Starting Fresh

[Volkov]

Hi folks. New member here. As I approach my 30s, I realize that I wasn't really having my finances under control. On some level, the past year was financially stressful for a lot of reasons (got married, unforeseen legal and health care expenses, paying for school for my wife, etc). Unfortunately, while I had a decent chunk saved up (about $25k), I had to sell a good chunk of what was effectively my emergency fund.

I have some savings currently (~$10k in stocks and bonds) and very little no debt (less than $2k in credit cards and car loan) and make a little over $100k. Unfortunately, I also live in Boston, so the cost of living hits us a little more than it would have in some other places.

Anyway, I've a couple of goals - short term and long term. In the short term (i.e. <5 years), I would like to buy a house. Nothing too fancy, just something around $250,000. I'm hoping that saving about $1,000 a month for the next few years (I'm thinking 3-4) would be a good start to this end, since I'd like to put in at least 20% in down payment. I would like these savings to be fairly risk-averse.

In terms of long term goals, I would like to begin investing my money wisely. I currently invest about $500 a month, broadly across sector ETFs (I use the El Erian investment model) - Domestic and International Stocks and Bonds, Commodities, Real Estate, Infrastructure, Energy, and Healthcare. I've had a decent return -- more than 10% so far. I'm hoping to double my monthly investment amount to about $1,000 a month.

So, I'm starting from ground up, and this time around I'd like to avoid some of my earlier mistakes (e.g. credit card debt).

Any thoughts or pointers on my approach would be greatly appreciated! Thank you.

[jpg7n16]

Hey welcome

Most of the home buying advice you'll see on here is as follows. You are ready to buy a house when you have:

• No debt
• An emergency fund in place of 3-6 months expenses held in cash
• Plus an additional 20% down (does not include the EF)

I don't know why you're keeping any debt at all. Less than $2k could easily get paid off, so I'd start there.

Then focus on building an EF. A proper EF is like debt deterrent.

Do you have a budget? Budgets are key to saving money, and controlling expenses. You and your wife should discuss a family budget together. If you'd like some pointers, feel free to post your budget on here; you'll get some really good advice. But be careful what you read online. Here's a hint, usually the more posts someone has, the better their advice (in general).

Has your wife completed school? Does the 100k include her income? I ask because too many families try and budget husband and wife separately from each other - which I don't support. You guys should combine financials, as well as discuss financial goals together.

Are you a reader? While you save for a home, you could read through my fav investing book ever - Amazon.com: The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) (9780060555665): Benjamin Graham, Jason Zweig, Warren E. Buffett: Books

Check it out from your local library (or you can buy it online from like $4); but that book describes the philosophy about investing I have.


If you're interested in learning more about individual stock investing in particula, this book is good as well: Amazon.com: The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market (9780471686170): Pat Dorsey, Joe Mansueto: Books

[disneysteve]

Most of the home buying advice you'll see on here is as follows. You are ready to buy a house when you have:

• No debt
• An emergency fund in place of 3-6 months expenses held in cash
• Plus an additional 20% down (does not include the EF)

I don't know why you're keeping any debt at all. Less than $2k could easily get paid off, so I'd start there.

Then focus on building an EF. A proper EF is like debt deterrent.

too many families try and budget husband and wife separately from each other - which I don't support. You guys should combine financials, as well as discuss financial goals together.

I agree completely and would give the exact same advice. First get out of the consumer debt. Then build your EF. Then start the house savings and don't buy until you have a 6-month EF and a 20% down payment.

[littleroc02us]

What's crazy is that the more I look at these posts, it seems like a lot of us have good standard advice that is given out and that I definitely agree with you guys on this one. I myself was a complete idiot with money until I was 33 and one day it finally dawned on me that living in debt sucks and I never wanted to rely on credit again. As for the your questions, follow the advice above.

[disneysteve]

What's crazy is that the more I look at these posts, it seems like a lot of us have good standard advice that is given out

It really isn't rocket science to manage money responsibly. Follow some very simple rules and you'll be in pretty good shape. The problem is that the vast majority of people refuse to follow those simple rules.

[Volkov]

Thanks for the great responses! Half of the $2k debt is from my car loan and the other half is only because I've heard that having a rotating credit is good for you. Yes, that debt can be easily paid off -- the one thing I did not add is about $5k I keep in my checking account (which constitutes my availability for short-term liquidity).

Yes, I do have Ben Graham's Intelligent Investor - I've tried to use his advice and have moved away from speculation (which I tried during the bull market, and fortunately got out before things went south). I'm embarrassed to say that I've not read it cover to cover, but I have touched on topics of interest -- maybe I'll dig deeper as a starting point.

