Today’s topic is all about income: the piece that makes this world go ’round. And, I’m just going to jump right into it. Here’s what you can look forward to with the different parts. Links will be updated as they come out!
Part III: Saving
Part IV: Spending
Importance of Multiple Incomes
For the standard American, we have one 9-5 job. That’s all fine and well, but what happens if you lose it? Sure, there’s unemployment, but they only payout so much for so long and, usually, it’s not the payout that you were getting nor is it paid out long enough to find another steady job. The purpose of having multiple incomes is stability. If one income dips, you have another source (or several) to keep you afloat. This is what I like to think of as smart financial planning.
Even with being self-employed, I don’t have one income stream. It comes from multiple sources: several different affiliate sites, many different sponsorships and varieties in those sponsorships. I’ll probably be adding a couple more streams over the upcoming year to fluff it out more. Point is: cover your bases. A table with many legs is much sturdier than a table 2 legs and a wobbly peg.
Some jobs don’t allow you to have another part-time job while you’re working full-time, which I think is bogus. I’m not saying to by-pass your contractural obligations from your employers, but there may be other options for adding more to your payday (see below).
In addition, additional income sources means more income, which means more into your savings and more financial freedom overall.
more skills = bigger payday
One way to increase your income is to increase your value as an asset to a company and society. This may be the least appealing option, especially because we, as millennials, know the education trap that was set up for us way too well. Get a college degree; spend copious amount of money going into debt to get degree to get the “better job” waiting for us; find out post-graduation that employers still want to pay us pennies and now we owe thousands in return. Big. Fat. Trap. At least for 90% of us.
However, once you hit the workforce, skill is still relevant. If you take a look at your bosses and the people above you in your career, you will notice that their skill level is (hopefully) much different than where you’re currently at. Of course, there’s experience and that comes with time, but I’m talking about if you look at the overall picture. Some of their skill does come from experience. But, is there a way for you to replicate that without taking the extra 10 years? Work smarter, not harder.
One site that I’ve found helpful is FutureLearn. It’s a site that has hundreds of online mini-courses. You can do them for free, but if you want a certificate of completion, you have to pay a little fee. Major contributors include Penn State, Purdue, UC Berkley, and other esteemed universities from all over the world.
Another thing to keep in mind is that the more languages you know, the more useful you are. I know that seems random, but imagine how many more doors would open up if you were bi- or tri-lingual. Not to mention that you would no longer be confined to positions solely located in one area, or even only in the US. Some top languages to learn are Spanish (extremely relevant in the US), French (still considered an international language), and Chinese (Mandarin is one of the primary business and finance languages).
practical ways to add income
I’m going to list these out. If you think of more, by all means, leave a comment and keep the ball rolling.
- Buy things at garage sales and flip them on eBay. It’s not uncommon to be able to pay $5 for an item and flip it for $80. Don’t knock it until you try it. Estate sales are great, too.
- Write ebooks and sell on Amazon. You have a skill. Trust me. Leverage it. Write about it. Package it up nice. Sell it on Amazon.
- Get a part-time job. You don’t have to go crazy. An extra 10 hours at a coffee shop is still an extra 10 hours and provides a steady income.
- Pet sit or baby sit. The good ole babysitting gig didn’t have to die when you collected your high school diploma. Now is a great time to snag a childcare or pet care gig as stay-at-home parents become less prevalent.
- Start something. Start a website. Start an online community. Start a business. But, please know, that this option is going to take the most dedicated time. This is also the option least likely to bring you an income fast, but most likely to bring you the biggest income with the most personal control.
As a side note, avoid doing things like lengthy surveys and handing over your email/phone number to random companies for a few dollars here and there. I know a lot of finance sites like to tote around this notion that if you can make tons of extra income of things like “Inbox Dollars”, but it’s a scheme and they’re really just sticking it in there for their affiliate link: don’t fall for it.
