If the notion that our mindset can either uplift or inhibit our financial future seems like a double “woo”, psychology says otherwise. According to Stanford University psychologist, Carol Dweck, there are two core mindsets that affect our relationship with money.
- The growth mindset is a belief that our skills and qualities can be cultivated through effort and perseverance, and that our abilities are due to our actions.
- The fixed mindset is a belief that our abilities and basic qualities are fixed traits, such as being inherently “good” or “bad” at something because it’s just who are you.
It’s easy to see how thoughts can truly shape our reality. Swapping a scarcity mindset for one that focuses on what is coming in could make a huge difference.
Ultimately, this fearful mindset stems from childhood memes and conversations that took place with parents about finances. For example, focusing on ways to bring in more money could be an major thought upgrade versus a fixed mindset that just focuses on paying off debts. A fixed mindset is ultimately what can get in the way of eliminating bad habits that keep up us from establishing and working towards better money goals.
What’s the first step forward to a more fruitful financial future?
It begins with a decision rather than mere desire to fix the outlook.
A growth mindset means thinking about abundance and completely withdrawing from the fearful, scarcity mantras. Know that resources are finite and if you invest properly, you will be able to achieve higher returns.
Ultimately, one has to be willing to step out of their comfort zone to reach this level of awareness. Because many of these fearful memes stem from childhood, it can take time to replace them. Ask lots of questions and seek answers from those who have gone before you to achieve abundance in their financial life. Remember that money can provide us with powerful tools for growth and service to the world.
Amidst the buzz of financial news headlines and word-of-mouth debt horror stories, the mantras of unpaid bills and major personal loans are repeated day in and day out. The statistics certainly highlight the fact the debt is bad and it’s all too common. The average credit card debt for indebted households is now at $16,048 and the average student loan debt amounted to over $37,000 last year. As for the average debt Americans owe on their mortgage, the amount is $196,014. These staggering stats explain why nearly half of families have less than $1,000 in savings.
It’s time to rethink what debt really means. Perhaps the way we use debt could be the biggest culprit after all. Let’s take a look at 5 times debt is not so bad after all:
- Buying a house. Taking out a mortgage on a home is considered “good debt” because it is secured by real estate. Better yet, today’s low interest rates have made the cost of borrowing very low. In fact, right now you can get a thirty-year fixed loan for around 4% APR. Borrowing money at a low interest rate means more cash to invest. Bonus points if you can earn more through investing than the interest rate you’re paying on the home loan.
- Needing cash to start a business. If you want to start your own business, you typically need cash to get started and sometimes debt is the only way to access the money you need. Sometimes people use debt to get into real estate specifically. Consider becoming a landlord and borrowing money to purchase a multi-unit building. It can be a great way to take advantage of low-interest rates that are currently available in the market. The income from the other units can offset some of the mortgage cost and build your equity in the building. It’s best to seek advice from financial, tax, and legal professionals first to minimize as much risk as possible.
- You need a new car but want to save your cash. If you are already on track with your finances and have a steady job, a zero percent APR car loan could be a great way to maintain liquidity and save on paying any interest. The key to using a car loan to your advantage is making certain the payment is affordable.
- You want to remodel your home rather than move. Moving can be an incredibly expensive endeavor and selling your current property could result in a 6-7% realtor charge (plus closing fees, repairs, and the cost of moving out.) Borrowing money to remodel your home could be the best way to save and upgrade your living space. Rates on home equity lines are typically only one half to 1% more than current mortgage rates. Plus, when you add up the selling costs of your new home (typically $2,000-$5,000) you could end up paying 20K more just to switch properties.
- Going to college. Borrowing money at low-interest rates to fund your college experience can be a great investment in your future. Choose wisely though and ensure your degree matches your dream job–the cost will totally be worth it in that case.
If you lose sleep at night, tossing and turning at the thought of how to overcome financial obstacles, you are not alone. In fact, a recent survey reported that over half of all Americans have sleepless nights over financial worries. There’s no need to fret though. Good sleep and an even better financial future can be found through a little research and extra discipline. Below are the top 3 most common money fears and ways you can overcome them:
- The fear of living paycheck to paycheck. It turns out that living paycheck to paycheck is one of the most common money concerns for Americans. In fact, 78% of full-time workers said they live that way. One of the best ways to remedy a scarcity mindset like this is to physically sit down and write out a stellar spending plan. This should include expenses as well as savings and debt payoff. Another great way to shift gears is to think of ways to eliminate unnecessary buys. Even limiting to your local coffee shop lattes or canceling your gym membership for more outdoor exercise could change the outlook of your finances. Saving money in small ways can add up and contribute towards an emergency fund too.
