Dear Deborah: A Monthly Financial Advice Column


This month’s column spotlights both sides of your money—managing credit cards, and early investment in your retirement.

Should I get rid of my first credit card with a low credit limit I never use? Does paying the minimum balance on my cc’s hurt my credit?  

Signed,

Credit Where Credit Is Due  

Dear Credit:

Paying the minimum balance is generally all that’s required, and tracked by the credit card company. As long as you pay the required amount on time, your score from that specific credit company will remain good.

However, there are other factors that can cause your overall credit score to suffer. Credit utilization is a major part of your FICO credit score. Creditors want to know how well you manage your credit line. If you want a high FICO score, pay attention to how much total debt you have compared to your credit limit. As you get closer to your credit limit, your score will decrease. Keeping your balances low will quickly benefit your credit score since your activity in the last 120 days is heavily weighted.

The unpaid balance will continue to accrue interest, which compounds over time. The crucial question is, how long will it take to pay off your balance if you only pay the minimum amount? Most credit cards provide this timeframe on their monthly statements. Have a look at your card’s estimate and prepare to be shocked. It can take years to pay off a relatively small balance. For example, a credit card with a balance of $1,000 will take 4½ years and $340 to pay off. To help drive the point home, you can use this calculator to determine how long it will take to pay off your current credit card balance. Paying only the minimum balance is a very expensive, and long suffering way to manage credit card debt.

To take advantage of the competitive promotions, your credit cards accounts should be reviewed once a year. When analyzing each account, take a look at the interest rates and payment terms, annual fees, etc. I suggest ranking all your credit cards in order of the value they provide you in addition to what they cost to maintain. If your credit score is good, consider asking the credit card company to increase your credit limit (which may increase your overall credit score) or trade the card for one that has a better interest rate, no annual fees, or other perks. Give priority to the cards that give you cash back for certain purchases, staying tuned into periodic promotions that offer higher rebate rates. As an example, Creditkarma.com placed the Freedom Card which provides up to 5% cash back for everyday purchases, at #1 on its list of the 10 best credit cards of 2016.

How much money should I be saving in my 20’s, putting in a 401k?  

Signed,

Super Savvy Investor

Dear Investor:

According to moneyunder30.com, beginning your long term investing habits in your 20’s can eventually make you a millionaire, but you have to remain engaged and interested in the process. They caution to stay educated and not put your 401k “on autopilot.” If you want to take a deeper dive, check out their insightful 10-step 401k Strategy.

There are many reasons to begin putting money into your 401k as early as possible. To begin with, your contributions are tax deferred, meaning you deduct them off the top when you calculate your taxes. Your tax rate at different ages should factor into your overall investment strategy. Spend some time with your tax professional to examine the impact of this important practice as you age.

Conventional Wisdom says you should always invest at least as much as your company matches into a 401k. Why? Because you automatically double your investment. For instance, if your company has a 401k program and matches up to 3% of your annual salary, for every dollar you invest up to the 3% limit, you earn an additional dollar from your employer. Picture this: You make $50,000 per year. 3% would be $1,500. If your employer matches your 3% contribution, your initial investment will double. But, usually there are strings attached. Most employers require that you stay employed with them for some period of time (such as four years) in order to receive 100% of their contribution, so make sure you fully understand the company policy and your career plans before including this money in your long-term stash.

If you’re consistent, and set up an automatic withdrawal every paycheck, then you create a habit and may not ever miss that money. Adam Brown, a writer for Forbes, said brilliantly, “Starting a life can get in the way of planning one.” He suggests getting into the habit of saving 10% of your earnings in your 20’s and for each decade, add an additional 5%: in your 30’s, 15%, in your 40’s, 20% and so on. Remember, once you reach retirement age, the money you withdraw from your 401k will be taxed at the time you take them out. To maximize the tax benefits when you are ready to withdraw the funds at retirement, Mr. Brown suggests that you fund a Roth IRA with your additional funds.
If you have  more money questions gnawing at you, please send it to editor@hiplatina.com

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