Also, don’t fall for the trap of buying an e-course teaching you how to sell or make money fast. Those are just more schemes. Anything that asks you to pay money to make money is just going to hand you the losing end of the stick. There’s no secret that people can sell you otherwise we’d all have it.
don’t fall for higher income + pay raise trap
This trap is especially rampant today. You got a pay raise. You got a promotion with a shiny new check. You got a year-end bonus. The initial reaction is: what are you going to spend it on? Well, I’m here to say, “please, don’t”.
The way that people stay down is by having their expenses match their income. Being “rich” and having money has nothing to do with your income. I know, it’s a bizarre notion to the popular belief, but it’s true. I know people who are making 6-figure incomes and living paycheck-to-paycheck. I know people living with $30k/year and living extremely well. How does this happen?
Well, it’s this general idea: you get a pay raise, so you start eating out more. Then, you get a promotion and you’re making significantly more than before, so you turn in your current lease and walk off the lot with a new, more expensive car. Then, you get a big year-end bonus, so you buy a house. And, another raise, so you take an expensive cruise. This keeps on until the raises and promotions slow (because it’s harder to climb the closer you are to the top) and you’re finding yourself drowning in bills. Don’t fall for that trap.
If you get a pay raise, promotion, or bonus, but it into your savings. Use it to pay off a large chunk of debt. Invest it into mutual or index funds. If you’re really gunning to spend it, dump it into an account and chew on it for a bit. Don’t make a fast move. If you want money, keep money.
Surprisingly, this is not one of the first things that comes to mind when many people try to figure out how to increase their income. If you decrease the amount of money that’s going out the door each month paying other people, then you’re increasing the amount that gets to stay in your pocket. Simple as that. Thus, if you’re looking for a sure-fire way to increase your income, debt reduction should be at the top of your list.
what is the snowball method?
Everyone talks about Dave Ramsey and his snowball method. And, it makes sense. The idea is to pay off your smallest debt as fast as you can while doing the bare minimum on the rest. If you pay off the smallest debt, even if it’s $10/mo. otherwise, that’s $10 more per month that you can keep and put towards paying down the next debt. Speaking from personal experience, this method is effective and it works quickly. Try it.
can debt be good?
Many financial people will swear up and down to the high heavens that there is such a thing as good debt. However, I’m discovering that the only people it’s really “good” for are lenders. Is debt good for you? Not really. There are a couple instances when it can give you an advantage, but not in the initial way you may think. Having debt is not the good part. Paying off the debt is.
For example, if you have a credit card and you put $200 on it this month. The “good” is not the $200. The “good” is that you paid it all off within the next statement and there was no carry over or interest. If you have an auto loan, the “good” is not the loan or the amount. The “good” are the consistent and timely payments on it. The “better” is if you’re doubling or tripling the minimum payment each month to pay it off faster. These all give lenders a green light for when you want to apply for a mortgage, student loan, or car loan.
Again, would it be better if you paid for the car, the college course, and the house upfront? Yes. But, we don’t all live in that pretty, pink bubble so we work with what we have. Something is better than nothing in some instances.
A Closer Look at Credit Scores
Ah, the mysterious credit score. I have many friends that a) aren’t sure if they have one (if you have a credit card or student loan, you have one) and b) have no clue as to what their’s even is.
Let me give you a little cheat right now: There’s an app called Credit Sesame. You can check your score without getting it marked on your report and it’s a great way to keep track of your debt/monthly payments. It’s free.
credit score break down: not everything is created equal
Your credit score is not simply one over-arching score. Different things effect it at different rates. Not to mention, there are several different categories, as well. So, let’s go over those briefly:
- Payment History: This makes up 35% of your credit score. The more consistent and timely you are with payments, the better this score is. Your score can get docked in this area for 4 major things: late payments, collections accounts, foreclosures, and bankruptcies. Each of those areas will stay on your credit score for a certain amount of time (usually 3-7 years from the report date) until they are erased off your report. For some things, like late payments and collections accounts, you may be able to call the creditor and work out a deal that if you pay a certain amount upfront, they take it off your report so you don’t have to wait the maximum time.
