Here are some reasons why you might want to close a credit card account

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Håkan Dahlström via Flickr

Welcome!

If you’ve arrived at this post from a web search, there’s a good chance you’re already looking to close a credit card and need some validation, so hopefully, this list can provide that.

The story starts with my own experience as I’m looking to close a credit card right now.

Before we get started, let’s review the primary reason that you shouldn’t close a credit card account — because it can negatively affect your credit score. As illustrated by the wonderful Credit Karma here, your credit score is made up of six items — three of which are affected by closing a credit card account, as follows:

  • Payment history
  • Credit card utilization (lower is better): Your utilization is the fraction of the total amount you currently owe divided by the total credit you have available across your cards. Close a card and your utilization goes up when the denominator of this fraction decreases (To understand this, remember that a 1/4-pound burger is smaller than a 1/3-pound burger)
  • Age of credit history (older is better): Over time, closing an account could also decrease the average age of all of your credit card accounts
  • Credit inquiries
  • Total accounts (more is better): Should be self-explanatory why closing an account makes this number smaller
  • Derogatory marks

If you’ve got otherwise solid credit, it’s likely that closing one credit card account won’t hurt your credit score much, if at all.

Still, that’s hardly an argument for closing an account. It may be tough to think up many benefits of closing a card that wouldn’t be similarly achieved by paying off the entire balance and simply shredding the card or making it otherwise unusable to you.

Still, I came up with a few which I explain here.

You’ll be charged an annual fee

This is a great reason to close a credit card account.

It’s why I’m closing mine! The annual fee was waived that first year and I got a fantastic sign-up bonus.

But keeping it open after that first year? No thanks. There are just too many solid alternatives out there that don’t charge an annual fee.

You’re afraid of fraud

Well, this is totally sensible. After all, the fewer accounts you have, the fewer opportunities thieves will have to steal your account information.

There are some steps you can take to minimize the chance of fraud before closing a credit card account:

  • Opt out of paper statements so thieves can’t pluck your information out of your mailbox
  • Ask your credit card company to not send you balance transfer checks in the mail (If they keep sending them, ask that your cash advance limit be dropped down to $0)
  • Practice good password discipline
  • Check your transaction history frequently so that you can spot and report charges you don’t recognize as soon as they happen

Emotions

Sure, there are plenty of practical, technical reasons why you shouldn’t close credit cards, but we’re humans; not robots! If closing your credit card makes you feel better, the potential drop in your credit score shouldn’t stop you from doing so.

Ambiguity of personal finance

I’ve said it before and I’ll say it again — personal finance is personal. I can only begin to imagine all the reasons that people might come up with for wanting to close a credit card given all the complex aspects of personal finance out there. And really, if you want to close a credit card account, you should just do it. Personal finance is personal.

And that’s that! What are some of the other reasons you can think of to close a credit card account rather than just paying it off and shredding it?

 

 

 

 

 

My 2015 finance goal: To go completely broke in one year

My personal finance goals for this year boil down to one simple target: By December 31, 2015, I want to be worth absolutely nothing.

Getting there is much less simple, but this post lays out the steps it’ll take to make that happen.

Goal #1: Have a 61% savings rate

Last week, I shared a categorical breakdown of all the spending I did in 2014 and found that I sent 60 percent of my take-home pay toward saving for retirement, paying off student loan debt, or traditional savings to be used as an emergency fund.

It certainly wasn’t easy using 40 percent for all of my other expenses.

In 2015, I’d like to improve upon that savings rate by one percent in order to tackle this year’s other ambitious goals.

spending

Goal #2: Contribute $6,000 to retirement savings

Spending just 39 percent of my income will leave me with more than enough to achieve my retirement savings goal for 2015, which is to contribute $6,000 before the end of the year. This is an average of $500 per month, which will be enough to qualify for the full employer contribution to both my 401(k) and my HSA. Of course, this doesn’t mean that I expect my retirement savings to stand still. To the contrary, I expect it to be over $20k bigger by the end of the year, due to the following:

$58k Starting balance
$ 6k My contributions
$13k Employer contributions and vesting
+$4k Gains (at 5%)
 $81k Targeted end of year retirement savings

