Your credit score — and why it matters ~ Get Rich Slowly

For today’s edition of “back to basics” month at Get Rich Slowly, we’re going to talk about credit scores. What is a credit score? Why should you care?

As you go about your life, you leave a trail of transactions. You take out a mortgage, you buy a new car, you use your credit card to buy new clothes and your debit car to purchase groceries.

Every month, your creditors — the companies to which you owe money — send info about your recent activity to a variety of credit reporting agencies (commonly referred to as credit bureaus). Each agency collects this info into a file called a credit report.

Your credit report is a history of how well you’ve managed your credit. It contains info about where you’ve lived, how much you’ve borrowed, and whether you tend to pay your bills on time. It also notes if you’ve ever filed for bankruptcy.

The credit bureaus — Equifax, Experian, and TransUnion — sell your credit report to other businesses so they can decide whether to lend you money, sell you insurance, rent you a home, or give you a job.

Credit reports may be boring, but they’re vitally important because they provide the basis for your credit score.

How to Get Your Free Credit Report
The U.S. government has mandated that consumers be allowed to view their credit reports from each of the three major reporting agencies once every year. This is easy to do via the free website. (Beware of scammy lookalikes. This one is the official government-sanctioned site.)

To get your report, you need to provide some basic info like your Social Security number. You might also need to answer some questions about current and/or past accounts. Sometimes these questions get tricky if you don’t have quick access to your files. (When Kim had to check her credit report recently, she couldn’t remember the amount of her mortgage payment from 2005. Her request was denied.)

If you’d like, you can obtain reports from all three credit reporting agencies at once. Or, you can stagger your requests, possibly requesting one report every four months from a different agency.

Your Credit Score

While your credit report collects info about your debt history, your credit score is a single number that summarizes all of that data.

Credit scoring has been around for decades in one form or another. It only became widely used during the 1980s after a fim called Fair Isaac (now known as FICO) developed a new type of credit score called a FICO score. The mortgage industry recognized the usefulness of credit scores, widely adopting them in the mid-1990s. Other industries followed suit.

To generate your credit score, FICO takes bits of data from your personal credit report and compares this info to similar data from millions of other people. FICO then uses secret formulas to squeeze all of this information into a single number, which can range from 300 to 850. This number is a measure of risk. It gives lenders a good idea of how likely you are to pay them back. They use it to decide how much to lend you, what interest rates to charge, and what terms to set.

Although the FICO score is the most widely used credit score — used in over 90% of U.S. lending decisions — it’s not the only credit score. Other companies offer competing credit scores, and FICO (the company) offers a variety of specialized scores to measure things like how likely you are to declare bankruptcy, close an account, and so on.

Take a company like Credit Sesame, for instance. Credit Sesame offers a variety of credit-monitoring tools including a free credit score. But Credit Sesame does not use a FICO score. The company uses the VantageScore, which was developed by the three major credit bureaus as an alternative to the FICO score.

Confused? Don’t sweat it. The important thing to remember is that we often talk about “your credit score” like it’s just one thing when it’s actually many credit scores.

“A bad or even mediocre credit score can easily cost you tens of thousands and even hundreds of thousands of dollars in your lifetime,” Liz Weston writes in Your Credit Score. “You don’t even have to have tons of credit problems to pay a price. Sometimes all it takes is a single missed payment to knock more than 100 points off your credit score and put you in a lender’s high-risk category.”

A high credit score will get you the best interest rates on credit cards and loans, including mortgages. With a low score, you’ll pay higher fees and interest rates.

Here’s an example from FICO:

FICO Score Effect on Mortgage Terms

Bad credit can cause a downward spiral. One money mistake leads to bad credit, which costs you more money and leads to more debt, which drops your credit score…and so on. But your credit history doesn’t just affect your ability to borrow money. Nowadays, it’s used by insurance companies, landlords, and even employers.

  • Some insurance companies use a specific credit score (known simply as your insurance score) — combined with other info — to gauge how likely you are to file a claim. A lower score can lead to higher insurance premiums.
  • When you try to rent a home, your prospective landlord may run a credit check. If your credit score is low, she may see you as a high-risk tenant and ask for a larger security deposit — or simply turn down your application.
  • Current and potential employers can pull your credit report if you grant them written permission. This is especially true for which security is important. To some employers, a good credit record shows that you’re less likely to steal from the company, to take bribes, or to reveal sensitive information.

As you can tell, your credit score can have a very real impact on your life. But how is your credit score actually calculated? Let’s take a look.

FICO Score Components

The Anatomy of a Credit Score

According to FICO, your credit score is determined by a variety of factors that predict how likely you are to repay the money you borrow. Your credit score tracks 22 pieces of information from five broad categories:

  • Payment history (35% of your FICO score): Do you pay your bills on time? If you pay late, how late? How long has it been since you missed a payment? How many times have you had problems? The more responsible you’ve been, the higher your score.
  • Amounts owed (30%): How much credit do you currently have? Of that credit, how much are you using? How many of your accounts have balances? The less of your available credit you use, the better your score.
  • Credit age (15%): How long have your accounts been open? How long has it been since you used them? The longer you’ve had accounts, the better your score.
  • Credit mix (10%): How many different types of credit accounts do you have? (The two main kinds are installment debt like a car loan or a mortgage and revolving debt like credit cards.) How many do you have of each type? Your FICO score will be higher if you use a mix of different kinds of credit. (This is the only weakness to my own score. I don’t have any installment loans at the moment.)
  • New credit (10%): Have you opened new credit accounts recently? How many? Opening new accounts may ding your score, especially if you open many at once.

For some folks — like young adults who don’t have a lengthy credit history — the weight of each individual category may be a little different.

While FICO shares this broad overview of how they determine scores, the actual formulas are confidential. If you want more info, download the free “Understanding FICO Scores” booklet from FICO.

How to Get Your Free Credit Report
Even a decade ago, it was tough for a consumer to get her credit score. They were considered top secret info. It was a Big Deal to find some sort of hack that let you see your number.

Nowadays, there are a variety of ways to see your credit score for free. Both my Capital One credit card and my Chase credit card, for instance, give me access to my credit score. On those rare occasions I need to make a large financial transaction, I’m almost always offered my credit score.

And, of course, there are now companies like Credit Sesame, which are set up to offer consumers a variety of credit-monitoring tools, including a free credit score. (I’ve been watching my credit score with Credit Sesame for a while now. It was 804 a year ago. It was 810 in November. It’s 814 now. But I still get a “D” for my account mix. If I had other types of credit, my score would be higher.)

My Current Credit Score

What Is a Good Credit Score?

According to FICO, the national average FICO score is 695. While the company doesn’t share detailed stats about credit scores, they have published the following guidance:

  • A FICO Score of 800+ is considered exceptional.
  • A FICO Score between 740 and 799 is considered above average.
  • A FICO Score between 670 and 739 is considered average.
  • A FICO Score between 580 and 669 is considered below average. (Many lenders will still approve loans with scores in this range.)
  • A FICO Score below 580 is well below the U.S. average and shows that you’re a risky borrower.

Each of these ranges (or quintiles) contains roughly 20% of the American population. (About 17% of the U.S. has a score below 580, for example, while 19.9% have scores above 800.)

Last February, I signed up for a new credit card. My banker was chatty and we had an amusing conversation about credit and credit scores.

“Your credit score is 804,” he noted. “That’s unusual. The average credit score is below 700. You also pay off your balance every month. That’s unusual too.”

“It is?” I asked.

“You bet,” he said. “Something like 90% of our credit card clients carry a balance. I can tell we’re probably not going to make any money off of you, but that’s okay. You can’t win them all!”

Although income is not a direct factor in computing credit scores, there is a strong correlation between household income and credit scores. The more a person earns, the higher her credit score is likely to be. Age is also a factor (which isn’t surprising since you have to build a credit history to have a good score).

FICO Score Distribution by Age

How to Improve Your Credit Score

Simply knowing your credit score doesn’t do you a lot of good. If you’re not happy with your score, you can take steps to improve it. My pals at Stacking Benjamins just published a podcast interview with Farnoosh Torabi about the keys to raising your credit score. From my reading, these five factors are important in giving it a boost:

  • Pay off your debt. According to credit expert Liz Weston, “The most powerful thing you can do to improve your credit score is to reduce your credit utilization.” In other words, reduce your credit card balances. FICO reports that about one in seven people who carry credit cards are at over 80% of their credit limit. “Below 30% is good,” Weston says. “Below 10% is better.”
  • Pay on time. According to Weston, if your FICO is 780, a single late payment can drop it 100 points. If your score is 680, a late payment can cut it 70 points. If you miss a payment, don’t panic. Do what you can to get current and stay current.
  • Only open new accounts you need. Don’t open a store charge account just for kicks or because the salesman pressures you into it. New accounts are only a small part of your total score, but they do have an effect. Keep new accounts to a minimum, especially if you’re planning a big purchase (such as taking out a mortgage).
  • Don’t close old accounts. It’s okay to cut up old cards or to free them in a block of ice, but to maximize your score, keep the accounts open. If you have to close an account or two, close newer accounts before older ones.
  • Keep tabs on your credit report. Even if you do everything right, your credit score can take a hit from identity theft and other forms of fraud. Even simple errors can hurt your score. Check your report regularly, and correct any problems you find.

