score, so making on-time payments will help boost your score tremendously. Although a missed payment may not seem like a big deal, once that gets reported to the credit bureaus, it could have a negative impact on your credit score for up to seven years! To have more control, schedule all your payments on your calendar or set automatic reminders and payments by autopay.

Keep Old Accounts Open
Once you have paid off your outstanding charges, do not be too quick to get rid of your credit cards and close your accounts as this may drop your score. An integral part of your credit score is its history- how long your accounts have been in existence. In addition, do not open too many cards at any given point in time, as it may raise a red flag to lenders. Always keep in mind that building your credit takes time and discipline- it is about doing the right thing over and over again, so aim to be a good strategist and stay ahead of the game. A good credit score will maximize your approval rating for loans and give you the calmness of mind to make key life decisions not just for you, but for your entire family.

Finally, the financial choices, young adults make while starting out their respective careers could be very challenging, nonetheless, with proper education and discipline, success is definitely guaranteed.

God loves you!

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