Financial Responsibility Part II

Originally, I started this post back in 2015 but never got around to completing my second installment. After brainstorming and thinking about different financial tools that I wish I knew when finishing college or while I was in college I came up with a few topics. This post is a follow up to installment one Financial Responsibility I.

Please be advised that I am not an expert. Nor do I hold a degree or certificate in financial advising. The information is based on life experience. Feel free to continue reading if you would like to read my personal experiences.

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Topics:

1. Emergency fund
2. Paying off Debt

Emergency Fund
An emergency fund is very important. It can cover all of your financial burdens for 6 months if you plan correctly. Personally, the biggest challenge that I faced when deciding how much my personal emergency fund would be was identifying when it become an unrealistic goal? If I add up all my expenses and get a total of $12,000 is that realistic for me to save? Then after further research I found that 3 months is a more realistic goal for me at the moment. This brings my goal from $12,000 to $6,000.

After creating the goal amount, a budget then needs to be created. During the first installment I mentioned a few Apps that I find helpful. Mint is definitely one that comes to mind when it comes to setting a financial goal. For instance lets say my goal was to save $200 a month into a certain account until I reach $6,000. I can label this savings account as my Emergency Fund account via the Mint website or app on my phone. The app also lets you specific when you would like to have this goal completed.

A few tips:
1. List out your expenses and identify needs and wants.
Ex:

• Rent
• Car Note
• Internet
• Utilities

2. If you notice that your list is exceptionally long you should think hard on whether or not the item is a need or a want. It may seem hard to cut out certain items but in an emergency you won't be going to the nail shop, car wash, or happy hour.

It is important to remember than an emergency fund cannot be touched unless there is a true emergency. I wouldn't count a new pair of shoes, a new purse, or a new phone (unless your phone ends up in a river or something).

Paying Off Debt

There are numerous ways that debt can be paid off. I will touch on two strategies that I think are important.

First identify your goal. Do you want to lower your debt or increase your credit score? Please refer to the first installment for a high level overview of the importance of Credit.

• Lowering Debt by targeting lower debts first
  • Lets say you have 3 credit cards. With balances of $300, $600, and $1,500 dollars. Leaving you with a total of $2,400. If you want to focus on lowering your debts, the first step would be to start with the card with the lowest amount. That would be the $300 card. If you pay the minimum on the other two cards and pay $100 a check or a month of the $300 debt will be gone in 3 payments.
  • Then the $600 debt is ready to be tackled. This can be accomplished by paying the minimum on the $1,500 card and now paying the minimum plus $100 that you previously applied toward the first card. I call this rolling over payments. As seen in the below example the debts will be paid off in roughly 16 payments.

• Raising credit score by targeting credit cards that are high utilizers
  • As mentioned in installment one a high utilizer is anything over 30% of the credit limit. Lets use the same example of the 3 debts $300, $600, and $1,500. Below are the credit limits on each card. 
    • $300 debt has a limit of $2,000 - 15%
    • $600 debt has a limit of $750 - 80%
    • $1,500 debt has a limit of $1,600 - 94%
  • Therefore we would attack the debt in this order $1,500, $600, and $300.

Another way to tackle paying off debts is utilizing Balance Transfers. If you have a credit card with no balance or a low interest rate look at their balance transfer terms. A good balance transfer usually consist of a low balance transfer rate or 3% or 4% and an introductory rate between 12 to 18 months. The introductory rate is very important because this allows for you to transfer the debt over with 0% interest and pay it off during this time period without owing additional money.

Total credit card debt in the U.S.: $504 billion
Average credit card debt per person: $3,971
Average credit card debt per household: $7,703

**More information can be found here at the source Magnify Money**