Here’s a final word of advice: Don’t obsess over your credit score. Sure, it’s important, but ultimately it’s a number for lenders, not for you. A less-than-perfect score isn’t the end of the world.

I just spent the weekend in a group of 58 early retirees. Many of these folks have more than a million bucks in the bank but have lousy credit scores because they do things like travel hacking. They’re not worried because they know their credit score is just one piece of the puzzle.

If you struggle with compulsive spending, it’s far better to cancel your credit card accounts and take the hit to your credit score than it is to risk getting buried deeper in debt. The bottom line? Be smart with your money and your credit score will be fine.

>Next Steps
If credit scores are important to you or interest you, I recommend Liz Weston’s Your Credit Score. Whether she likes it or not, Weston has been pigeon-holed as one of the top credit score experts in the nation. Her book is packed with great info on how credit scores work and how to improve yours.

I also recommend checking your credit score regularly. I pull mine whenever I check my credit report. But I try to to look at it every month or two, even if I’m not checking my credit. I use one of my credit card accounts, if I think of it while I’m doing my finances. Otherwise, I just pop into Credit Sesame.

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Financial independence, purpose, and happiness

Credit Sesame

From time to time, I make podcast appearances. Last week, for instance, I recorded three episodes for various shows — including a l-o-n-g discussion with Joe Saul-Sehy from Stacking Benjamins about the pros and cons of the new Star Wars movie. (We both loved about two-thirds of the film but disliked the rest of it.)

New RetirementThe afternoon before I flew out to Florida, I sat down to chat with Steve Chen from NewRetirement.

For those of you unfamiliar, NewRetirement is a retirement planning tool. It’s not just a calculator, but a sophisticated forecaster to help you plan your future. I have no financial stake in the company — not yet, anyhow — I just like it. I think most retirement calculators suck. The NewRetirement tool is one of a handful I like.

Anyhow, over the past year, I’ve had a chance to get to know NewRetirement founder Steve Chen. I like and respect him. He’s doing good work and his heart is in the right place. When he asked me to be the first guest on his first podcast, I was eager to do so. We talked about purpose and happiness (Surprise!)

Steve and I had planned to talk about the pros and cons of early retirement, but, as sometimes happens, our talk strayed to other (equally interesting) topics.

I don’t have space to quote the entire transcript. (You can find that here.) Instead, I’ll highlight one of my favorite (edited) sections.

I want to ask you another question. One thing that I found really interesting about you is that you’re writing about personal finance and helping people make better choices, but I also know that a big thing for you is purpose — helping people figure out what should they be doing with their time and their lives. I’m wondering if you could elaborate on that a little bit.

I have a money blog. I write about money. I mentioned at the start of the show that I have a degree in psychology. I’ve always been interested in the pursuit of happiness. What does it mean to be happy? What does it take to be happy?

Even though I’m writing about money, I’m actually writing about the pursuit of happiness. From my reading and my experience, the best way to achieve well-being is to have a sense of purpose and to pursue that purpose, to build your life around that purpose. I know that sounds New-Agey, maybe a little hokey. I don’t mean it in a hokey, New Age way. I mean it a very real way.

As long ago as Aristotle — thousands of years ago — up to modern day, psychologists have found that when you have a purpose, when you have a direction in your life and you build your life around it, you tend to be much more fulfilled. It’s easier to make decisions with your money, with your time, with your friends — with everything — if you know what it is you want to accomplish out of life.

I don’t think there’s any one right purpose that’s right for everybody. For some people, your purpose might be your family. For other people, it might be travel. For others, that might be serving a higher calling, whether that’s a God or some other purpose like serving others. It doesn’t really matter. I urge my readers to get clear on what their purpose is so they can make better financial decisions.

One interesting thing is that the rates of depression actually go up when people retire because they lose a lot of the benefits that they have from work that they might not have been aware of: the social connections, the sense of purpose, the daily activity, just being out and about. Suddenly, that goes away and your life is suddenly different. Thinking about that ahead of time is super important.

As I say, I think the whole conversation was interesting. If you’d like to read (or hear) more, check out the NewRetirement website.

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Fighting lifestyle inflation ~ Get Rich Slowly

Credit Sesame

This is a guest post by former Get Rich Slowly staff writer Donna Freedman, a veteran personal finance journalist — and one of my favorite writers. Since leaving GRS, Donna has published two books: Your Playbook for Tough Times and Your Playbook for Tough Times, volume two. These are both excellent handbooks for folks trying to make ends meet under difficult circumstances.

Your Playbook for Tough Times by Donna FreedmanFrugalists aren’t averse to spending. They’re just canny about how they buy, or whether they buy at all.

That’s a tough sell, so to speak, in a country where we’re persistently pressured to keep up with the Joneses (or the Kardashians). Flash sales, one-click shopping apps, deal websites, and near-weekly sales at brick and mortar stores make it soooo easy to buy.

Haul photos on social media, hot deals shared by friends, clothing or cosmetics worn by favorite celebrities, that bling your sister-in-law sported at Christmas – spending triggers, every one of them.

It’s tempting to believe that next purchase will be the one that makes you finally, truly happy. Except that it probably won’t, thanks to what sociologists call the “hedonic treadmill” or “hedonic adaptation” – our tendency to adjust back to previous levels of happiness after a spike in glee.

J.D.’s note: You might have seen this concept referred to as “lifestyle inflation” at GRS and other money blogs.

Maybe that initial joy is caused by a pay raise or the purchase of a big-ticket item like a luxury car, or even a smaller-ticket item like a leather jacket or the cookware you were convinced would change your life. All too quickly the Lexus becomes just another vehicle, and the raise seems to melt away thanks to lifestyle inflation (like, say, a higher auto insurance rate).

A steady practice of purchasing sets the bar higher every day. Shopping, meals out, luxury vehicles, fabulous entertainment all become needs rather than wants. Little extras and perks are no longer treats – they’re the bare minimum of acceptable.

Saying “Yes” to What Matters

As a midlife university student paying off divorce-related debt, my default setting was “no.”

  • No, I couldn’t shop anywhere but the secondhand store.
  • No, I couldn’t go out every weekend.
  • No, I couldn’t stop brown-bagging.

My dollars had better places to go than malls or movie theaters. Specifically, they were slated for slaying my divorce-related debt, and for building my emergency fund and retirement account.

Once I was debt-free and reasonably well-funded, the “no” setting turned into “well, sure – if you really think it through”. I was able to say “yes” to things that really mattered: health insurance, charitable donations, therapeutic massage, travel.

Mostly, though, I kept soaking beans instead of ordering in, taking the bus instead of buying another car (I’d given the old one to my daughter and son-in-law when they moved), and sticking with my thrift-shop apartment furnishings.

It’s not that I minded spending. I just didn’t want it to be too easy. You shouldn’t want it to be easy, either.

Saying “no” or “not today” doesn’t just improve the bottom line; it also enhances the occasions when you do say yes. A really nice meal out or tickets to the opera or the monster truck rally feel super-special precisely because you don’t get them all the time.

I love steak, probably because I rarely eat it – but when I do, oh boy is it ever great. Would I enjoy it as much if I ate it twice a week? Probably not.

Deferred Gratification Doesn’t Have to Hurt

Understand: I’m not saying you should never buy anything. Frugality does not translate to a life of joyless self-denial. What it does mean is making conscious decisions about what’s right for you and your money.

Obviously you should enjoy the fruits of your labors. Never underestimate the effect of a Saturday matinee or a craft beer with friends; even small treats can feel supremely luxurious.

But treat yourself mindfully rather than automatically. How easy it is to think, “It’s just a hobby magazine” or “I deserve to hit the clubs every weekend while I’m young and carefree”. Pile up enough of those publications and pay enough of those cover charges and it starts to look like real money.

Deferred gratification doesn’t have to hurt. In fact, new electronics might be exponentially cooler because you researched them, anticipated their purchase for weeks, and then paid cash. Which brings me to a word you don’t hear all that often: sacrifice.

Putting off immediate desires used to be a defining characteristic of adulthood. First apartments and first homes were small and modestly decorated (and “decorate” was often code for “things from your grandparents’ attics”). Making it in the real world meant years of hard work and of using it up, wearing it out, making it do or doing without.

That notion may seem downright quaint to those who grew up in a culture of buy now and pay eventually. Why shouldn’t you have the latest smartphone upgrade? Why shouldn’t your first apartment have throw pillows and wallpaper borders and pillow shams that match the dust ruffle? Why shouldn’t your kids have the best that money can buy?

