Banks 101: Personal Banking Made Simple

Stashing away a chunk of your money in bank accounts is a sound idea. However, this should not be your only means of financial management. Banks don’t offer competitive interest growth rates when considering investing your money into a basic savings account or money market. In fact, the only reason I would consider storing money in a bank account is for the federally insured protection. Trusting the bank with your entire nest egg is NOT necessarily a sound financial decision, with all things considered.

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Banker Training June 2018 – Warren, MI (Michael 2nd from left)

Category #1: Cash Accounts

Checking – A convenient account to swipe your debit card with for daily purchases, however this account will not generate competitive interest yield and your money is potentially ‘at risk’. Try to stick to accounts with no maintenance fees or minimum balances, so you can swipe for daily purchases at ease. Secure your account and routing numbers to prevent fraud and or identity theft, or general theft of funds.

Savings – A safe, federally insured, but still potentially ‘at risk’ account that may be used for short-term savings. Short-term savings are important when expenses and non-expected emergencies arise. The downfall is the interest rates vs. inflation moving forward with your financial future. The inflation rates are outpacing the low interest rates offered by most traditional banking institutions.

Money Market – An ‘advanced’ savings accounts usually offered to bank clients who have at least a $30,000 balance in a savings account. This is the best option for large balances, as it maximizes what little interest the bank rates present. Money markets contain investments into highly liquid accounts such as cash and short-term debt instruments, with short maturity periods. Money markets have a relatively low level of risk.

CD – A fixed period investment with an annual percentage yield, typically used for balances over $50,000. The rates for CDs were supreme in the mid to late 1900s when savings bonds were a popular choice to purchase from the federal reserve. Unfortunately, in modern times the CD rates are typically below .05% APY, not to mention those funds are locked up and early withdrawals are penalized.

Category #2: Investments

Summary – Basic investing principles are directed by the large financial institutions such as government sectors, banks, private equity firms, and others. These are great options for a certain percentage of your nest egg, however, to place all your funds in these investments will not yield a viable long-term return anymore.

Private Bank Clients – The bank’s financial advisers will place your investment funds in long-term equity holdings. Typically, the larger funds with long-term S&P Benchmark methods are chosen. This includes Vanguard size companies, and the only difference is the bank fees that the advisers take for maintenance, commission, etc. This will reduce total return in your portfolio compared to investing in these funds without an adviser.

As with any bank account for both consumer and business, it is important to diversify your savings therefore opening an investment account that is federally insured is a safe diversification strategy. The previous paragraph regarding the investment account fees that advisers and the institution will allocate among themselves is to illustrate the different options for diversification in full transparency. It is up to you on which diversification options you choose to disperse your funds throughout, I simply display the available options.

Category #3: Consumer lending

Consumer lending products are ones that are almost unavoidable in one’s lifetime. The economy is set up to entertain loan options for vehicles, education, business, and much more. The personal lending products that we will be reviewing are ones that I have had personal experience with in the banking industry along with my own personal life. Term loans, debt consolidation loans, and home equity lines of credit.

Term loans also known as personal loans, should only be used for absolute necessity projects. Defaulting on a loan payment will damage your credit score significantly and this will effect your ability to participate in lending products. It is important to review the loan amortization period with your bank to ensure that you are able to make each payment on-time.

Home equity lines of credit are excellent lending options for consumers who own a home and need to leverage the equity. The same principle applies to term loans as do HELOC’s, only utilize this option for absolute necessity payments. Debt consolidation loans are a last resort for those who have unfortunately incurred debt through multiple accounts with multiple interest rates. This debt manager loan will consolidate your balance in to one payment attached to a single interest rate.

Thanks For Reading,

Michael Moran, IHG Management

A Guide to Credit Management: Millennial & Gen X Edition

One of the most prevalent financial problems in today’s society is poor credit and lack of educational resources for credit management. Most people don’t realize how important it is to maintain a favorable credit score until it affects their livelihoods in some instance. The most common areas that poor credit will negatively impact an individual or a family is with housing, travel, personal loans, and other rental related area.

Housing, travel, and personal loans are almost an absolute necessity for everybody in today’s society unless there is a special circumstance where one is able to avoid these life stages and get by without having to undergo a credit check. If you are not a special circumstance person then managing your credit on a regular basis will be a process to strongly consider implementing if you haven’t already.

