Glen McDermott
In the Know links readers with UMaine faculty, students and staff with particular expertise. Glen McDermott, a master’s student in economics and member of UMaine’s Household Financial Education Initiative, and Sarah Morehead, graduate student in UMaine’s School of Economics, took questions on personal finance.
On personal finance
Glen McDermott is a master’s student in the University of Maine School of Economics. Sarah Morehead has a graduate certificate in financial planning from Bentley University and is a graduate student in UMaine’s School of Economics. As part of UMaine’s Household Financial Education Initiative, McDermott and Morehead lead workshops in Maine communities and schools that help individuals and businesses evaluate their finances; discuss household budgeting and winterizing; and connect with an extensive list of organizations and programs that can provide assistance.
Sarah Morehead
What does a personal finance plan consist of, and how do I get started?
Your personal financial plan includes:
Safety Nets: Emergency fund (3-6 months of household expenses) – These are cash reserves to cover your expenses if you lose your income for a time. Some people use a home equity line of credit (that is NOT used unless you have a dire emergency like a job loss or medical need) as their emergency fund. This is the single most important element of a financial plan, and should be the very first thing you invest in.
Life Insurance – Buy a policy that will pay off all your debts and replace your income for several years if you die unexpectedly.
Will – The very important, often ignored, document that ensures that your assets will be distributed the way you would like. (Parents, if you don’t have a will, do you know what the state and federal laws are concerning who will take charge of your children?)
Growth Funds and Goals: Based on your personal goals and your risk tolerance, financial investments are the tools to making your money grow to meet your needs. 401Ks and IRAs are two of the most common types of investment accounts. Mutual funds are a great investment tool for beginners.
How to begin? Start with the emergency fund, then pay off consumer debt. (The high interest rates on consumer debt often make other investments moot.) Next, you’ll need to set some goals for retirement. Learn your risk tolerance so you can choose investments that suit you best; then visit a retirement planning calculator to learn what percentage of your income that you should be investing each year to reach your goals. Here’s a link to a great retirement savings calculator: http://www.dinkytown.net/java/RetirementPlan.html
What’s the biggest financial mistake people make without even knowing it?
The single biggest mistake that people make blindly is thinking about the money in their lives in terms of income and expenses. When we think in terms of income and expenses, we put ourselves in the fairly passive role of directing the flow of our money, but we believe its source is somewhere far off. If we shift our focus to assets and liabilities, we begin to understand how money actually works, how we generate it and dispose of it. Understanding that our internal assets (our personal strengths and skills) are the source of the material assets we receive from our work, we will invest in them to generate more cash, and invest that cash into building more assets. Strong financial decisions begin with clarity. Income and expenses only tell us part of the story. Assets and liabilities are, respectively, the source and endpoint.
What are the top three steps I can take to improve my financial outlook?
Pay yourself first – Our lives have a way of sucking up every penny we don’t assign to use ahead of time. When you make your budget, put your savings percentage first. When you get paid, put the savings portion into savings. Again, automatic transfers to your savings account can help a lot. Emergencies don’t give warning. Do this and you’ll sleep better every night.
Pay off consumer debt – Automatic payment plans can be lifesavers for people who don’t like to sit down and do the bills every month. A little planning up front, and an automatic payment schedule, can free you up immensely.
Pay your bills on time – It seems obvious, but it needs to be said. Do whatever you need to do to make sure that you are making at least the minimum payments on debts and bills every time they are due. If you know you are going to miss a payment – CALL and speak to the company. It takes one missed payment to hurt your credit, and many on-time payments to repair it.
I’m a saver. My husband’s a spender. How can we plan our household budget?
If you can afford to, certainly set up separate “fun money” accounts that are funded equally, but used separately. Honestly, though, it’s not a budget fix you need. Money differences are one of the top three reasons for divorce; they’re often cited as #1. Unfortunately, marriage counselors aren’t usually trained in financial psychology. You’ll really need to learn how to talk to each other about money in a way that you both can understand, and respect. Start by asking yourselves some questions: When do you save the most? Do you allow yourself to enjoy your money or is the number in the bank account the only pleasure you feel you can afford? When does he spend the most? Is his way of coping with financial stress to spend money on little luxuries? Are you each reacting to the other person’s behavior by intensifying your own? You have each developed strategies to cope with fear, need and enjoyment of life. Try to listen to each other without judging the other person’s strategies as bad. Learning to talk about the underlying emotions you both have attached to spending and saving will bring you a lot closer together than a budget template will. Remember, you have the same needs: security, freedom, etc., just different strategies. When you understand each other, and can support each others underlying needs, you will be able to invent – together – a plan that works for you.
How important is a FICO score and what can I do to improve mine?
A FICO score is often the only information a lender has about your ability and willingness to pay back money that you borrow. If you have no credit score, they have no information. A good FICO score is essential if you want to borrow money. If you need to establish credit or need a quick fix for bad credit, a secured credit card, paid on time, is the easiest way. These cards are secured by your own capital, so the risk is lower and they are easier to get. Again, automatic payments work wonders. Choose a regular expense like your phone bill, and pay it with the card every month. Use the card only for these regular expenses, and pay it off in full every month.