- Credit Usage: This makes up 30% of your credit score. There’s two ways to make this area better: pay down debt to open up more available credit or request an increase of credit to your current creditors. I’m obviously a bigger fan of the former. Just remember: the higher your usage, the lower your credit score.
- Credit Age: This makes up 15% of your credit score. Typically, any credit age above 5 years old is going to be considered good. Anything under that will take time of having the same accounts open and updated before getting into the green. This score is made up by your average account age, so be sure not be opening/closing accounts too frequently.
- Account Mix: This makes up 10% of your credit score. Theres 5 different account types you can have: credit cards, home loans, auto loans, student loans, and other loans (usually personal loans fall into that category). The more of a mix the better. Again, not so much better for you (because more debt), but better for lenders to gage how consistent and responsible you are and, essentially, whether you’d be a good candidate for their bank.
- Credit Inquiries: This makes up the final 10% of your credit score. You want this to be at a zero. Even 1 account inquiry can negatively impact your credit score. A credit inquiry is a credit check and you can typically do it through secure government sites. However, I strongly advise against doing so frequently because it will impact that score. To keep track of your credit score without having it get a hit, download that Credit Sesame app that I mentioned above.
what happens if your credit score sucks?
Sadly, this is not uncommon for our generation. However, that doesn’t mean that you’re screwed and you have to throw in the towel. There are several things you can do to make it better.
First, you have to know why it sucks. Did you make late payments? Is your credit usage maxed out? Anything having to do with payment history or credit usage are going to make the biggest impact. Determine the cause and then we can go from there.
If you have late payments, try working with your creditors. I mentioned this a little bit above, but if you’re a skimmer, you may have missed it. Many creditors are willing to take the negative mark off your report if you promise a certain payment. If you can pay it all, that’s the best option. However, many will work with you if you’re willing to make a payment on a large chunk. If you can’t do those things, then talk to them about you’re current situation. They may be willing to remove the mark and work on more feasible monthly payments if they know that you have a certain life circumstance that’s making finances difficult. In the end, most creditors just want to be paid back. Simple as that.
If your credit usage is almost capped or high enough to damage your score, there’s a couple options available. Again, I mentioned these above, but you may have missed it if you’re a skimmer. Your first option is to pay down the debt. It’s not fancy or suave, but it’s the most effective and the option I recommend. Hit up the Dave Ramsey article on the snowball method and get to work.
The second option if your credit usage is high is to ask your creditor to increase your credit limit. This isn’t really an option for things like student, home, and auto loans. But, for credit cards, usually you can log in to your creditor’s site (i.e. AMEX, Citi, etc.) and there will be an online option titled something like “Increase Credit Limit”. They’ll ask you for your current income and what you want your credit limit to be. After you submit it, they will usually get back to you fairly quickly as to whether or not it was approved. Again, I recommend the first option, but if you’re looking for a quick credit boost, this can work, too.
Building Finances Takes Time
The overall takeaway I really want you to get from this piece is that this all takes time. You’ll notice no quick fixes or “get rich quick” schemes in this article because they don’t exist. If they did, we wouldn’t be here. You wouldn’t be reading this. I wouldn’t be writing it.
Patience is a virtue and it’s going to be the best one to get you where you need to be. As frustrating as this answer may be: keeping your head down, working, and being consistent with your budget, savings, and investments is going to get you much farther than trying to make quick moves.
Everything will come and you have to trust the process. However, don’t let that fool you into being idle. In order for the process to work, you have to work. Again, that’s not the cool answer or pretty answer, but it’s the real one.
Next Week: Part III
what to expect and look forward to
Next week, we’ll be going into the savings portion of this series. I’ll talk about my favorite savings apps and how I get cash back on most of my every day purchases. I’ll also be discussing about how you can start investing, even if it’s scary and even if you don’t have a few thousand dollars lying around. I’ll also talk about which savings accounts are the best (yes, there’s a best) and what types of savings to have. Savings is one of the most important pieces of this puzzle to your financial health and having more financial freedom, so I will be giving lots of details on how to fluff up your savings!