Regardless of your personal and financial situation this guide to managing credit will come in handy for your real life. The following body of this blog post will contain key credit management areas to focus on in your plan. Whether you are trying to establish credit or are in the phase of paying down your credit card bills and loans, key takeaways are present for your financial future.

Understanding Credit Scoring

Before you understand how to properly manage your credit score it is important to learn how the credit bureaus determine one’s credit score and overall report. A credit score is defined by FICO as “A credit score tells lenders about your creditworthiness (how likely you are to pay back a loan based on your credit history). It is calculated using the information in your credit reports. FICO® Scores are the standard for credit scores—used by 90% of top lenders.” 

One’s FICO score is determined by a scoring table with ranges of categories used to determine an individual’s creditworthiness. The numerical scoring scale ranges from less than 580 to 800+ and are separated by the following categories poor, fair, good, very good, exceptional.


FICO Scoring Table
FICO Credit Score Ranges

FICO Score Management Tips:

Start with checking your FICO score through any of the three credit reporting agencies to ensure your information is accurate and error free. If there are any errors on one’s credit report an option to dispute exists. This is important because a sizable portion of credit related issues stem from inaccuracies and unfortunately criminal activity such as fraud and identity theft. Once you have reviewed your credit report and analyzed the data within the report, you are ready to begin implementing positive and simple credit management strategies.

The first management strategy to put in foundations is rules to abide by when opening a credit card, the purpose and advantages along with the negative choices one may make in his or her financial journey. The first strategy is to choose which expense you will incur with your credit card and a solid reasoning as to why you choose that option. The responsible financial decision is to use a credit card for an affordable expense in order to build credit for future loans.

The next step is to establish credit with your plan of action. Set a day of the month that your scheduled payment is coming out of your credit card. This expense should be paid in the full statement balance for approximately 4 months to make enough on-time payments to establish an initial credit score. This process will also beneficially create positive financial habits for you in on time payments and it will familiarize one with the process.

Once the initial learning curve along with positive habits have been put in place, it is time to understand how the amount of available credit you have left plays a part in determining your credit score. Using 30% or less of your available credit and making on time payments will provide for a good credit score. To increase one’s credit score even more, using 10% or less of available credit will provide for the most favorable score.

Summary

  • Choose a reasonable and realistic recurring expense to incur on a credit card
  • Establish at least 4 on-time payments and pay full statement balance
  • Using 30% or less of available credit + on-time payments for favorable score 
  • Using 10% or less of available credit + on-time payments for superior score

Source(s): https://www.myfico.com/credit-education/credit-scores

Thanks For Reading,

Michael Moran

Managing Partner @ IHG Management

7 Basics to Personal Finance – Millennial & Gen X Edition

7 Basics to Personal Finance – Millennial & Gen X Edition

The decade kicks off with continued economic predicaments in areas such as the wealth gap, student loan bubble, the affordable housing crisis, and wage limitations. These major talking points in modern society play a crucial role in the current state of the millennial and gen X generations financial prosperity and outlook for the future.

Although these outside influences have an effect on daily living to a certain degree, there are more sensible paths to take regarding financial responsibility. This blog will highlight 7 important areas of personal finance that every millennial and gen X-er should consider no matter what stage in life you are in.

1. Evaluate Your Debt Choices

This concept is especially important for the generations whom this blog post is tailored for. Millennial and gen X generations still await a great many financial decisions for the good or bad in their lifetime, therefore implementing this rule is critical. Evaluating your debt choices simply means evaluating the cost vs. benefit of any financial decision that puts you in debt. As someone with banking experience I understand how easy and tempting it can be to make these decisions without calculating the reward or return, however debt will keep you financially stuck due to interest rates overtime.

A large portion of this demographic took out student loans, which many are finding difficult to match jobs within their salary requirements when the loan payments begin. Furthermore, student loan forgiveness is not a viable option for the everyday college graduate by any means. These governmental programs will be debated for years but won’t apply to most people anytime soon.

If you must take out a loan or line of credit then ensure the return is a worthwhile investment, and don’t make it a habit. Also it is helpful to leverage equity in your home before accruing a high credit card balance where interest rates are around 24%-26%. Living below your means is always spoken of because it holds such importance to your financial future.