Because you pay for many months or even for years, that’s why, and because it’s not just the interest charges that hurt. Being in debt means opportunity cost – think of where that money could have gone! – and more to the point, it limits your options. How many people do you know who hate their jobs but can’t afford to quit because they need to make minimum payments on the credit cards that paid for all the things they bought to take their minds off the fact that they hate their jobs?

Frugal people do attend shows and sporting events, buy cars, take vacations. What they don’t do is get these things by going into debt without a clear plan to pay it off. That’s like sticking your head in a lion’s mouth on the theory that it might not be hungry today. But it probably is – and you won’t know for sure until you feel the jaws clamp down.

Face it: You probably won’t win the lottery or have a rich uncle leave you a bundle. Your needs and your wants will be met by the dollars and cents that you earn and build.

It can be hard to imagine how the things you give up today will make a big difference decades down the road. But you are responsible for that future, which means being responsible in the present.

Donna’s books are available on Amazon and Kindle for $9.49 and $7.99, respectively. She’s also created a Get Rich Slowly discount for the e-versions (PDFs). You’ll pay $5 per book if you visit her online payment platform and using the code GRS1 for the original “Playbook” and GRS2 for “Playbook Vol. 2.”

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The secret to wealth and happiness ~ Get Rich Slowly

Credit Sesame

A few weeks ago, I cataloged the difference between successful people and unsuccessful people. Based on my reading (and personal experience), I compiled a list of 61 habits that foster wealth and success.

While writing that article, I found one critical difference was mentioned again and again. Every author and expert on the subject shared some form of the following. Generally speaking: Successful people believe they control their destiny and unsuccessful people do not.

In Secrets of the Millionaire Mind, for instance, T. Harv Eker lists seventeen ways the financial blueprints of the rich differ from those of the poor and middle-class. Number one on his list?

Rich people believe: “I create my life.” Poor people believe: “Life happens to me.”

This message comes up time and again when discussing the difference between those who succeed and those who don’t. Successful people are proactive, they take responsibility for their future, they have an internal locus of control. Unsuccessful people believe they are victims of fate or circumstance.

Let’s look at why many folks feel like they’re not in control of their lives — and how it’s possible to learn to be proactive (even if you’re old like me and set in your ways).

Permission and Control

[The Seven Habits of Highly Effective People]As children, we’re conditioned to ask permission whenever we want to do something. You need permission from your parents to leave the dinner table or to go outside and play. You need permission from your teacher to use the bathroom.

Even as adults, we feel compelled to request permission. You need permission from your boss to leave work early. You need permission from your spouse to grab drinks with your friends instead of weeding the garden. You need permission from the city to build a shed in the backyard.

As a result, most of us have developed an external locus of control.

In personality psychology, the term locus of control describes how people view the world around them, and where they place responsibility for the things that happen in their lives. Though this might sound complicated, the concept is actually rather simple.

  • If you have an internal locus of control, you believe that the quality of your life is largely determined by your own choices and actions. You believe that you are responsible for who you are and what you are.
  • If you have an external locus of control, you believe that the quality of your life is largely determined by your environment, by luck, by fate. You believe that others are responsible for who you are and what you are.

This isn’t an either-or proposition, obviously. Locus of control exists on a continuum. But many people tend to favor one side of the continuum over the other.

Julian B. Rotter developed the locus of control concept in 1954 as part of his social-learning theory of personality. Stephen R. Covey popularized the idea in 1989 with his best-selling The Seven Habits of Highly Effective People. He urged readers to become proactive.

Becoming Proactive

Covey believes that we filter our experiences before they reach our consciousness. “Between stimulus and response,” he writes, “man has the freedom to choose.” Our self-awareness, imagination, conscience, and free will all give us the power to select how we’ll respond to each situation in life.

Covey says there are two types of people: proactive and reactive.

  • Proactive people recognize that they’re responsible for how they respond to outside stimuli. They have an internal locus of control. They don’t blame circumstances, conditions, or conditioning for their state. They believe their existence is largely a product of personal choice derived from personal values.
  • Reactive people believe their condition is a product of their physical and social environments. They have an external locus of control. Their moods are based on the moods of others, or upon the things that happen to them. They allow the outside world to control their internal existence.

To illustrate the difference between proactive and reactive people, Covey discusses how we focus our time and energy.

We each have a wide range of concerns: our health, our family, our jobs, our friends; world affairs, the plight of the poor, the threat of terrorism, the state of the environment. All of these fall into what Covey calls our Circle of Concern.

Within our Circle of Concern, there’s a subset of things over which we have actual, direct control: how much we exercise, what time we go to bed, whether we get to work on time; what we eat, where we live, with whom we socialize. These things fall into what Covey calls our Circle of Influence, which sits inside our Circle of Concern.

Here’s a visualization of this concept from James Clear and Mr. Money Mustache:

[Circle of Concern vs. Circle of Control]

According to Covey, proactive people focus their efforts on their Circle of Influence. They spend their time and energy on things they can change. This has two effects. First, proactive people actually do affect change in their lives; and as they do so, their Circle of Influence expands.

On the other hand, reactive people tend to focus on their Circle of Concern. They spend their time and energy on things they’re unable to influence (or can influence only with great difficulty). They try to change other people, to correct social injustices, to shift thought patterns of states or nations. Their efforts are largely frustrating and futile. What’s more, as they focus on their Circle of Concern, their Circle of Influence begins to shrink from neglect.

Any time you shift your attention from your Circle of Influence to your Circle of Concern, you allow outside forces to control you. You sacrifice your freedom. You place your happiness and well-being in the hands of others. If you don’t act for yourself, you’re doomed to be acted upon.

But what about about luck? Aren’t there times when we really are at the mercy of the world around us? Of course. But our responses are always our own. Eleanor Roosevelt said, “No one can hurt you without your consent.” Covey agrees:

It’s not what happens to us, but our response to what happens to us that hurts us. Of course, things can hurt us physically or economically and can cause sorrow. But our character, our basic identity, does not have to be hurt at all. In fact, our most difficult experiences become the crucibles that forge our character.

Bad Examples

Successful people believe they’re in control of their destiny and unsuccessful people do not. Let me give you some specific examples.

  • I know a woman who owns a business. The business is always on the brink of collapse. She believes her store struggles because of onerous city codes and an unresponsive landlord. Yet, other businesses around her thrive despite similar circumstances. She doesn’t see that the problem could be with the way she runs the place: the store’s odd hours, its poor condition, the way she treats her customers.
  • My youngest brother has had his share of financial struggles. Within a one-year span, he lost two homes to foreclosure and declared bankruptcy. At first, he didn’t own any of this as his fault. He viewed it as bad luck, as if he and his wife were simply victims of circumstance. They thought they were screwed by stupid people and a bad economy. A decade later, Tony has a different view. I spoke with him recently, and it was refreshing to hear him take some responsibility for what happened.
  • For years, my own locus of control was primarily external. I was overweight, in debt, and unhappy. On some level, I knew that my state was a result of my choices, but most of my time was spent rationalizing reasons I couldn’t change: I didn’t have time to exercise, my car broke down, I didn’t get the job I wanted. Nothing good ever happened to me. (Notice that phrase: “happened to me.”) I thought most things were outside of my control.

The good news is that people can change. If you have an external locus of control, you can develop an internal locus of control. If you’re reactive, you can become proactive. I know because I’ve done it myself.

In time, I realized that if I wanted something more from life, it was up to me to obtain it. Gradually, my locus of control shifted from an external focus to an internal focus. I decided that I am responsible for my own destiny and my own happiness. It’s up to me to live a life I love.

I am responsible for my own well-being, and you are responsible for yours.

If you’re unhappy, nobody else can make things better for you. You must make things better for yourself. Focus on the things you can control, and use that control to fix the other things that are broken. In this way, you’ll gradually gain confidence and greater control of your future well-being.

Good Examples

Since I’ve become aware of this distinction — between folks who believe they’re in control of their lives and those who don’t — it’s been like breaking free from the matrix. I can’t help but see the patterns everywhere I go.

I hate to admit it, but it’s often tough to talk with folks who have an external locus of control, people whose Circle of Concern far exceeds their Circle of Influence. It’s hard to watch friends repeatedly make poor choices. On the other hand, it’s refreshing to spend time with people who don’t let life get them down.

My girlfriend, Kim, is a great example of somebody proactive. She never lets anyone or anything hold her back. If something goes wrong, she finds another way to achieve her goals. She takes complete and total responsibility for building the future she wants.

This manifests in lots of little ways:

  • If she doesn’t understand something, Kim asks questions.
  • If she has a problem with a company, she calls to explain (not complain about) the problem.
  • If something is broken, she figures out how to fix it.
  • Kim never waits for things to get better but actively seeks ways to improve her situation.

Here’s a great example of Kim’s proactive nature in action.