Among these, the 5% gain is the most uncertain, but will work for this projection.

retirement

Goal #3: Pay $36,000 toward student loans

Spending just 39% of my income on all of my needs and wants, and limiting my own contributions to my retirement to $6,000 will allow me to send $36,000 toward student loan debt. That’s a mind-blowing $3,000 a month! Uf. Still, if I can manage, here’s what could happen during 2015:

$105k Starting balance
$-36k Payments
$+11k Interest
 $80k Targeted end of year student loan debt

 Making these aggressive payments would knock a big chunk off of my student loan balance, so I’ll give it my best shot!

debt

Goal #4: Get to a net worth of $0

As I mentioned in the 2015 net worth update I posted yesterday, I’m currently at a net worth of -$47,300. It’s ugly, I know, but when I started this blog at the beginning of 2013, I had an even uglier net worth which was worse than -$150,000. If you look at goals #2 and #3, you might notice that my target balances for retirement savings and student loan debt are just about equal.

networth

If I’m able to take the steps that let me accomplish both of those goals, then I’ll reach a point I didn’t think I’d hit for a long while: having retirement assets that cover my student loan liabilities.


My 2015 net worth update — up $46,000! — and 2014 year in review

Good morning, y’all! 2014 is no more; long live 2015!

Having watched another year pass by, I’d like to take stock of where I am right now, and look at the progress I’ve made on my long-term personal finance goals.

2015 net worth update

Let’s start with the numbers:

net-worth

The bad: If I had to pick one thing to feel bad about, it’s that the $31,300 gain to my retirement savings was so much bigger than the $15,000 drop in my debt.

Some of that was just being smart and contributing enough to a 401(k) or Health Savings Account to take advantage of an employer match.

Some of it was just the market being very kind to me. Can’t complain about that!

However, most of it was just because I don’t always do the smartest things.

The good: In the post yesterday detailing how much I spent on different things last year, the two biggest line items by far were student loan repayment and retirement savings.

This represents nothing short of a total transformation for me; as recently as 2013, those two numbers would have been $0 and $0 if I even tracked them (I didn’t).

But numbers aren’t everything and they definitely don’t tell the whole story of my 2014. Sending 60% of my take-home pay to savings and debt payments doesn’t come without sacrifices. I skipped weddings and birthdays, didn’t buy the nicest gifts, declined invitations for travel, restaurant dinners, and nights out, sold some things I shouldn’t have bought in the first place, and more.

And that’s why it’s such a great feeling to see this big increase, helping to reassure me that in at least one way, it was worth it.

Here’s a graph of my retirement savings, net worth, and debt ever since I started this blog back in January 2013.

graph

2014 goal results

I set four personal finance goals for myself at the beginning of 2014.

2014 Goal #1: Pay off $27,000 in debt. FAIL.

I wasn’t even close on this one. This goal was always going to be a reach and I really shot myself in the foot by allocating so much effort toward retirement savings at the expense of paying down my student loans.

The lesson from this failure, of course, is to switch the two around and focus hard on paying off debt in 2015. It’s still a doable goal.

2014 Goal #2: Add $17,000 to retirement savings. PASS.

Because $31,300 is still more than $17,000, right? Excellent, let’s move along.

2014 Goal #3: Add $1378 to my emergency fund. PASS.

This is a very big deal for me. I’ve always had trouble adding to my savings account even though I knew it was important to put cash away for those inevitable rainy days.

I finally kicked my hesitancy by taking the 52-week savings challenge, wherein I saved just $1 the first week, $2 the next (easy, right?), and so forth until before I knew it, I was putting about $200 per month into savings in November and December.

The result? An emergency fund that’s now over $6,000 which makes me feel much more comfortable :)

2014 Goal #4: Reduce monthly food spending to $300 and switch to prepaid service to save on cell phone bills. NEUTRAL.

My food spending — which includes groceries, alcohol, dining out, and food while traveling — was just over $400 per month. I failed that part pretty badly.

I may never get to $300, but I think it’s still good to aim for.

I also never did switch to prepaid service.

However, I did drop my monthly bill from $90 to $18 thanks to switching to T-mobile (plus a couple other steps).

I’ll call this a neutral.