2. Open a Roth IRA Account

I’m sure the statement “Begin saving early to retire with confidence” or something along those lines has registered with you at some point in your career. Although it most likely didn’t stem from an educational setting, as schools often don’t teach personal finance. A Roth IRA is a form of an individual retirement account offering tax-deferred withdrawals upon age 59 1/2. Monthly contributions will provide for dividend returns and compound interest over time, setting you up your entire life for a stress free retirement.

The important factor to keep in mind when considering your recurring contributions is your overall financial picture. It is more difficult to contribute to the Roth IRA account if you are in debt or in need of cash. The penalty for early withdraw on Roth IRAs are around 10%. If you have read this far I would advise you to schedule an appointment with your bank as soon as possible. Every day you don’t invest in to your future is money lost in retirement.

3. Pay Yourself First

This is becoming an increasingly popular financial concept, and one that I learned years ago through my father’s advice, which I then rediscovered in Robert Kyiosaki’s book “Rich Dad Poor Dad”.

The concept actually describes the process of how it works, you literally pay yourself first. Think about it, you are required by law to abide by tax deductions from your paycheck where a small portion of the revenue goes to the government first. Then typically individuals first payment is to monthly mortgage or rent for housing. Only after basic needs and necessity costs are you able to ‘pay yourself’ and by this point most individuals have run out of income to spend.

Instead set aside a small percentage of income to a savings account before ‘paying others’ such as your needs based costs. This will require strategy as you will discover it is much more realistic to have this automatically done for you through paycheck deductions in to a 401k or Roth IRA.

4. Closely Monitor Expenses

This is the most difficult to stick to and constantly changing process that is more difficult than it sounds. A very detail oriented task is to closely monitor and evaluate your expenses other than necessities. Do you regularly evaluate your monthly bank statement expenses to ensure you aren’t unnecessarily losing money each month? This is a basic principle to adopt when managing your expenses. This step works in the long-term with step #1 in managing your debt.

Every unnecessary expense is an investment opportunity squandered. This is an economics 101 term called ‘opportunity cost’. For example, if you spend $30/month for a gym you don’t use often, that’s $30 a month you could be investing in your retirement account. Over time that $30 invested gains returns and dividends helping you retire with greater funds. Therefore an expense as innocuous as a gym membership could be costing you thousands of dollars in the long run in opportunity cost. Another example is opening free checking accounts with no minimum monthly fees, and considering your overdraft options.

5. Stick to Overdraft Free Bank Accounts

More online banking institutions are gravitating toward grace periods or eliminating overdraft fees in total. A few examples of theses are chime, ally, and axos. Typically overdraft fees for standard checking accounts are around $34 when your bank account goes below the available threshold. This concept is similar to an interest rate on a credit card which goes in to play when you spend more of your available credit, in this case when you spend more than you have available in your checking account.

In time I’m sure that most banks will have eliminated the infamous overdraft fee, otherwise brick and mortar banks will continue to close at rapid pace. Nonetheless you have the option to avoid them right now. If you already have a bank account with these fees, at least ensure you opt-out of automatic overdraft options.

I’ve seen unfortunate scenarios where consumers have had their checking account transferred to collections for a payment plan. This will damage your credit and prove it tough to get a favorable interest rate on mortgages, personal loans, auto loans, etc.

6. Create Multiple Streams of Income

This is a core principle of my personal finance & Investing, along with one of Michael Moran’s founding values. Providing value in various areas of life and business is a key challenge to pursue in growing yourself and your business. Robert Kiyosaki taught me this principle in his book “Multiple Streams of Income”.

This process is essential to provide yourself stability and freedom through cash flow, allowing for a more diverse revenue stream protecting from singular threats and liabilities surrounding your main source of income. This philosophy has also proven to mathematically provide financial freedom in the long run so long as the revenue streams are viable.

7. Automate Your Plan

Automating your financial plan is crucial to staying disciplined and on track. I strongly recommend signing up for monthly paycheck deductions, including direct deposit split savings options to place a certain percentage away in another account for savings. Utilizing this feature will automatically aid to your long-term plan because this process happens whether you login to your bank account or not.

It is prohibitive toward your plan to ‘give yourself a choice’ in sticking to your plan and putting away 10% for savings. Don’t allow yourself to make a choice regarding your financial plan. The best route is to craft a realistic plan, make it automatic and continue living worry free. Read more on the importance of making your financial plan automatic in the book “Automatic Millionaire” written by David Bach.

Trust the process!

Michael Moran

Managing Partner at IHG Management