During our 15-month RV trip across the United States, we paused for six months to rent a condo in Savannah, Georgia. Kim could have spent those six months relaxing and seeing the sites, but instead decided she wanted to seize the opportunity to make some money.

The moment we knew we’d be wintering in Georgia, Kim started the process of getting her dental hygiene license. It took several weeks for all of the paperwork to process. Rather than wait and wonder, Kim made polite calls every week to make sure there were no problems.

The day she received her license in the mail, Kim hit the pavement. She scoured the city, dropping off résumés and speaking with doctors. Within a couple of days, she started getting calls asking her to do fill-in work while other hygienists were sick or on vacation. She also got a couple of offers for a long-term positions. During the six months we were in Georgia, Kim had as much work as she wanted.

When we returned home to Portland, she applied the same technique here. She pounded the pavement, putting her name out there as a potential fill-in hygienist. For a few months, she tried various offices. Eventually, she found two practices where she fit in perfectly. Now she has steady work — and constant offers from the other places she filled in.

Simply being around Kim and observing her strong internal locus of control has helped me become more proactive! I’m still not as good as she is, but I’m getting better.

You Are the Boss of You

Shifting from an external locus of control to an internal locus of control isn’t just important for happiness, but also for making meaning in your life, for obtaining personal (and financial) freedom. Freedom comes from focusing not on your Circle of Concern, but exclusively on your Circle of Influence. As long as you allow yourself to dwell on the things you can’t control, you are not free.

Obviously, shit happens. But you know what? Shit happens to everyone. Ultimately, who we are and what we become is determined not by what sort of shit happens to us, but by how we respond to that shit.

Victor Frankl was an Austrian psychiatrist who survived the Nazi death camps during World War II. The extreme suffering and harsh conditions caused many inmates to lose their will, to choose death.

To be sure, prisoners often had no control over whether or not they died. But Frankl observed:

A man can, even under such circumstances, decide what shall become of him — mentally and spiritually. He may retain his human dignity even in a concentration camp.

In the classic Man’s Search for Meaning, he wrote:

Everything can be taken from a man but one thing: the last of human freedoms — to choose one’s attitude in any given set of circumstances, to choose one’s own way.

Even with a severely restricted Circle of Influence, prisoners still had control of how chose to approach their destiny.

Accepting responsibility for your own fate and attitudes can be uncomfortable and intimidating. There’s a kind of solace when you can attribute your situation to the winds of fate, the will of god, or the workings of the universe.

But recognizing that you’re a free agent can also be liberating. When you take matters into your own hands, you shed your fears, create your own certainty, and discover that you’re freer than you ever imagined possible.

You are the boss of you. You don’t need anybody’s permission to get out of debt or to buy a house or to ask for a raise. And nobody’s going to come to you out of the blue to explain investing or health insurance or your credit card contract. Take charge yourself.

Focus on the things you can control. Use that control to remove constraints and complications from your life. Strengthen and stretch your Circle of Influence. This is the only path to changing your Circle of Concern. You have no control over the hand you’re dealt, but you can choose how to play the cards.

Here’s a simple exercise from The Seven Habits of Highly Effective People: For thirty days, commit to working only on your Circle of Influence. How? Keep your commitments, to yourself and others. Don’t judge or criticize other people, but turn your attention inward. Don’t argue. Don’t make excuses. When you make a mistake, accept responsibility and fix it. Don’t blame or accuse. When you catch yourself thinking “I have to…” or “If only…”, stop yourself and choose to reframe the thought in a more positive light. As far as possible, accept responsibility for your circumstances, actions, and feelings.

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How to use credit cards wisely ~ Get Rich Slowly

Credit Sesame

It’s back to basics month at Get Rich Slowly! Today, we’re going to take a l-o-n-g look at how to use credit cards wisely. Believe it or not, credit cards can be a useful tool — so long as you don’t fall into debt.

Credit Cards and Cash by Sean MacEnteeFor a long time, I thought credit cards were evil. Starting in college, I abused credit cards. As a result, I ended up deep in debt. Those two decades of debt sucked, and they led me to believe that credit cards were dangerous.

Well, credit cards are dangerous — but they’re not evil. Credit cards are a tool. Like any other tool, credit cards can be used to build or to destroy. Just as you’d treat a chainsaw with respect, you need to be careful with credit to avoid hurting yourself. If you use credit cards wisely, they can actually give you a financial edge!

Because this is a long article, I’ve create a table of contents so that you can jump to the section you need. (Or, you can read the entire thing, of course.)

Table of Contents

  1. How credit cards work
  2. Why use a credit card?
  3. Essential credit card skills
  4. How to use credit cards wisely
  5. How to choose a credit card
  6. How to dispute credit card charges
  7. How to cancel a credit card

How Credit Cards Work

First, let’s review some basics.

When you buy something with a credit card, you’re taking a small loan from the card issuer — Bank of America, Capital One, your local credit union — and you owe the issuer that amount. If you pay your balance in full each month, the card basically gives you a short-term, interest-free loan. You’re taking advantage of “float”.

This free float is a fine thing — so long as you pay your balance every month. But if you carry a balance, the advantage of float vanishes. Anything you might have gaines is lost to fees and high interest rates.

How many Americans carry balances and how much debt does the average cardholder owe? There’s a lot of conflicting data out there, but one reliable source of information is the Federal Reserve, which every three years publishes its Survey of Consumer Finances. The latest study, from 2016, found that:

  • 43.9% of American families have credit card debt, and
  • the average amount owed is $5700.

Clearly, lots of Americans continue to struggle to use credit cards wisely.

That said, not everybody who uses credit cards goes into debt. In fact, the Survey of Consumer Finances shows that over half of Americans use credit cards without going into debt. They treat them as a convenience.

True story: Last year, I went into a bank to apply for a new travel credit card. During the half-hour process, I chatted with the banker. “We banks don’t like people like you,” he told me. “I’m sure you’re a nice guy, but you pay your bill every month. We don’t make any money on you. Fortunately, 90% of people who use credit cards suck with money!” He told me banks are willing to lose money on the handful of folks who use credit cards wisely because they make so much money on the people who abuse them.

Why Use a Credit Card?

If credit cards are so dangerous, why use them? Let’s be clear on one thing: If you worry about self-discipline, if there’s even the slightest possibility that using credit cards might lead you to debt, the smart choice is not to use them. Outsmart yourself by not letting yourself be tempted.

That said, here are reasons people use credit cards:

  • Convenience. It’s easier to carry around a single piece of plastic than to deal with cash and checks. Plus, a lot of people like the automatic record-keeping that comes from using a card.
  • Protection. Most credit cards offer a variety of features that protect your purchases. Some extend manufacturers’ warranties. Others offer insurance for things like rental cars. Others protect you in the case of a purchase gone sour. On top of that, if your wallet is stolen, your cash is gone. But the Fair Credit Billing Act limits your liability on a stolen credit card to $50.
  • Building credit. Your credit score has a huge impact on your personal finances. Using credit cards wisely improves your credit score so that you can get the best rates on auto loans, mortgages, and other financial products — including, of course, other credit cards.
  • Rewards. Nowadays, most credit cards offer perks of some sorts. Some offer airmiles. Others offer cash-back bonuses. The new travel credit card I picked up last year includes all sorts of benefits, including TSA pre-check and access to airport lounges.

Again, these benefits are meaningless if you don’t use credit cards wisely. If you miss a payment or carry a balance, you’ve negated your cash-back bonus for months (or years) to come — and you’ve hurt your credit score. Pay your balance in full each month, and credit cards can be a valuable addition to your money toolbox.

Essential Credit Card Skills

Okay, you get it. Credit cards are the chainsaws of personal finance. Used wisely, they can be an awesome tool. Used carelessly, you’re likely to cut off a (metaphorical) arm. Let’s turn our attention now to some essential credit card skills.

First and foremost: In order to use a credit card without getting burned, you can’t let it change your spending habits. A credit card isn’t a license to spend; it’s just a different way to pay. If you’re using credit cards to spend more than you earn, you’re using them wrong.

Here are what I consider five essential skills to using credit cards wisely:

  • Learn to read the fine print. Read the legal stuff when you fill out the application, when you receive the card, and on any future mailings. Credit card terms and conditions can be confusing. This credit card glossary from Wells Fargo can help. If you don’t understand something, ask for help.
  • Similarly, review your statement every month. Due dates, fees, and interest rates are subject to change. Reconcile transactions and keep an eye out for fraud. Many people — and I’m one of them — actually check their statements online several times a month. By paying attention, you can prevent small annoyances from becoming large hassles. (Just yesterday, I found an a billing error. I was charged for two episodes of Smallville on iTunes. It’s only $1.98, but it’s not $1.98 that I spent, so I disputed it.)
  • As always, don’t be afraid to speak up. If you notice something strange on your bill, call customer service. If you want to dispute a charge, call customer service. If you want a rate reduction, call customer service. It never hurts to ask.
  • Be wary of the special offers your credit card company sends you. Understand the teaser rates. Beware offers to skip a payment. Be suspicious of other products the company tries to push: insurance, fraud protection, etc. Many of these are bad deals for consumers.
  • Finally, pay your bill on time and in full every month. If you are not yet in credit card debt, don’t start. Don’t rely on credit cards to support a lifestyle you cannot afford. Don’t resort to using a credit card because you can’t afford to pay cash for something — use a credit card because you can.