I make about $125k and no, it doesn't include my wife's income -- she hasn't completed school. She's in it for the long haul (Ph.D.) and isn't going to be done for a while. She goes to Harvard, which is on the more expensive side, but she gets a partial scholarship and the GI bill which helps offset her fees and other expenses. We've not combined our expenses - that's a good suggestion, thank you.

We're only now starting to look at a budget. I'll be sure to post one here and get folks' suggestions. For starters, we just consolidated a few months' statements and I can already see some patterns (and that's what I do for a living, ironically). For instance, we spend about $200 a month at just Starbucks, and eat out way more than we should. We're trying to address those, and come up with a number for the essentials, set aside some for discretionary income, and save the rest.

I typically get about two bonuses a year at my level, and I'm hoping that with no additional weddings in the horizon, we can put money into our "house fund".

Thanks again for the great suggestions.

[disneysteve]

I've heard that having a rotating credit is good for you.

That is complete and utter nonsense. It amazes me that this rumor persists.

Owing money is never "good for you." Using credit responsibly can help boost your credit score but you DO NOT need to carry a balance on your credit card and pay interest in order to accomplish this. Just use your card regularly and PAY IT OFF IN FULL every month. Don't ever charge more than 20-30% of your credit limit. So if your limit is $10,000, keep your monthly charges below $3,000. Your credit score will be just fine. It never makes sense to carry a credit card balance. Even at 0%, one could argue that it isn't a great idea.

[Volkov]

That is complete and utter nonsense. It amazes me that this rumor persists.

Owing money is never "good for you." Using credit responsibly can help boost your credit score but you DO NOT need to carry a balance on your credit card and pay interest in order to accomplish this. Just use your card regularly and PAY IT OFF IN FULL every month. Don't ever charge more than 20-30% of your credit limit. So if your limit is $10,000, keep your monthly charges below $3,000. Your credit score will be just fine. It never makes sense to carry a credit card balance. Even at 0%, one could argue that it isn't a great idea.

Wow, I had no idea. I mean, I agree with you, and it makes sense - but I had heard differently from the credit card company reps themselves.

I'm not originally from the States, so even the concept of having a credit history is new to me. I've about $20,000 in credit (just two cards with $10,000 each - they offered me increases on their own), but I've never really used more than $5,000 on two occasions (grad school and wedding). I never used my card, and my score did not really change much. I was then told (by the CC company agent, no less) that you needed to have rotating credit to have a credit history.

Do you know where I can find documentation on the exact mechanism by which your credit score is calculated? It seems more like blackbox voodoo than voodoo itself. I've never failed a payment and I've never defaulted, and I've always paid all my bills and cards on time. I've a decent amount of credit limit available but only use a very small portion. Still, my credit score is only in the 680 range, and I'm rather confused.

[jpg7n16]

Wow, I had no idea. I mean, I agree with you, and it makes sense - but I had heard differently from the credit card company reps themselves.

I've heard from several car salesmen that I need a new car as well.

The credit card company reps are a bit biased on this topic

[disneysteve]

I had heard differently from the credit card company reps themselves.

I've heard from several car salesmen that I need a new car as well.

The credit card company reps are a bit biased on this topic

JPG beat me to it. WHY would anyone take advice about credit cards from a credit card company rep? Sales people are in business to sell things. That is never who you want to get your advice from whether you are buying a car, an insurance policy, a TV or anything else.

[Hector]

Wow, I had no idea. I mean, I agree with you, and it makes sense - but I had heard differently from the credit card company reps themselves.

I'm not originally from the States, so even the concept of having a credit history is new to me. I've about $20,000 in credit (just two cards with $10,000 each - they offered me increases on their own), but I've never really used more than $5,000 on two occasions (grad school and wedding). I never used my card, and my score did not really change much. I was then told (by the CC company agent, no less) that you needed to have rotating credit to have a credit history.

Do you know where I can find documentation on the exact mechanism by which your credit score is calculated? It seems more like blackbox voodoo than voodoo itself. I've never failed a payment and I've never defaulted, and I've always paid all my bills and cards on time. I've a decent amount of credit limit available but only use a very small portion. Still, my credit score is only in the 680 range, and I'm rather confused.

Dont worry about credit score that much. By doing following your score will keep getting better.
Pay every credit bill in time every month in full and make sure that you are not borrowing more than 1/3 of credit line (if at all you need to do that). Also make sure that you check your credit report periodically to make sure nothing is fishy in it.