Pretty soon, I’ll post my personal finance goals for the new year, but for now, I’m happy with my results.

How did everyone else do with their goals?

Everything I spent money on in 2014 (toward a 60% savings rate)

With 2014 in the books, I’m in a retrospective mood. I’ll start reviewing the year just past today by looking at my spending.

Twenty years from now, it might be difficult for me to remember that 2014 even happened when compared with the years preceding it. I didn’t finish grad school, didn’t lose my job spectacularly, didn’t end up in the emergency room, didn’t go to war, didn’t win an election.

Instead, I’m working for the same company, having received a modest promotion, and living in the same apartment in which I started the year. That second thing is more of an event than it seems on the surface; I’ve now lived in the same place for two full years — something I haven’t done since leaving my childhood home in 1998.

Rather, 2014 was a great reminder of just how important the journey is. This past year, I strengthened existing relationships, rekindled old friendships, and — just to balance things out — burnt a couple bridges. I got back into writing fiction and did some long overdue maintenance work on my mind and body, finding saplings of success with each.

I can truly say that 2014 was both the best of times and the blurst of times.

Now let’s talk spending.

Total effective tax rate: 32%

There wasn’t a whole lot I could do to avoid taxes this year. Of course, I contributed to a 401(k) before tax, contributed to a health savings account, and even gave to charity, but none of it had much of an impact since I’ve been phased out of many tax credits and deductions, and don’t yet get those associated with being married or having kids.

From my gross income, the American people — by way of the government — took 32%, broken down as follows:

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I’ve got nothing much to say here as none of that looks out of the ordinary.

After-tax spending by category

Once those taxes were taken out, here’s how I spent my disposable income, broken down into three categories I call basic needs, wants, and savings and loan repayment:

Click to enlarge

These ratios look solid. Obviously, I would like to put more toward savings, but as it stands, 60 percent feels very respectable.

Basic needs

Here’s that category I called Basic needs, broken down a bit further:

Basic needs

Of course, the definition of a Basic need can be subjective, but I think this gets close.

My New York City rent, at 18 percent, makes up the majority of this category. Even though I split a small apartment with two roommates in one of the outer boroughs, this is more than I want it to be. However, I’m sure that I’d spend more than two percent of my disposable income on transit if I lived in a place where I needed to buy a car, insure and maintain it, and fill it with gas, so I don’t feel too bad.

As for transit, that includes about two cab rides a month. I live in a very subway-friendly area, but if I’m running late to an appointment in Queens or the less subway-friendly (to me) neighborhoods of Brooklyn like Williamsburg, then I can pretty easily convince myself to take a cab instead. Taking fewer cabs is something to strive for.

In the food section you’ll find booze, even though it probably doesn’t belong in the needs section. Still, it’s much easier to include money spent at bars as part of restaurant spending. Consumables pretty much includes anything bought at a grocery store, such as toilet paper.

Finally, my total spending on utilities was way down in 2014, now that my cell phone bill is just $18 per month compared to $90 per month in 2013.

Wants

Here are the things that made up my wants section:

Wants

I work pretty hard at saving money on travel (See here, here, and here, for example), but it still makes up a big chunk of my spending, thanks to living across the country from the place I call home, and going to lots of weddings all over the country and all over the world. That said, a lot of the money I spent on what I call travel went to trips around the northeastern United States, including New Jersey, Connecticut, Pennsylvania, and Delaware, which means much of this is just a factor of living in New York and not owning a car.

In the electronics and home goods category, I needed a new flat sheet for my bed and was pleasantly surprised by the inexpensive option I found. I also needed to replace an aging tablet that I was using as a laptop, and was also pleasantly surprised by this Asus I picked up for $180.

Otherwise, the rest of this chart looks about right.

Savings and loan repayment

The category I called Savings and loan repayment was composed of the following:

Savings

It’s pretty nuts to think that I’m sending almost one-third of my take-home pay to student loans, but I guess that shows how serious I am about paying those things off. In fact, I wouldn’t mind seeing my retirement contributions go down just a bit — while still enough to take advantage of my employer match, of course — so that I could send an even bigger percentage toward paying down my loans. There are lots of good goals to strive for in 2015 and I’ll include them all in a later post.

