Still confused about finances? Lauren’s back with more tips. Photo by Lauren Hough.
LAUREN HOUGH | OPINION COLUMNIST | firstname.lastname@example.org
Foreword: I am the least qualified person to be giving you this advice — I am a sophomore economics major with nothing more than an Excel spreadsheet and binder full of credit card and bank statements to manage my finances. However, my basic understanding of budgeting and credit has set me up for financial success in the future. It goes to show that this information is incredibly easy to find, learn and implement in your own life and it is definitely worth the trouble.
This week, we are tackling three of the scariest concepts in the world of personal finances — credit, insurance and investment. But don’t fret: understanding credit score, insurance types and the difference between stocks and bonds isn’t as hard as your high school home-ec teacher made it sound. If you haven’t yet, take a look at the student loan and budgeting edition from last week. It will help prepare you for what’s coming.
So sit back, relax, and let’s tackle this together.
What is credit, really? A magic number, a mystical power, a wizard who deems you worthy of dangerous adventures? Honestly, it kind of is! Credit is your ability to borrow money without immediate payment because lenders know they can trust you to pay back your debts. Your “borrowing capacity” is numerically represented by something called a credit score.
Credit scores, which range from 300 to 850, tell lenders how reliably you have paid back previous loans. Credit score is the primary reason it is important to open a credit card as soon as possible — to start building credit now. Over time, you will develop something called credit history, which shows just how reliable you are. Your credibility as a borrower can be determined by how high your credit score is, and the longer your reliable credit history and on-time payment of bills, the better your score will be. Abby Wild, junior finance and accounting double major, stressed the importance of opening a credit card.
“It teaches you responsibility because you have to pay a bill at the end of the month,” Wild said. “Building up credit is super important because in the future, if you want to take out a loan, all of the banks will look at your credit.”
It can seem scary to track and maintain your credit score, but it’s very manageable if you know how. You can get a free annual credit score check through credit bureaus like Experian, or your credit card company may offer it as well.
To prevent your score from falling, there are a few easy steps you can take. First and foremost, pay your bills on time. Professor of finance William Templeton told me one of his top credit hints for students.
“Never carry a balance on a credit card. Never,” Templeton said. “All in all, you should avoid having large amounts of debt in any capacity because it will harm your score.”
Next, don’t close your credit cards. I repeat: Don’t. Close. Your. Credit. Cards. Closing long-used cards lowers your credit age and in turn, your credit score. Not to mention, it lessens the amount of credit available to you, which is also taken into account when calculating your score.
You may be asking, Lauren, I get what credit is, but why is it important? Here’s why: a good credit score can lower interest rates and increase your likelihood of being approved for a loan. Over time, these two perks will save you a lot of money and a ton of stress.
Now that you’ve — hopefully — created a budget after last week’s article, it’s time to understand what the “insurance” portion of that budget means. Before you go signing up for insurance plans willy-nilly, you should take some time to determine what types of insurance you need and what plans your employer offers.
There are three types of insurance you should definitely make sure are covered: auto insurance, homeowner’s/renter’s insurance and health insurance. Auto and homeowner’s insurance are not typically provided through employers, but health insurance is, so be sure to check what your company’s health insurance policy is.
Other types of insurance that may be offered are disability insurance and life insurance. Chances are, you might not need either of these right now. Unless you choose a line of work that has an inherent possibility of physical danger, disability insurance isn’t necessary. Life insurance will probably be worth the money later in life, but as a young graduate, there really isn’t any need for it unless you have children.
I strongly suggest you consider investing. Unfortunately, there are a lot of confusing messages out there about how to invest money.
The most important thing to distinguish about investment is the difference between stocks and bonds. Bonds are essentially a loan that you give a company or the government. They have a fixed interest rate that will ultimately generate a higher return. Because of the fixed interest rate, bonds are significantly less risky than stocks.
When you purchase a stock, you are actually purchasing a portion of a corporation. Partial ownership comes with higher risk because your return is dependent on the success of the company — in other words, it is not guaranteed you will get back more money than you put in. However, stocks have the potential to be far more rewarding. This being said, it is usually recommended to invest in both stocks and bonds.
Templeton emphasized the importance of your stock to bond ratio.
“When you’re young, that’s when you should go for it. Now is not the time to be a conservative investor, now is the time to be in the stock market,” Templeton said.
In other words, right out of college you should ensure your diversified portfolios include more stocks than bonds. By diversified portfolios, I don’t mean those big folders art majors carry six miles to Jordan Annex, I mean a collection of assets that can include investments like stocks and bonds. Having stocks in your investment portfolio will grant you a higher rate of return over a long period of time — and you’ve got plenty of time!
Now that you’re on your way to becoming a master of your personal finances, understand that financial management can be tricky at times — finances are always changing. You will continue to learn what management styles work best for you and continue to expand on the foundational knowledge you now have.
“It’s up to you to do your research, and make sure you’re doing what’s best for you and your future. That is the most important thing,” Wild said.
Personal finances are just that — personal — and it’s important to realize that your finances will look very different than those of your friends, family and peers.
“Understanding that everyone has different financial situations is huge, and being open about that is important,” Wild said.
If you remember nothing from this series except for one thing, know that it’s okay to ask for help when it comes to managing your finances. Take any and all suggestions you can get and then use them to formulate a financial plan that works best for you. The only way to learn is to seek out information and try it yourself
Closing Date: For a credit card, the statement closing date is simply the last day of the card’s billing cycle. Billing cycles typically last about a month.
Deductible: In terms of health insurance, a deductible is the portion of your medical bill that you must pay before your insurance pays the rest.
Diversification: Diversification helps lower the risk of investing. A diversified portfolio is a portfolio in which the investments are spread over many different asset types.
Installment Credit: When taking out an installment loan, a fixed amount of money is loaned over a specified period of time. The loan must then be paid off in a series of scheduled payments. Student loans are an example of installment credit.
Rebalancing: Rebalancing refers to the ratio of assets in your investment portfolio. To rebalance your portfolio, you buy or sell assets that will put your portfolio back to the desired risk allocation.
Revolving Credit: Revolving credit is the opposite of installment credit. With revolving credit loans, you are given a limit as to how much you can borrow. After that, the loan can be paid back over time — but not necessarily on a strict payment schedule. Credit cards are a great example.
ROI: Return on Investment is used to compare investments against one another. The ROI calculates how efficient an investment is, or rather, how profitable it will be for the investor.