Credit Improvement Lessons

I’ve learned many things during my credit improvement journey that I would like to share.  By reading this blog post I hope that knowledge will help you on your credit improvement journey.

  • For couples, the path to better credit can and should be a shared adventure
  • Discussions with you partner can be challenging! (But worth it.)
  • There are no quick fixes, except, perhaps for one
  • It feels liberating to get reduce your debt burden

My newest learning are largely about the emotions of finance. Whether you are in a relationship or not, money, credit, debt, personal finance, and even wealth management is an emotional process.

When it comes to finance I am extremely logical, almost like a Vulcan.  My wife’s financial personality is more emotional, perhaps like a Romulan’s.  If you don’t relate to the Star Trek references, perhaps you can relate to “Men Are from Mars, Women Are from Venus.”  I’m not saying that all men are less emotional about money, or that all women are more so.  I have seen couples where the roles are reversed.

Either way, it is rare that a couple has little emotion about money.  We all have our hangups, and some are financial.

Now, if you are currently single, I can relate too.  When I was single, I had impeccable credit and finances. I was also lonely.  I went on occasional dates, and I turned off some first dates when I picked them up in my 15-year old Saturn.  I could have afforded a brand new car, but I was too young for that to be in my financial best interest.  Believe me, you are better off without someone who complains about your car being too old!

When I finally met the right woman, my finances remained impeccable, but hers were different.  I would say that about half of our fights over the years have been about money, and that ratio became higher after we got married. My number one lesson about money and love is:

Talking about money is important, listening about money is doubly so. Knowing when to talk, when to listen, and when to postpone the money conversations is critical. Patience is better than pushiness. Your partner is likely listening — it may just take them a few days to process what you are saying.

I realize this post has focused on money and relationships.  When you are single, financial strength leads to self confidence, which leads to not being single (however be choosy… pick someone kind and mostly compatible). When you are in a relationship, realize that talking about money means listening.  If you communicate with patience and honesty you will have fewer arguments and better finances!

I realize I left a teaser at the top. What is the one quick way to improve your credit score?  Simple: pay down your balances, if you can. (And avoid increasing them with dogged determination).

What’s a Good Credit Score (or Great Credit Score)?

The answer depends on for what purpose you’re hoping to use your credit score(s).  However, my short answer is:

  • Good Credit: 700-739
  • Great Credit: 740+

I’m basing this short answer on mortgage rates. A FICO score of 740+ should be high enough to get the best mortgage rate from virtually lender. A FICO score of 700-739 is sufficiently high to qualify for most mortgages but at likely a slightly higher rate (+1/8 %).

Your credit score is only one of several important variables that factor into a mortgage qualification decision.  Other factors include income, amount borrowed, appraised home value, and credit history details (from your credit report).

For credit cards a score of 720+ is a high enough score to qualify for all but the most selective credit cards. Credit card company each have their own proprietary risk measures that go beyond just credit score.

One thing I have learned is that if you have a big total limit from on credit card issuing bank, you will have a harder time of getting more total credit from that bank.  The issuing banks care about how much risk they are exposed to.

So, if your are trying to grow your total available credit in general it is best to do a little bit of homework as to what is the issuing bank.  If you already have 3 credit cards from Bank of America, applying for a 4th from them is probably not your best option.  Instead look for a card issued by another bank, say, US Bank, or Capital One.

Best Way for a Twelve-Year-Old to Learn Finance: My Paperboy Job

By the time I was 12 years old I knew more about finance and budgeting than most 20-year-olds.  I had started delivering papers at age 11 and had accumulated a lot of experience by the time I turned 12.  One of the older kids in the neighborhood had out-grown the paper route job, and my friend Alan I and I decided to share his route when the older kid “retired” from the newspaper business.  Alan was 12 and I was just 11 — making me one of the youngest paper boys in town.

The route was long, spanning about 4-5 miles, and hence came with a long-distance premium paid every month.  Alan and I alternated delivery weeks which included afternoon delivery Monday through Friday and early morning delivery on Sundays.

The best part of the job was afternoon delivery in the summer months.  I seldom minded the heat and I enjoyed riding my bike around the neighborhoods.  The worst part of the job was collections.  Most subscribers paid by mail, but some paid directly to the delivery boys.  For them, I would have to knock on their doors and ask for their monthly subscription fee.  Since many paid in cash I had to make sure to have enough cash on hand to make change.  I found that some people were very prepared to pay, while others said they did not have the money and “could I come back tomorrow?”.   The worst was when tomorrow never came.  The missing money temporarily came out of me and my partner’s pay.  Only when the adults in billing got involved and the situation was rectified did Alan and I get our missing pay — and this could take a couple weeks. We pre-teen kids served as the bank floating interest-free loans to the newspaper!