These skills are all rather academic. They’re important, yes, but they don’t address the behavioral issues that lead to credit card debt. It’s one thing to say “pay your bill on time and in full every month”, but it’s another thing to actually do it. What most people need are real-life methods for using credit cards without going into debt. Let me show you the four laws I use to guide my credit card use.

How to Use Credit Cards Wisely

I can’t speak for everyone, but I know that for me, I had to adopt an actual set of written guidelines to define what acceptable credit card behavior would look like. No joke. Because I’d been in credit card debt for twenty years, when I decided to re-enter the world of credit cards in 2007, I was very nervous. I set the following ground rules:

  • I resolved to make my decision to buy first, and then decide how to pay. This may seem like common sense, but it used to be that I’d let the fact that I could pay on credit influence my decision: “I have a credit card, so I can just charge it and pay later.” Now, however, I decide whether or not to make a purchase, and then I decide which payment method makes the most sense for me: cash, credit, debit, check, etc. (I do this because research shows folks tend to spend more with credit than with cash. I’m sure that I’m not completely negating this effect, but by putting the buying decision before the payment decision, I’m hoping to mitigate the overuse of credit.)
  • I vowed never to buy anything unless I had cash in the bank for it. In other words, if I see a new videogame system that I want, I won’t buy it on credit if doing so means that I have to wait for cash to come in. Or, if I decide to take a safari to South Africa, I don’t make the purchase unless I already have cash in the bank to cover the entire expense. I only use credit if I could actually pay with cash. (Why not pay cash then? Because often credit is more convenient, and because by paying with credit I get 1% cash back.)
  • I promised to pay my card in full every month. This goes back to the last item in the list above: I never carry a balance. This is my number-one rule. Everything else is secondary. When I decided to try using credit cards again with rewards cards, I promised that if I ever carried a balance, I’d cancel the card. It’s been over ten years now, and I’ve never carried a balance.
  • I told myself that I’d never use my card for an impulse purchase. One of the things that got me in trouble with credit during the 1990s was impulse spending. And while I still struggle from a compulsion to spend, by not using credit I limit myself to the cash I have in my pocket. (I try not to use my debit card for impulse spending, either.)

Despite these careful steps, I do sometimes worry about my use of credit. Research shows that people tend to spend more with credit than with cash. Am I doing that? Is my use of credit hurting local businesses? (I won’t use credit at the local bookstore, for example, because I’ve talked with the owner and we know that merchant fees for card use hurt her business. I always pay cash when I buy from her.) And by using credit, am I feeding the monster of predatory lending?

How to Choose a Credit Card

No two credit cards are the same. Each has its own advantages and disadvantages. Over the past decade, I’ve come to believe that choosing a credit card is a little like choosing a mate. That probably sounds silly, but I’m not joking.

Instead of just marrying the first person you meet, you take your time to find a partner that makes your life better. You should do the same when looking for credit cards. Decide what features are important to you, then spend time looking until you find the card that’s best for you.

The biggest factor to consider is whether or not you currently carry a balance on your cards. If you do, or you’re worried that you might in the future, then look for cards with low interest rates. On the other hand, if you pay your balance in full each month as you should, then your credit card interest rate doesn’t matter. Instead, look for a card with no annual fee and/or a solid rewards program. (My latest card actually has a ginormous annual fee — $300! — but it also comes with a $300 “travel credit”, which effectively negates that annual charge.)

In either case, keep the following in mind as you look for the perfect card:

  • Take time to do research. Your goal is to find the card that best suits your needs, so don’t just sign up for the first offer that comes in the mail. You can research cards at sites like Consumer Reports, Card Ratings, Index Credit Cards, and NerdWallet.
  • Check with your credit union. If you belong to a credit union, you may be able to get a great deal on a card. A 2009 study from Pew Charitable Trusts found that “credit unions offered significantly lower advertised rates compared to bank credit cards, with penalty fees that were half the cost of comparable bank fees and fewer dangers associated with ‘unfair or deceptive’ practices.”
  • If you’re after a rewards card, choose one that offers something you value. Some offer frequent-flyer miles or other “points”. If these appeal to you, great. But if you’re not a big traveler, consider a cash-back card. Cash is versatile and, unlike airmiles, never expires.
  • Watch out for extra fees. Some fancy cards carry great perks — at a price. You’re usually better off with a no-fee card than paying $50 or $100 (or more) for features you rarely use.
  • Look for more than just a low interest rate. Though it might sound like gibberish, a credit card’s method of computing the balance for purchases is important. Look for cards that calculate your interest using either “average daily balance” or “adjusted balance”.

Once you’ve chosen a credit card, be sure you understand its limitations. Always read the fine print before you sign up. Remember: Your goal is to pick a useful tool. You’re not looking for a one-night stand, but a long-term relationship you can live with.

Which credit cards do I use? In 2007, at the prompting of Get Rich Slowly readers, I signed up for the Capital One No-Hassle Cash Back card, which not only gave me one percent cash-back on every purchase, but also came with some nifty travel benefits. For a decade, that was my main personal credit card. (In 2011, I signed up for a British Airways card from Chase, but that was just to get the miles. I don’t use it.)

Last January, “>I switched from my Capital One card to the Chase Sapphire Reserve because the latter boasts tons of travel perks, which I use often. So, there you go: I have three personal credit cards — although I only actively use one of them.

How to Dispute Credit Card Charges

Mistakes happen. Once in a while, a restaurant will charge you twice for the same meal. Or they’ll charge you for somebody else’s dinner. Just last month, my girlfriend noticed that the gym membership she’d cancelled two months earlier was still being charged to her account.

When you notice something goofy on your credit card statement, it’s important to act quickly to correct the problem. Here’s how:

  • Gather documentation. To make things easier when trying to resolve the issue, take time to gather supporting info such as receipts, warranties, and written contracts.
  • Start at the source. Before contacting your credit card issuer, first contact the merchant that charged the card. Explain the problem and ask them to resolve it. If that doesn’t worth, then move to the next step.
  • File a dispute with your card issuer. As soon as possible, send a written complaint to the issuer’s “billing inquiries” address (not the address where you send payments). Include info about your account, an explanation of the problem, and copies of any supporting documentation. The FTC offers a detailed description of the process. Also, most card issuers now have an online dispute-resolution process, which may be more convenient than filing a dispute by mail.
  • Take your complaint elsewhere. If you’re unhappy with how things turn out, contact agencies such as your state’s Attorney General’s office or the local Better Business Bureau.

Note that these steps are for disputing improper charges, not for fighting over shoddy merchandise. Your credit card may offer some protection if your new computer is a lemon, but you’ll need to read your card agreement to know your rights. Save the dispute process for actual billing errors.

How to Cancel a Credit Card

If you have trouble with compulsive spending, it’s best to take away the tool that makes it so easy to get into trouble. Don’t just cut up your credit cards — cancel them. Doing so buys you time to learn to manage credit responsibly without a constant temptation to spend. Even if you don’t have trouble with credit, you may still want to close an account from time to time.

Canceling a credit card is easy. But if you’re going to do it, do it right.

  • Close just one account at a time, even if you’re closing several. First, cancel cards that charge you fees. Also, it’s better to cancel new cards before old ones. And you may want to keep cards with good rewards programs.
  • Before you close an account, pay off your balance or transfer it elsewhere. If you try to cancel a card while it still has a balance on it, you might end up paying nasty fees and high interest rates.
  • Contact your credit card company. You can cancel some accounts online, which is convenient because often when you try to cancel by phone, the sales rep will do his best to talk you into staying. If this happens, be firm.
  • Send written confirmation. Follow up by writing a letter like this one to the card issuer.
  • Watch your credit report. It may take several weeks for changes to appear on your credit report. It’s your responsibility to be sure the report is accurate, so keep tabs on it. You may also want to watch your credit score to see if canceling the card did any damage.
  • When you’re certain the account is closed, cut up your card.

Be aware that canceling a credit card may actually hurt your credit score. Part of your score is based on how much of your available credit you actually use; this is your credit utilization ratio. When you close a card, this ratio jumps because you’re using more of your valuable credit. And when this ratio jumps, your credit score goes down. (Also note that the longer you’ve had an account, the more you’ll affect your credit score by closing it.)

If you think it’s important to keep a high credit score and you’re sure you won’t abuse them, then keep the accounts open. But it’s a mistake to keep your credit cards if having them will tempt you deeper into debt.