- The fear of saving up enough for retirement. Living in the moment is a fabulous mindset and it is great to focus on the now. Simultaneously, it is recommended to save up during the early stages of finances so you can breathe easy come retirement age. The good news is that saving up for retirement doesn’t have to be a complicated process. Rather, you can make simple steps towards retirement by taking advantage of your organization’s retirement plan or even setting up and contributing to an IRA. Pro-tip: Start out with small amounts and, as you make more money over time, you can amp up your contribution amount until you find your comfort level.
- The fear of tackling debt. The fear of debt can be quite crippling. Ultimately, it’s a shift in mindset that can set that debilitating fear free. First, examine what your relationship with money looks like and where it came from: was debt a debate during childhood? Second, make a decision to change your perspective and take small action steps daily. Examine how much you owe and how much you have been paying. This will help you determine the best repayment strategy as well. Start out tackling small debts, stay motivated, and turn to the higher interest rates later.
With the recent trend of healthy returns on 401(k)’s, IRA’s, and mutual fund balances, it may seem off topic to brainstorm ways to keep your retirement savings “safe.” However, no matter what the status of your finances or the economy, it is always best to stay prepared for the changes that can occur at a moment’s notice. Here are 3 tips to protect your gains, manage risk, and make sure you have enough cash set aside for the things you may need in the future:
- The portfolio stress test. It’s easy to get distracted when stocks are at a record high, but it’s paramount to test their risk tolerance and stay emotionally and financially prepared to deal with potential losses. The best thing investors can do is envision how they would feel if the market tanked. Interestingly enough, laying out a worst-case scenario can keep you mentally prepared, and putting a dollar amount on the potential loss keeps a vivid perspective. For example, a 20% drop in the Dow would result in a paper loss of $30,000 for somebody who invested $150,000 in the Dow in their retirement account.
- Portfolio rebalancing: adjust your risk. A great question to ask is, “what was the asset location supposed to be and what is it now?” In order to stay on track an investor should sell enough stocks and invest the proceeds in bonds to get back to the initial 70/30 asset pie.
- Balance need and greed. Now is the time to be pushing for every penny of profit if you have money in the stock market set aside for use in the next 12-18 months. In fact, the money should be in cash. If you know you have to write a check soon, don’t try to stretch a little more money out of the stock market as you do not want those dollars to be subject to market fluctuations. For young investors saving for retirement 20-30 years down the line, try not to worry about what the market is doing now or tomorrow–there is ample time to recover from short-term losses. Any pullback along the way will allow you to buy more shares at cheaper prices.
Beyond just looking great on paper, having an excellent credit score can aid in a myriad of financial opportunities. Having a high credit score can save you money in the long run and help you to qualify for the lowest interest rates when you borrow for money for a mortgage or a car loan. What does it take to get to a great place in your credit score? Better yet, how do we avoid common blunders that can lead to a lowered score? Below are 7 common mistakes to avoid when climbing the ladder to a freer financial future:
- Late payments. Paying bills late plays a major role in the downfall of a credit score. The little things add up in the end. Even a late or unpaid library fine can affect your score and just about any creditor can report you to credit agencies.
- Owing too much. Your credit utilization ratio makes a huge impact on your credit score. In fact, 30% of it is tied to how much you owe. Ideally, lenders like to see you having borrowed only about 10-30% of the sum of all your credit limits. Pro-tip: Avoid debt and if you do have it, pay off your highest-interest rate debt first. Credit card rates of 20% or higher are much more costly than a 5% mortgage or car loan.
- Closing accounts. Your credit utilization ratio which reflects how much of your available credit you’ve tapped will be lost if you close credit card accounts. While you cannot control the overall length of your credit history much, you can be sure not to close out old credit card accounts, as older histories are more valuable. Opening a new credit card account can lower your score and lower the average age of your credit accounts.
- Overshopping for credit. Opening too many credit accounts can harm your score because each time you apply for credit, a potential lender will pull your credit score to check it. In the end, too many of these pulls can damage your score.
- Co-signing a loan. As kind of a notion as it may appear to be, co-signing a loan with a loved one could do more harm than good if that borrower misses some payments or makes them late. This is also not a good idea if it makes your credit utilization ratio too high. Remember, co-signing can be helpful to your score if the loan is paid off responsibly.
- Bouncing checks. Bouncing checks is a bad move and could result in a financial institution hiring a collection agency to go after you. This move can end up on your credit report and can alter your score for the worse.
- Not reviewing your credit report and score regularly. Never assume that your credit score is good. Rather, constantly stay on track and check your credit report regularly. Even if you pay your bills on time and in full, there could be an error on the report that results in a lower score than you expected.
Photo by William Iven