Question: I am 32 years old and would consider myself financially illiterate! I briefly held a credit card, but after a series of rather poor decisions at the age of 20, I got spooked by the idea of credit altogether. When I last checked my score several years ago, it was not surprisingly in the toilet.
In deciding to try and repair my finances, I checked my score today and found that it was (surprise!) 775! So after years of neglect, illiteracy and general incompetence, how do I maintain this incredible turn? Desperately in need of some sound, simple advice! Ryan, Cincinnati, OH
Answer: I don’t think you’re financially illiterate and financially incompetent. That’s for sure. Most of us make mistakes with our money at some point in our lives. It’s how we learn. You must have developed some good habits over the past decade.
When you think about it, much of personal finance is really about developing good habits. Set money aside in emergency savings. Don’t carry a credit card balance. Pay your bills on time. Fund your retirement savings plan. Don’t borrow too much for college or home.
When it comes to your credit score, the most important thing you can do to keep it high and get it even higher is to pay the bill on time all the time. I would add that, with credit cards, there’s no need to carry a balance to improve your score. All you have to do is use the card on a frequent basis, keep the amount you borrow on the card low relative to your credit limit and pay off the balance when it’s due. Many people buy their groceries or fill up at the pump with a credit card and get rid of the total tab at the end of the billing cycle. They get a good credit score and don’t pay any interest charges to the lender.
The key idea is to manage household finances with a margin of safety. A healthy financial buffer — especially savings — offers shelter against terrifying downturns in the economy and upheavals in the financial markets. A margin of safety is a money cushion against inevitable setbacks, such as a layoff, a pay cut or an illness.
However, a margin of money safety involves much more than protection against emergencies. It allows for sensible risk-taking over a lifetime. It lets us pursue intriguing opportunities when they come along, to take risks that might lead to a more satisfying career and to embrace changes in our lives that could lead to greater happiness.
Safety and opportunity, like risk and return, are two sides of the margin-of-safety coin.
I’m glad you listen to the show, since we are all about sound, simple advice. Financial complexity is the enemy of good money management. You might want to look at Jane Bryant Quinn’s Smart and Simple Financial Strategies for Busy People or my book, The New Frugality: How to Consume Less, Save More, and Live Better. I recently read Risk Less and Prosper: Your Guide to Safer Investing and I liked its perspective a lot.
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