Final Thoughts

The credit card industry earned $163 billion through fees and interest in 2016. Much of this profit comes because they’ve made it easy for folks to spend more than they should and because people don’t understand the rules of the game. Remember: Your credit card company is not your friend. They’re hoping you screw up because that’s how they make money! In fact, the industry’s term for somebody who pays their bills on time is “deadbeat”. Nice, huh?

But millions of people — more than half of credit card users in the United States — have found that if they play by the rules, credit cards can make their lives a little easier. (Some brave folks even try to beat the credit card companies at their own game!)

Your credit cards will never make you ruch, but used wisely they can fee you to focus on the things that matter most in your life — and earn a few rewards in the process.

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My no-shopping experiment ~ Get Rich Slowly

Credit Sesame

This guest post from Kamie is the first in the newly-revived “money stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all stages of financial maturity. Today, Kamie shares her resolution to break her shopping habit in 2018.

Two weeks ago, just before Christmas, I found a New York Times article about somebody who went a year without shopping.

“Why would anyone do that?” I thought to myself — but I kept reading. The author had some compelling reasons for her experiment:

  • It made her more mindful of her “wants”.
  • It forced her to use things she already owned.
  • It helped her appreciate the things she had — and the things she was given.
  • And, surprisingly, it freed up tons of her time.

I read the article, thought it was interesting, and went on with my day. Later that evening, though, I started thinking about the article again. I thought about how much I shop and how much time and effort I put into it. Could I possibly go a year with no shopping?


My Background

You see, I worked in high-end retail for a very long time. I went to school for fashion merchandising and was in retail management as soon as I graduated. Everything in my life revolved around fashion and shopping! Working at Nordstrom was my greatest success and worst punishment both at the same time.

As you can see, I learned to shop with the best of them. And shopping became an outlet for me.

Today, I’m 44 with two teenage boys, an amazing husband, and two dogs. I work for our family business, so I’m not exposed to the retail environment on a constant basis. But I still shop — a lot!

Honestly, I love shopping. Shopping makes me happy. It’s fun to have new pretty things, whether it’s clothes, shoes, accessories (for me or the house), makeup, furniture, or even a new car. You know: anything.

Now, let me tell you, our family isn’t rich by any means. We have to budget just like everyone else. Sometimes it sucks. But we’re trying to teach our boys (and each other) what it means to save money, even if we’re not the best at it.

In reading the New York Times article, I could relate to much of what the author said. Shopping made her happy too, but she decided there were enough benefits to a year without shopping that she wanted to give it a try. I decided that maybe I wanted to give it a try.

When I told my husband about the idea, he looked at me and smiled. He told me that he’d be incredibly proud of me if I could actually do a year without shopping. Because he and I are very competitive, we love to challenge each other. I gave it some more thought and realized that this was a challenge I wanted to accept.

I keep asking myself, “Can I really do this? It’s going to be so hard!”

But my answer to myself — for myself — is, “Yes, I can do this.”

My Plan

ShopNext, I had to come up with a plan. I’m a huge planner. I love to make lists and then cross things off one at a time. It makes me feel accomplished.

First, I had to decide when I was going to actually start this crazy challenge. Since the new year was fast approaching, January 1st seemed sensible. I could make the challenge a New Year’s resolution. This sounded great — until I realized that this would give me an opportunity to go on one last shopping spree. That seemed counter-productive — the complete opposite of what this challenge is supposed to be about.

Instead, I decided to start on December 26th, the day after Christmas.

J.D.’s note: This is a smart move on Kamie’s part. As a guy who has done tons of these sorts of things in the past, I’ve learned that as convenient as it might seem to start on a specific day — January 1st, your birthday, your anniversary, whatever — waiting often leads to failure. You have one last blow-out before the big start, then that makes you feel lousy and you don’t follow through on your commitment. Once you decide to take on a challenge, it’s much better to start immediately rather than wait for a specific date. Any time I’ve been successful at getting fit, writing more, or cutting back on alcohol, it’s because I’ve started now — not tomorrow.

Now that I had the when, I needed a plan to keep myself committed to this challenge for an entire year. How can I keep myself preoccupied so that I’m not tempted to shop every day?

To start, I had to decide what qualifies as shopping. This was hard. Until you do something like this, you don’t realize how many things you purchase every day.

I made four lists.

First, I made a list of things that are not necessities or that I have to much of already. These include:

  • Clothing, accessories, makeup, shoes.
  • Electronics and gadgets, including phones.
  • Furniture and home accessories. (This one is tough. Don’t laugh, but I love to buy candles!)
  • Starbucks. Normally, I spend a lot at Starbucks. But for this experiment, I’ve promised myself not to go to Starbucks unless I’m traveling for work. (Honestly, I’m not sure how I’ll do on this one.)

Next, I had made a list of stores I had to keep away from. Much like J.D. wouldn’t allow himself to go into comic book stores when he was getting out of debt, in order to succeed at this challenge I need to keep away from:

  • Department stores
  • Boutiques
  • Malls
  • “One-stop shopping” stores. I should only go to actual grocery stores so that I’m not sidetracked by other shopping opportunities.

I also made a list of things to do for when I get the shopping bug. Instead of shopping, I can:

  • Exercise: go to the gym, go for a run, do sit-ups.
  • Clean the house.
  • Organize a cupboard — or four.
  • Reorganize my clothes closet.
  • Call a friend.
  • Bake or cook.
  • Remind myself why I’m undertaking this challenge. Maybe write down what I’m thinking and feeling.

Finally, I sat down to make a list of things that I can buy, which was much more difficult. There are obvious things that are okay, such as groceries and toiletries. Plus, gas and maintenance on vehicles. Once I started trying to think of things that were necessary, I realized just how much stuff I don’t need. I guess that’s a good thing.

My Start

After making my plan, I put it into action.

I started with my email. I don’t know about you, but I get tons of messages from stores, membership clubs, and other forms of advertising. All of this email is designed to entice me to spend more.

It took some time, but I went through each message and unsubscribed from the mailing list. Honestly, I felt sad unsubscribing to email from certain companies that I love. But I realized that if I didn’t do this, I’d just be tempted to shop.

Next, I cancelled my subscription boxes. I’ll confess that I had a few. They’re so fun to get in the mail! It broke my heart to cancel the FabFitFun box, which was my favorite. I love the feeling when it arrives and I get to open each item individually and fall in love. This might sound silly to some, but if you love to shop, you understand. As much as I hated to cancel FabFitFun, it had to be done. (J.D.’s note: After I visited the FabFitFun page to grab a link, I started being served their ads everywhere I went on the web. You’ve been warned.)

By the time I finished my quest to sever ties with stores and subscriptions, I was exhausted. I was emotionally drained from not shopping. How does that even happen?

There’s still tons more to do, of course, and I know it. That’s okay. I have an entire year to make these adjustments. After only a few days, I’m realizing how much time and energy it takes to discontinue old habits. But I’m up for the challenge! That’s six days down and 359 to go…

Have you every participated in a no-spend challenge? What rules did you give yourself? How long did it last? How well did you do? Do you have any advice for others who might want to try this?

Reminder: This is a story from a guest contributor. Please be nice. After twenty years of blogging, I have a thick skin, but it can be scary to put your story out in public for the first time. Remember that Kamie isn’t a professional writer, and is just learning about money like you are. Tough-love is fine, but don’t be a jerk.

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Budgeting tips from 1948 ~ Get Rich Slowly

Credit Sesame

Long-time readers know that I love old instructional films — the kind of thing we older folks used to watch in high school. (“Play it backwards!”)

Because the previous owners of Get Rich Slowly “unpublished” all of the old films I once shared, I get the joy of sharing them again with a new audience. Today, we start with a gem: “Your Thrift Habits“, a film designed to teach teenagers how to budget.

Produced in 1948 by Coronet Instructional Films, this 10-minute short is filled with great advice — and it’s fun to watch too.

“Your Thrift Habits” highlights some important aspects of budgeting and thrift:

  • “If you can do without extravagances, you can save regularly.”
  • Be aware of your budget-breakers and try to avoid them. In the film, Jack’s budget-breakers are movies, candy, and peach super-delights. Yours might be Starbucks or iTunes. In the past, comic books were my budget-breaker.
  • “Buying cheap, unsatisfactory products is never thrifty.” When you can afford it, purchase quality.
  • Sometimes you’ll have to make choices. In “Your Thrift Habits”, Jack chooses to attend a football game, which delays his savings plan by one week. The key is that he chooses this course of action and accepts the consequences.
  • Don’t get discouraged if you fall behind. Jack falls behind once or twice, but he doesn’t give up. He keeps saving.
  • “When you save for a specific goal or purpose, it’s easier if you have a visual reminder.” Tracking your progress can spur success.
  • Money management gets easier with time. After you’ve kept a budget for a month or two, or after you’ve saved for one big item, it’s easier to repeat the process.

