How to avoid being a Financial Idiot.The purpose of this
Financial teaching tool is to give you just enough information to
prevent you from being a financial idiot, not to make you the next
Wolf of Wall street. Youre working hard to earn your future, dont
waste all that effort just to throw it away because you chose to
turn a blind eye to fiscal management. Attached to this document I
plan on having a few links for the reader to have some useful tools
to walk away with. Id like to cover the basics of budgeting,
credit, debt and debt repayment. BudgetEverybody hates the idea of
a budget; they are tedious, constrictive and never seem to work out
just right. With todays technology you can set up a budget in 20
minutes and then spend less than 10 minutes a month adjusting it.
They are only as constrictive as you make them, so if you budget 50
bucks a month for food, then yes you will go hungry and be upset
about the walls you drew around yourself. And lastly, the fact they
never work out well usually the first month they dont because you
dont yet have a good idea as to where all your money goes, which is
exactly why you need to make one. By month 2 or 3 your budget you
will have a pretty good idea of what to anticipate for the upcoming
months.Why make a budget? If you dont know how much youre spending
or where your money is going then how can you plan for the future
or be accountable for yourself? Moneytime magazine found that those
who kept a regular budget retired with 40% more money at retirement
(Im not citing my work because its not worth the extra effort and I
dont think you care). Youll also have a better idea why budgeting
is so essential after we address credit and debt.How can I have a
simple and effective budget without spending all my free time
looking through finances? Mint.com, voted #1 free budgeting app.
Click on the hyperlink to set up an account. Its a safe and secure
site that can monitor all of your accounts in one place. Its online
and has a convenient app for any smart phone. Follow the
instructions on the site and itll help you set up your accounts,
create a budget and even see your credit score. This brings me to
my next subject.CreditThis is an area where if you havent taken a
course or done some specific homework you might be more ignorant.
Thats fine, but lets fix it. Credit is a major player when it comes
time to getting a loan. Your credit tells a lender if you are a
high risk or a low risk. They are giving you their money in hopes
of a return. The less risky you are to them the cheaper they will
give you their money. This can be the difference between a 2.1%
mortgage or a 4.3% mortgage. To put that in perspective Ill give
that a number value. 250,000$ loan for a home with a 30 year
mortgage at 2.1 % = 87,200$ interest for 337,200$ total250,000$
loan for a home with a 30 year mortgage at 4.3 % = 195,400$
interest for 445,400$ totalThats over 100,000$ difference. Granted
Im showing you 2 extremes, but it goes to show that building good
credit can save you big in the long run.CreditKarma.com and
mint.com both have great free resources to monitor your credit and
give you advice on how to improve it. Ill give a few quick tips
here. 1. Paying your bills on time- High impact2. Age of Credit
history- medium impacta. Dont close old accounts, even if you
switch to a new account. It helps build your credit3. Credit Card
utilization- high impacta. Look at the credit limit on your card;
pay off your card before it gets to 20% of its maximum. Ex. 2,000$
limit, pay it off when you balance reaches 400$b. Always pay your
credit cards before they accrue interesti. you can set up auto-pay
to make sure you dont forget4. Derogatory Marks- High impacta. This
happens when something goes to collections if you dont pay a bill,
bankruptcies.b. This is usually something you would be aware of, if
its happened to you itll be a giant red A on your forehead for a
couple of years before its removed.5. Total accounts- Low impacta.
Complicated, but the more accounts the better. Caveat, opening too
many accounts in a short amount of time is also bad, so opening new
accounts over time is best.6. Credit Inquiries- low impacta.
Happens whenever someone is about to give you a loan. They want to
see how your credit looks. Every once in a while is totally fine,
but if your credit is inquired very frequently its not great. Now
lets briefly discuss credit cards. They are neither good nor bad,
but merely a tool that can help you or destroy you and leave you
broke. Simple rule, never spend what you do not have. Follow that
rule and a credit card will never hurt you. Credit card interest
rates can be as high as 18-20%. This interest never accrues if you
pay your credit card on time, but if you pay the minimum and leave
a balance then that interest begins to accrue. Youre in enough debt
with student loans; you shouldnt need to top it with credit card
debt as well.DebtThe average medical student leaves school with a
whopping 170,000$ of debt. DO programs on average are more
expensive, putting us around 225,000$. If you take out the max
loans of something around 68,000$ per year thats equal to 272,000$.
Now lets put some interest on that number. Because a student loan
is higher risk than a house mortgage the interest rate is higher.
Now were looking at 272,000$ with about a 6% interest rate (I
believe its around 5.5% for the unsubsidized Stafford loan and 6.5%
for the grad plus loan). Say you wanted to get out of debt in 20
years, youll end up paying 468,000$ for that original 272,000.
Thats almost 200,000$ of interest you pay the bank.So what can we
do? Lets make a list of ideas1. Spend less during med school by
keeping a budget.a. With a budget say you take out 60,000 instead
of 70,000 per year, saves you 60,000 in the long run.2. Refinance
once youre out of residency.a. Many dont know this but as soon as
you get a job you can get a financial institution to buy your
loans. That means they will pay off your loans to the current
lender and assume your debt for a lower interest rate. Why? Because
once you have a good job and make money you are much less risky.
You can change your interest rate from 6% to 3%, but this rate is
contingent upon your credit score, another reason to keep tabs on
it. b. Those two steps alone take you from your original 468,000$
to 320,000$, thats saving you 150,000$ dollars!c. Caveat to
refinancing, doing so can forfeit things like loan forgiveness
programs and other perks. This is a great choice if you plan on
just sucking it up and paying off your loans yourself.3. Pay off
your loan sooner.a. Say you pay off your loan in 10 years instead
of 20.b. Now youre down to 278,000$, thats only 38,000$ of interest
as opposed to the original 200,000$Now Ive saved you 160,000$, hows
that feel? Download a financial calculator onto your smart phone,
itll allow you to punch in numbers to see for yourself how much you
can change your debt payments by changing different parameters.
Theres a lot more we could talk about, but I hope these few
simple tricks will help you on your road to financial success. If
you need help with anything or want to discuss other topics feel
free to shoot me an email at [email protected]