[snshijuptr]

I guess we should clarify for Volkov that "revolving credit" is just having and using a credit card. Basically, every month the credit card company reports the balance they bill you for to the credit agencies. Then you pay off the amount...let me create a little timeline of a month in the life of your credit card bill:

Month 1
- You charge $100 to your credit card
- You get billed $100
- The credit agency is told you have a $100 balance on your credit card with a limit of $1,000, and you paid your bill on time. They say you have $100 debt and 10% utilization
Month 2
- You pay your entire credit card balance, $100, & pay no interest
- You charge $200 to your credit card
- You get billed $200
- The credit agency is told you have a $200 balance on your credit card with a limit of $1,000, and you paid your bill on time. They say you have $200 debt and 20% utilization.
Month 3
- You pay only $100 to your credit card & are charged $20 for the remaining $100
- You charge $0 to your credit card
- You get billed $120
- The credit agency is told you have a $120 balance on your credit card with a limit of $1,000, and you paid your bill on time. They say you have $120 debt and 12% utilization.

So basically, the credit card company only sees the balance at each bill, not how much is interest, from previous months, etc. They want to see you using credit and paying bills ON TIME. They also track your utilization (which you want between 1-20%, best 1-10%).

So here's the kicker: charging a whole lot of money on your credit card one month and paying it off immediately looks really bad! If I max out my credit cards one month and pay the entire balance after my bill comes in, FICO docks my score. I paid my bill every month, but my utilization was around 30%, not good. I applied for another credit card and now my utilization is lower, though I still pay off my bill every month.

Remember they are rating both your fiscal responsibility (paying your debts & paying on time) and how much people trust you (the amount of credit you have, the types of credit, etc).

[jpg7n16]

Remember they are rating both your fiscal responsibility (paying your debts & paying on time) and how much people trust you (the amount of credit you have, the types of credit, etc).

Keep in mind that you might should be skeptical of the credit scoring system.

For instance, DisneySteve posted his credit score at over 800 (fantastic) and Warren Buffet's score is in the low 700's. (718 in 2008; » Warren Buffett’s Credit Score &#64; Credit Card Addict)

Now no offense to DS, but Warren Buffet is more fiscally responsible, and is vastly more likely to have the resources to pay off his debts, and many people/companies trust Warren Buffet (seeing as he can borrow billions for his company). If he needed a personal loan, he literally owns the bank (Wells Fargo).

So why does our beloved DS have a higher score than the 2nd richest man in the world?


I don't really know how they keep score, or what exactly they are tracking (though I have my conspiracy theories).


I honestly don't know my score, and don't plan on needing to borrow anything until I buy a house one day. I guess I'll find out what it is then. But I really just don't care about it.

[skydivingchic]

Credit scores are a bit of a black box. FICO has not and will not release the exact formula they use to calculate credit scores. But they have released a basic breakdown of what goes into the score.

- 35% payment history
- 30% outstanding debt/utilization ratio
- 15% length of credit history
- 10% new credit
- 10% types of credit

So the two biggest factors are the ones people here have already mentioned - paying on time and keeping your utilization ratio low. For the length of credit history, the longer the better. You said you are new to this country and credit scores, so I would guess this would be one area where you don't score as high since you have a relatively short history. Nothing you can do to improve that one obviously except wait. The new credit factor has to do with applying for new credit. FICO scores assume that you can't handle new credit. So if you apply for a new card or take out a new loan or especially apply for a bunch of CCs in a short period of time, it dings your score. This affect is generally relatively short lived if you start paying on time and as agreed. The last factor is the types of credit you have. They like to see a mix of fixed accounts such as mortgages and loans (where you generally don't have as much influence over the utilization ratio - i.e. if you take out a 30 year mortgage, even if you pay extra principle your utilization will likely be pretty high for a good long while) and revolving credit where you do have a lot of influence over the utilization. So yes, it helps your score to have revolving credit, but there is absolutely zero need to pay interest. For negative stuff such as late payments or collection accounts, the more recent that activity, the more impact it will have on your score.

So keep paying your CC bills on time and start paying them off in full each and every month. Your credit report will still show revolving credit activity and a good payment history and you won't be paying interest. Win-win. Give it time and your score should go up.

[Volkov]

Once again, I really appreciate this - I did some reading on my own, and I think I'll pay off my credit cards. I'll probably do autopay for a couple of utilities from my cards while repaying them regularly (within the 30 day period). I'm going to leave the car loan be, though, since it's an incredibly low interest loan, and it's going to be closed out in a couple of months anyway.

So, what's do you folks think of my investment strategy? Currently, the CCs will all be paid off next month, and the car loan in a couple of months.

Currently, I've a savings account with BofA, but my interest rate is quite low. I noticed that Amex and HSBC had a high yield savings accounts. Are there others? Any recommendations?

Cheers.