It’s been nearly a decade since I first watched this film. I still love it.

If you spot other short films (or cartoons) on similar topics, please drop me a line so that I can share them with everybody!

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What are your goals for 2018? ~ Get Rich Slowly

Credit Sesame

Ah, the new year. A perfect time to set goals and work to adopt new habits.

Heeding my own advice, this year I’m setting goals based on effort not outcome. (After nearly fifty years on this planet, I’ve come to recognize that while outcomes are influenced by effort, there are other factors involved. But I am wholly in control of my effort.)

That said, here are my goals for 2018:

  • I will run at least one mile every day. I like to exercise. Unfortunately, I make tons of excuses to avoid exercise. But running a mile per day is easy. It’s something that takes less than ten minutes. I can do it every day — even when I’m sick. Might get tough when traveling, but I think I can make it work. (As I mentioned the other day, a handful of us money bloggers are planning to run a half-marathon here in Portland at the end of March.)
  • I will eat at least three servings of plants every day. One serving might be an apple or a cup of fruit cocktail or some asparagus with dinner. Starches like rice and potatoes do not count toward this goal. (Normally, I’m lucky to eat three servings of plants per week, so this is a big goal.)
  • I will drink fewer than 500 servings of alcohol. Here’s a frank admission: I’m worried that I drink too much. No surprise to long-time readers, who have seen the development of my love for beer and wine. And whisky. I think going “cold turkey” is setting myself up for failure, so I’m proposing this more modest goal. It still represents a sharp curtailment in how much I drink. (To get me started right, I’m pledging to drink no beer until my birthday at the end of March.)
  • I will publish 500 articles at Get Rich Slowly. Initially, I intended to publish 1000 articles at GRS, but my direction has shifted over the past couple of months. I thought the site was going to become a curation engine with original content a secondary concern. Now I see that my original path with GRS (from 2006 to 2009) is still sound. I’m going to highlight lots of curated stuff, but original material will take center stage. [Ha. Maybe I can allow myself one serving of alcohol per published article.]
  • I will read one book for pleasure each week. I used to read a lot. In my late twenties, my goal was to read one book per day. That seems insane now. After starting Get Rich Slowly in 2006, I entered a long period where I rarely read fiction. I went through phases where I read a lot of non-fiction — especially personal finance and economics material — but for some reason I abandoned novels. Last year, I started reading fiction again. In 2018, I want to take that from a hobby to habit.

These goals are all intensely personal. Some might seem silly and simple to you. Others might seem crazy. It doesn’t matter. They’re all relevant to me, and will help me become a better person.

But none of those are financial goals. What about those? After missing on all of my money goals last year, I’m reluctant to make plans for 2018. That said, I do intend to pursue a couple of aims:

  • Kim and I are both cutting back hard on recurring monthly expenses. I’ve experienced a bit of lifestyle inflation over the past few years, subscribing to newspapers and magazines, signing up for streaming music and video services. I’m actively working to get rid of anything I don’t actively use and get value from.
  • As I’ve mentioned, my cash reserves are empty. I’ve used them all to repair the house and to buy back this website. I feel pinched. I don’t want to access my investments to get cash, so I need to get money in other ways. So, I’m going to do two things: sell our RV and work to build GRS into a profitable website once more.

In essence, I’m following my own advice. I’m boosting my cash flow by cutting costs and increasing income. Yes, I could simply live on my savings, but I don’t want to do that. I want that to be a cushion.

What about you? What are your financial goals for 2018? Are you working to get out of debt? Saving for a house? Do you want to start your own business? Become financially independent? Are you hoping you can follow a budget for the entire year? Tell us what your money goals — and other aims — in the comments below!

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Start where you are ~ Get Rich Slowly

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My life isn’t the only one filled with flux lately. Many of my family and friends are experiencing Big Life Events (BLEs). Some are suffering serious illness. Others are switching careers. A few are leaving long-term relationships. And a couple are simply experiencing a mid-life crisis.

As often happens, these BLEs are prompting the people I know to evaluate their circumstances (financial and otherwise), and to re-evaluate their priorities.

Resets due to BLEs can make people feel panicked.

My girlfriend Kim, for instance, has been fretting that at age 45 she doesn’t have enough saved for retirement. She hangs out with me and at early retirement gatherings and comes away feeling inadequate, like she doesn’t measure up to the rest of us.

Or there’s my friend Joel who’s facing a BLE and desperately wants financial advice — but is afraid to ask for it. He’s embarrassed by his past decisions and his present circumstances. He’s afraid to look foolish.

Text exchange with Joel re: starting at 50

Text exchange with Joel re: starting at 50

Here’s my message to people like Kim and Joel: Start where you are. Don’t fret about your past, and don’t worry about how others are doing. Start where you are. Use what you have. Do what you can.

How to Start Where You Are

Start where you are quote by Arthur AsheClearly, this is easier said than done. It’s one thing for me to sit at my desk and type out pithy advice; it’s another to actually deal with the situation day-to-day in real life.

But here’s the thing: In order to get where I am, I had to start where I was. In order for other Get Rich Slowly readers to get where they are today, they had to start where they were.

When I say “start where you are”, I mean that you should accept that who you are and what you have today is, essentially, your starting hand. Don’t beat yourself up for past mistakes. Don’t blame others for getting you into this situation. These are the cards you’ve been dealt (even if you’ve dealt them to yourself), and it’s now up to you to play them as best you can.

How do you do this?

  • First and foremost, take care of yourself. Pause. Breathe. Prioritize your physical and mental health, even if that means spending a bit of time and money. Exercise. Eat right. If you need the help of a therapist, see a therapist. Money spent on self-care is never wasted.
  • Next, take stock of your situation. Figure out exactly where you are starting from. Set aside a Saturday morning to perform a “financial inventory”. Ideally, you’d take the time to begin tracking your money with a program like Quicken or YNAB or Personal Capital. At the very least, calculate your net worth and list all of your debts, bills, assets, and income. You need a snapshot of your current financial situation so you know what you’re working with.
  • Figure out where you want to go. Big Life Events can suck, I know. But dark clouds come with silver linings. As hinted earlier, these times of transition are excellent opportunities to re-evaluate your direction. Craft a personal mission statement, and maybe use this to set up a series of smart goals to act as waypoints along the road to your destination.
  • If needed, restructure your life. We all suffer from “financial drift”. We become complacent and lose sight of our larger goals from time to time. And during BLEs, it’s as if we’re in a storm at sea. We’re more worried about immediate survival than any greater purpose! But when you press the reset button, when you start your financial journey, it’s the perfect time to make changes, large and small. Analyze all of your spending. Cut the crap you do not need. Consider changing jobs. Ask yourself if it might make sense to move to a cheaper home — or to a cheaper city or state.
  • Meanwhile, don’t compare yourself to others — not even in the abstract. On an individual level, comparing yourself to your friends and family is a bad idea because you’re pitting your internal worst against their external best. Of course this’ll make you feel like crap! Besides, it doesn’t matter where anybody else is; what matters is where you are relative to where you want to be. It’s also a bad idea to compare yourself to statistical norms. Sure, stats can be fun to look at — and I share them all the time here at GRS — but stats are soul-less, lifeless abstract numbers. Statistics don’t have cancer. Statistics don’t get divorces. Statistics don’t struggle with faulty financial blueprints. When you start where you are, worry about your own self — not anybody else.
  • Seek support. One of the best things you can do when starting out is find support for the journey ahead. This support can take many forms. You might find a mentor, for instance, somebody who’s been down the same path before you. Pick their brain. Find out what worked for them and what didn’t. You might put together a “personal board of directors”, trusted experts who can give you solid financial advice. Most of all, look for other people in a similar position to you. Band together so that you can start your journeys together.

There’s a lot more to getting out of debt, managing your money, and saving for retirement, obviously. That’s what the rest of Get Rich Slowly is all about! But these are the essential steps to getting started. You don’t start where your friends or co-workers started. You don’t start where you wish you were. You start where you are.

Where I Started

I was in debt for seventeen years before I began my own quest for financial freedom. For many of those seventeen years, I was grasping at straws, trying to find quick fixes to fundamental problems. When I looked at my friends — at my wife, even — I felt ashamed that they were financially successful and I was not.

I wasn’t able to turn things around until I surrendered to the idea that I had to start where I was. I couldn’t magically will myself into smart financial habits. No amount of wishing was going to give me the same amount of savings that my wife had or the fancy house that my best friend had. It didn’t matter where anyone else was on their financial journey. I had to approach my money with what Zen Buddhists call a “beginner’s mind”.

So, in October 2004, I sat down one night to take stock of my situation. I put all of my financial information into Quicken. I entered my bills, my debts, and my income. For the past thirteen years, I’ve used Quicken (on and off) to keep tabs on where I am.