A bundle of about 50-60 papers was dropped off at Alan’s house every afternoon (or Sunday morning).  On rare occasions there would be one too few papers dropped off.  This meant that I had ride an extra two-mile round trip to the nearest store to buy a copy to replace the missing paper.  I would report the missing paper and get reimbursed for the cost of the paper — but not for riding an extra two miles.   Another lesson — sometime you just have to take on extra work to keep your customers happy.

I was getting first hand exposure to revenue, earnings, “one-off” financial events, and accounts receivable.  I learned that some customers paid on time and others were often tardy.  Occasionally some were generous and even tipped!   Those that paid my mail would sometimes leave a tip, especially around Christmas time.  All of that had to be accounted for because Alan I shared the tips.  Sometime the tips were gifts, rather than cash.  Alan and I divided the cash, be kept the non-cash gifts we were given.  We were both very fastidious about our finances, and I don’t recall ever having a conflict or dispute between us.  We were honest and meticulous and it paid off in a good working relationship.

I had a savings account and interest rates were around 5 percent.  I was eager to get my money in the back to start earning interest on it, and I’d go with my Mom to the bank to make deposits.  (I think her main reason to go to the bank was to deposit my Dad’s paychecks).  I was fascinated with the idea that after two months I would earn interest on interest (in addition to interest on my savings).  After three months I’d earn interest on my interest’s interest’s interest (even though that amount might be less than one penny).  I was paid interest monthly and always looked forward to my monthly bank statements.  I also wondered about the possibility of daily interest, hourly interest, etc.  I only learned later that my musings had touched on the mathematics of fundamental financial concepts such as compound interest, continuous interest, opportunity costs, and discounted future cash flows.

Looking back, I see that my paper route taught me a great deal about money and business.  It also helped me develop a strong work ethic. In many ways it is a shame that the job of paper boy or paper girl is pretty much a relic of the past.  So many lessons not being learned.  It seems that there are fewer and fewer opportunities for younger kids to work, earn money and learn important life skills at an early stage.  Nonetheless there are some young entrepreneurs who are finding real information-economy jobs on the internet, for example.  Times change and so do opportunities to learn and grow.  And that rate of change appears to be accelerating.  We live in interesting times.

 

High-Tech Portfolios

When I think about the phrase “high-tech portfolio”, I don’t think tech stocks.  Instead I think about using technology to build a smarter portfolio.   Most actively-managed portfolios are constructed, in full or part, using 50-year-old “modern portfolio theory” methods.  I’m working to change this by bringing superior portfolio technology to market.

So, while writing for this financial blog remains a passion of mine, I will likely be spending much more time refining software and building a financial software business.  Much of that effort will be off-line at first.  Occasionally, however, I will provide business and software updates on the Sigma1 Financial Software Blog.

Developing portfolio-optimization software combines two of my long-term passions:  software development and finance.

Rest assured, that I will keep this blog up and going.  I think it contains some hidden gems that are worth discovering.  I will also continue to blog here when inspiration strikes.

Financial Toolkit: The Rule of 72

The rule of 72 is an easy way to make fast financial calculations in your head (or on a sheet of paper)… no calculator is necessary.  The idea is that you can determine how fast money will double based on an interest rate or rate of return.  Divide 72 by the interest rate and that is the number of years it will take for the investment to double.

For example if a CD (Certificate of Deposit) is paying 6% it will double in 12 years because 72/6 = 12.

The rule of 72 can be used for decreases in value, such as inflation.  If inflation is 4%, money under a mattress loses 4% per year in value.  Because 72/4 = 18, that money’s value will be cut in half in 18 years.   So positive returns divided into 72 tell how long it will take your investment to double and negative returns how long to lose half its value.

The rule of 72 provides convenient illustration of how fees can effect an investment.  Let’s say you are considering two investments in your IRA managed by your brother-in-law Sam.  Option A is to buy and hold SPY, an index fund that has an expense ratio of virtually 0% (0.09% actually) or option B tracking the same index  but managed by the Sam’s company with a 2% expense ratio.  Sam says “Hey buy my index and I get a commission and a chance to win a boat.” Using the rule of 72 you see that 72/2 is 36, meaning Sam’s index will only be worth half of SPY in 36 years.  If you are 29 years old and want to retire at 65 (in 36 years) that’s half of your retirement money!  Tell Sam to find some other sucker to win his stupid boat.

Rule of 72

Cost of 2% based on the Rule of 72

Finally you can use the rule of 72 together with inflation and expected return to plan your financial future.  If you expect a 7% (nominal) return on your retirement portfolio and 3% inflation, that’s a 4% annual return, so your money will double — in inflation-adjusted terms — in 18 years.  Now if inflation is 4% your real return is 3% and your real investment value will double in 24 years; that’s a whole 6 years longer.  Possibly 6 more years until you retire.  Add a 1% management fee and your real return drops to 2% and doubling time is now a whopping 36 years.  Yes, even a 1% fee can cost you 12 more years until you retire!

The example above shows the destructive power of inflation and why even a 1% annual inflation underestimation can be a big deal.  For tax payers that means tax brackets (based on the government’s CPI-U) gradually form an increasingly tight straight-jacket around your take-home pay.  For Social Security recipients this means cost of living adjustments that simply don’t keep up with real world expenses.

The rule of 72 is a powerful tool for financial estimation.  The rule of 72 is not perfectly accurate, but it is generally pretty close to the target.  It is, however, easy to use and can be used to explain financial concepts to people that aren’t that “mathy”.  It is a great way to start explaining finance to kids; while being a tool powerful enough that is also used by Wall Street pros.

Dumb Phone, Smart Money

My two-year contract expired, and I traded in my smart (HTC Android) phone for a “dumb” phone.  The main reason was to save money: I will save $25/month by being able to drop the data plan.  That’s a savings of about $340/year including tax.  I enjoyed my Android phone, but I also have an Android Tablet with wifi only (and a 10.1″ screen) so that satisfies my Android needs.  Of course my laptop has wifi which allows me to write this very blog in a coffee shop.   I just don’t need a smart phone, and $340/year in savings is not insignificant.

I will divulge that I have been much less vigilant with my spending habits this year.  Since my girlfriend and I have stable, high-quality jobs and our financial strategies have been reasonably successful, it has been easy to indulge a bit.  One indulgence has been adopting two wonderful rescue dogs.  We spoil them, and they eat a lot.  I figure they collectively cost $4000/year.  We enjoy their company greatly so the price, while steep, is worth it to us.

I used to be a master of savings.  Now I am merely pretty good living below my means.  I still have the extreme saver know-how, but I am no longer living the extreme-saver lifestyle.  I am living the disciplined saver lifestyle.  I say this because I am sensative to the fact that my finance blog readers are in a wide variety of financial positions.  I am a strong believer in living below your means, especially in your accumulation (savings) years.

Bitcoin: The Inflation-proof E-Currency of the Future, or Not

Bitcoin LogoIf I were to design a new currency I would design something very much like BitCoin.  It is a digital currency with about 6.5 million units in circulation. BitCoin will never have more than 21 million units of currency in circulation…. ever.  Bitcoin is divisible into tiny fractions of a unit down to millionths of a BitCoin and smaller.

BitCoin is digital money.  Imagine PayPal but without the hassle, or the commissions.  Image digital gold.  Gold which is mined (by computers), but has a known maximum supply of 21 Million ounces.

Gold’s value is largely related to its relative rareness.  Gold’s usefulness is pretty limited except as jewelry and a form of currency.  Industrial uses of gold consume only a small fraction of gold’s supply.  And gold can be mined faster than it is consumed.

Gold cannot be as easily traded or exchanged as BitCoins.  Yes gold ETFs can be exchanged for cash which in turn can be used for web transactions, but this is a multi-step process.  BitCoins, however, can be easily exchanged from person-to-person or person-to-business with ease.

Today each BitCoin is worth more than $13.  BitCoin valuations have fluctuated rapidly.  One person, according to Forbes, turned $20,000 into $3 million by buying Bitcoins early then selling them for a killing.

BitCoins may one day be worthless relics on discarded hard drives.  Or BitCoins may become the E-commerce alternative replacing PayPal.  Right now BitCoins seem to be priced about what the current mining cost will bear.  The cost of mining is measured in 1) electricity (energy) and 2) depreciation of the graphics cards used to mine new BitCoins.  This tends to put a short-term ceiling on BitCoin prices.  However, the BitCoin system makes the cost of BitCoin mining escalate geometrically.  Eventually, if all goes optimally, the mining cost will be come prohibitively expensive.

If BitCoins gain wider and wider acceptance I anticipate they will hold or increase in value.  However if either of the following happen they will end up virtually worthless: 1)  BitCoins simply don’t gain wide acceptance, and lose acceptance over time.  2) The algorithmic infrastructure underlying BitCoin is found to be flawed.  There is yet another alternative:  That a BitCoin-like system is created the competes with the original BitCoin.  Finally one more possibility:  various governments outlaw BitCoins.

In closing, BitCoin is a brilliant idea and a risky “investment”.  It is riskier than gold, silver, or index ETFs.  It is similar in risk to buying options, because the value can rapidly go to zero.  However, it is an interesting speculative play that is potentially inflation-proof.  Inflation-proof because, unlike government currencies, the printing presses (BitCoin mines), are held in check.  Buying 1500 dollars worth of BitCoins is no sillier to me than buying a $1500 gold coin. Just make sure you guard your BitCoins like you would your expensive gold coin… security, security, security.   Because BitCoins can be stolen, just like gold.  And they can be stolen without the thief even setting foot in your house.