Next, I figured out where I wanted to go. I drew up this “spending plan” as a roadmap to my desired destination:

Gradually, I restructured my life to be more aligned with my mission. I made major cuts to my spending, which included giving up things I had previously valued such as computer games and comic books. I boosted my income by taking side gigs — and starting this blog.

I stopped comparing myself to my friends. I realized it didn’t matter what they had achieved. (I also realized that, in some cases, what appeared to be financial success was built on a house of cards. Some of my friends were just as poor with money as I was. They fueled their fancy lifestyles with debt!)

And, most importantly, sought support. I found people who actually were good with money and asked them for advice. I read books. I participated in online communities. I started Get Rich Slowly, which turned into a massive support group for myself and many others.

The Final Word

My main message to family and friends who find themselves at forty or fifty and feel behind the curve is: Don’t panic. All is not lost. You’re not too late. This isn’t a contest. Start where you are. Use what you have. Do what you can.

If you’re meticulous and methodical, it doesn’t matter when or where you start. It’s still possible to get rich slowly. I’m here to help — and so are other GRS readers. Join us.

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You Need a Budget ~ Get Rich Slowly

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In a nutshell: By diligently applying four simple rules, you can move from being at the mercy of money to being a master of money.

You Need a BudgetIn 2004, Jesse and Julie Mecham were twenty-year-old newlyweds trying to make ends meet. They lived in the 300-square-foot basement of a sixty-year-old home. He was pursuing a master’s degree in accounting, while she was finishing a bachelor’s degree in social work. Plus, they were planning for their fist child.

The Mechams felt flat broke.

But because Jesse was (and still is) a self-proclaimed “numbers nerd”, he decided to create a spreadsheet to budget for every day of the year. The couple steadfastly stuck to their budget, and something surprising happened. Despite their meager circumstances, they no longer felt desperate about money. They paid their bills and still had a little left over for a couple of date nights each month.

Later, while brainstorming ways to earn extra money, Jesse wondered if other people would be interested in his budgeting method, which involved four simple rules. He started teaching others these rules and sharing his spreadsheet. In time, that spreadsheet morphed into a piece of software called You Need a Budget [my review].

Today, You Need a Budget is one of the most highly-regarded personal finance apps available. (Seriously. Everyone who uses it seems to love it. Its users are die-hards.)

In his recent book — also called You Need a Budget, naturally — Mecham shares the method that has helped him (and thousands of others) overcome financial anxiety. Let’s take a quick look at the YNAB method.

Note: Throughout this review, I’ve embedded videos from the YNAB YouTube channel. While these videos contain great supporting material, they use slightly different terminology from the book. Not a big deal, but I thought you should know.

Rule One: Give Every Dollar a Job

The first step to building a better budget, Mecham says, is to give every dollar a job. Ask yourself this fundamental question: “What do I want my money to do for me?

Before you can give every dollar a job, though, you have to know which “jobs” need doing. Begin be listing all of the places your money needs to go — your obligations, the expenses that cannot be ignored.

For most folks, these top priorities will include housing, utilities, transportation, and health care — survival stuff.

Once your essentials are covered, the hard work begins. Now you have to “prioritize your priorities”. After you’ve set aside money for your needs, you can do whatever you want with the money that’s left. Want to travel? Use your money for travel. Want to buy new shoes? Buy new shoes. Want to upgrade your car? Upgrade your car. “Take time to think about what makes you happy,” Mecham writes, “and add those things to your budget.”

Again, you’re trying to answer the fundamental question: “What do I want my money to do for me?” First, you want it to cover survival basics. Next, you want it to help you enjoy life.

“Before you can start bossing your dollars around…you have to decide what needs to get done. You’re literally writing a to-do list for your money. If you’ve never done something so proactive with your money, you’ll quickly see how it changes your perspective on each dollar you hold.”

Rule Two: Embrace Your True Expenses

What about irregular expenses? That’s where You Need a Budget‘s second principle comes in. After you budget for essentials but before you budget for the fun stuff, Mecham advocates setting aside money for what he calls “true expenses”.

These “true expenses” don’t show up as regular, monthly obligations. They take two forms:

  • Predictable expenses include things like your auto insurance or home insurance, which might be paid once or twice each year. They also include stuff like electricity bills (which might spike in summer and/or winter) or holiday gifts and trips.
  • Unpredictable but inevitable expenses are those curveballs life throws you: The transmission fails on your car, your 12-year-old dog needs surgery, you discover dry rot in the attic.

It’s these true expenses, Mecham says, that derail most budgets. The average person is great about setting money aside for necessities and, especially, for the things they value in life. They’re not so good at remembering to account for periodic insurance payments. And they’re terrible at planning for the unpredictable but inevitable obstacles.

With his second rule, Mecham is trying to get reader to think long but act now. This can be tough for some folks. This sort of budgeting and saving feels like sacrifice. It’s not. You’re absolutely getting something you want — but it’s something you want or need in the future, not today.

“Every time you choose to put money toward a long-term priority,” he writes, “you’re literally spending money ahead to the future, setting Future You up for success.” Amen!

“Rule Two gets you to be proactive with your money on a much deeper level than you’ve ever experienced. When you think long and act now, you’re not just looking at your immediate bills — you’re seeing the bigger picture and you’re hyperaware of all your expenses. Your spending doesn’t surprise you anymore…”

Rule Three: Roll with the Punches

Even if you give every dollar a job and embrace your true expenses, your budget is going to take some unexpected hits. “There’s a difference between a plan and real life,” Mecham says. “If you obsess over sticking to the plan…despite any consequences, you’re sure to be stressed and unhappy.”

The third rule of You Need a Budget is all about making adjustments based on whatever comes your way. Because your budget is a plan that reflects your life and priorities, your budget should change as you life and plans change.

Rule Three is also about being completely honest with yourself about what’s truly important. Mecham conveys this concept with a story from his own life. For a decade, he and his wife overspent their budget grocery nearly every month. They kept setting optimistic targets, then missing wide. Eventually, his wife got frustrated. “I do not care what a can of corn costs,” she told him, and something clicked. They bumped their grocery budget to something more realistic.

Rolling with the punches is also about dealing with the completely unexpected stuff life throws at us. Imagine your garage door breaks, Mecham suggests. “The day before it broke, replacing the garage door was not a priority…The day after? Darn close to number one in [the] budget.”

The bottom line? Changing your budget is not failing. Neither is missing your targets. Don’t let it get you down. Roll with the punches. That’s budgeting in real life.

“Change is so important that we’ve dedicated an entire rule to it…Rule Three is what will save you when all other budgeting apps, experts, and programs make you feel you’ve failed the moment you stray from the original plan. It’s what pulls your budget out of a spreadsheet and into the real world.”

Rule Four: Age Your Money

The first three rules of the You Need a Budget method create a framework that allows you take charge of your money, to control it instead of letting it control you. If you follow these rules, you’ll find that you gradually move from feeling pinched every month, to having enough, to eventually generating a surplus of cash. Rule four is about building a stockpile of cash so you have enough saved to cover your expenses for a very, very long time.

To explain this rule, Mecham introduces the idea that money has an “age”. He writes:

Money’s “age” is based on the gap of time between when you earned the money (money in) and when you spend the money (money out). If the money you’re spending on Tuesday was deposited on Monday, your money is one day old. If it’s Friday before you’re spending that money you deposited on Monday, then you money is four days old.

Your goal should be for your money to be as “old” as possible when you spend it. Mecham urges readers to aim to age their money for thirty to sixty days, but reminds us that five days is better than one — and one is better than zero. “Just keep working on increasing the time between receiving money and spending it.”

(He also notes that if you’re in debt, then the age of your money is negative. You’ve spent money that you haven’t even earned yet.)

Mecham says that living off “old” money can feel like a pipe dream if you’re living paycheck to paycheck. It can seem like a luxury reserved for the super-rich. From his experience, that’s just not true. As you apply his rules, he says, you’ll move from having a stack of bills waiting for money to having a stack of money waiting for bills.

Final Thoughts

You Need a Budget is a simple book, but it’s excellent. It doesn’t try to throw the entire world of personal finance at you. It’s laser-focused on one thing: building a better budget. (And I appreciate that Mecham doesn’t use the book as a platform to pitch the You Need a Budget software, which is how he makes his living.)

The book includes chapters on budgeting as a couple, slaying debt, teaching kids to budget, and what to do when you feel like quitting. It’s also peppered with examples and real-world stories (some of Mecham’s own family) to illustrate the You Need a Budget philosophy.

Because Mecham has been reading and writing about budgets since 2004, he’s learned a lot about what works and what doesn’t. He’s constantly receiving feedback from the tens of thousands of people who follow his program. This book is a culmination of that experience, and it shows. If you need a budget, I highly recommend this book.

Related Reading
The Total Money Makeover by Dave Ramsey
All Your Worth by Elizabeth Warren and Amelia Tyagi

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