Just don’t call it QE3 nor Inflationary

Drilling for stimulus, finding inflationWhether it’s Barack Obama releasing 30 million barrels of oil from the Strategic Petroleum Reserve, or Ben Bernanke saying they might buy another $300,000,000 worth of U.S. Treasurys… even after QE2.  But, no, it’s not QE3… nah.

The oil gambit was, from a purely stimulative standpoint, an interesting move.   It would have been more effective when oil was at $110 and rising rather than in the $90’s and falling.  But, perhaps there was some political hay to be made.  Short term this was not an inflationary move.  However, someday, those 30 million barrels will have to be repurchased… which will have an inflationary effect.  It was a short-term political move.  From a geopolitical perspective, it also signals a US willingness to manipulate the oil markets… rather than being truly “Strategic” (aka for military and other strategic purposes).    Ironically the Obama administration is accusing others of oil price “manipulation” while they just did just that with the SPR oil release.

And for Helicopter Ben, QE and QE2, both unprecedented;  it seems that maybe a little more magic juice is called for.  He doesn’t understand the current economic problems, other than to call them (mysterious) “headwinds”.

The situation, as I see it, is inflation-triggering non-stimulus.  The magic “CPI” may not reflect this right away.  In fact I believe inflation is currently outpacing “CPI Index” inflation by 1 to 2 percent.

I’m not fully aware of the whats or whys of QE3, I just know that I’m not supposed to call it QE3.

Wired in High Finance

Stock Tickers BlueThere are two economies, the real economy and the financial economy (the financial markets). The two economies are linked, but sometimes the linkage is almost imperceptible.

Take for instance the recent run up in stocks, up ~20% in the last year, and up a total of ~40% in the last two years. This stock run up in the financial economy is in spite of the dismal real economy which was (still is?) in the midst of the Great Recession. The classic explanation for this jump in stock prices is anticipation of strong economic growth that many were guessing was just around the next fiscal quarter or two.

But continued lackluster economic growth, high unemployment, and inflation fears have the stock markets retreating 4% in the last month. QE and QE2 have driven commodity, gold, silver, and oil prices up (and the dollar down to a degree). Low interest rates have also helped fuel the commodity boom. I don’t say commodity bubble, I say boom, because I don’t believe it is a bubble… merely a precursor to higher inflation.

Further the prospects of Congressional legislation past and present loom as large economy and business-dampening prospects.

  1. Dodd-Frank Act regulating all sorts of financial and non-financial items.
  2. Obama Care.
  3. The real possibility of tax increases as part of debt ceiling deal.

The danger of Dodd-Frank, which deals primarily with the financial economy, is that it may spill over into the real economy as well — a form of fiscal contagion.   Obama Care hits right in the solar plexus of the real economy soon.  Potential tax increases are a kidney shot to the real economy.

Also on the horizon is the debt crisis in Europe, currently centered around Greece, but with dominoes in Portugal, Spain, Italy and Ireland ready to fall.

So, why on earth would I be neutral to mildly bearish (long term) on US equities?  The title “Wired on High Finance” sums it up.

  1. Wired, as is in connected, by wire, cable, fiber optics, or wireless.  The continuing computational and connectivity revolution is only accelerating.  This helps business productivity, which helps business (the real economy) and inevitably the financial economy (the stock market).
  2. High Finance.  High finance in the US eventually finds a way.  Take for instance GE which managed to pay zero income tax last year.  Big money always finds a way.   Call it industriousness, creativity, or greed… it gets things done.

Without all of the governmental fiscal and regulatory “headwinds” (as Bernanke has called them), my outlook would be bullish.  Despite them, I believe that the power of a wired world of high finance will find ways to resist the government onslaught.  Either through back-room deals (the new and no-so-new crony capitalism) or the ballot box (voters tired of 9% unemployment), these “headwinds” will be reduced, skirted, or avoided.

And while CPI stands for Consumer Price Index, most commonly, it also stands for Cycles Per Instruction — one measure of computer processing speed.  So while the mainstream CPI may understate prices, the other CPI is very favorable to computation power.  (In both cases keeping true CPI down is desirable.)

Notice I am neutral to mildly bullish on the US (and global) economy.  That is why I, personally, am increasingly invested in investments that reflect that believe — namely covered-call market-index strategies.  That is why I have switches some of my ETF investments from SPY (an S&P500 index EFT) to PBP (an S&P500 covered-call ETF).  Inflation fears and low interest rates have continued to cause me to shy away from most bonds and bond fund… with the exception of high-yield (junk) bonds.

Disclaimer: These are my personal investing thoughts, opinions, and choices as of today.  No one can reliably predict the markets (stock, bond, futures, options) or interest rates, certainly not me.