So, how did everyone else do with keeping spending in check this past year?

Five personal finance must-do tasks for the end of the year

Dawn Ellner via Flickr

Dawn Ellner via Flickr

With just a couple days before we say good night to 2014 and good morning to 2015, there’s just a little bit of last-minute housekeeping I’m doing to make sure I don’t leave any money on the table and any loose ends hanging around.

1. Make sure I have contributed up to my company match for my 401(k)

This is a no-brainer. If, for example, your company matches your contributions to a 401(k) up to six percent of your income, and you’ve only contributed five percent so far, then you’re essentially saying no to free money.

Don’t say no to free money.

I have contributed at least as much as my company will match.

2. Use up any money in a Flex Spending Account

What did I just say about saying no to free money?

If you’ve contributed pre-tax money to an FSA for health spending and you haven’t yet used it all, make sure you do before the end of the year or else you’ll lose it.

(Note: The law allows employers to extend the deadline to as late as March 15, but not all do)

You would likely need a prescription for any drugs to be eligible, but medical supplies — including contact lenses and eyeglasses — are also eligible. An easy way to do it would be to search Amazon for “FSA eligible” and then check with IRS Publication 502 to verify that whatever you choose checks out.

I personally don’t use an FSA.

3. Consider giving to charity

There are many good reasons to give to charity.

If you were planning to give early in 2015 anyway, consider moving that up to 2014 if having the additional tax deduction would make sense for you.

I have given as much as I would like to charity for 2014.

4. Contribute to an IRA

Sadly, because we’re this close to the end of the year you’re unlikely to be able to complete a Roth conversion in time for it to apply to your 2014 taxes.

However, if you still haven’t hit the $5,500 maximum for contributing to an IRA, you have until April 15, 2015, to contribute for it to count for the 2014 tax year.

Get more information from this IRS table on traditional and Roth IRAs.

I have maxed out a traditional IRA.

5. Have tough talks with parents (or children, if you’re the parents)

There are never any fun times to have the difficult conversations with aging parents including the following:

  • Whether they’re prepared financially for retirement,
  • Whether their will and testament are up to date,
  • Whether they’ve taken the necessary steps toward estate planning, and
  • Whether they’ve put together an advance directive — also called a living will — that is, what should happen if they become incapacitated to the point that they can no longer make decisions by themselves.

Sure, this conversation will never be easy, but think about it this way: The holidays might be the only time every year when you’re together with your parents and all your siblings and it’s best to have this sort of heavy conversation in person.

I had a few of these conversations in pieces with my parents. Definitely not fun

6. Reflect and re-energize for the new year

Bonus tip!

If you’re like me, you had a mixed year with some good outcomes and some challenges. But the new year offers a blank page to continue writing our story and the opportunity to look forward to adventures to come.

Best of luck to all of in finishing the year strongly.

Holiday PSA: Re-check the prices for gifts you already bought RIGHT NOW (Regarding refunds)

I was poking around Amazon this morning and noticed that a gift I bought last week had gone down in price.

…by thirteen cents.

Now, that’s not enough for me to go to war over (My minimum is $4 worth of Chinese food), but it did present the opportunity to show off one of my favorite holiday shopping tips in action.

On getting refunded the difference when a store drops its price

OK, so back to the title: Go back right now and check to see if the prices have dropped on any gifts you’ve already bought. Plenty of stores have an official policy, but many will refund the difference between what you paid and the new price if you just ask nicely.

Why would they do this?

Think of it this way: Stores know that if the difference is big enough, you’ll just return the item, then re-buy to get the lower price. Besides buying themselves a little bit of goodwill with the favor, they’re also saving themselves the potential hassle.

Amazon in particular makes it easy with items they sell if you get in touch with them within seven days of taking delivery. Just go to their contact page:

Picture1

Then, click chat and ask nicely:

Picture2

Best of luck getting those refunds! :)



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My simple real estate investment philosophy: Don’t lose money

https://flic.kr/p/bDWRMV

Berit Watkin via Flickr

I’ve mentioned before that investing in real estate has been a long-time hobby of mine and one I look to as a future source of passive income.

Admittedly, I’ve slowed down while focusing on other personal finance goals — namely my huge student loan debt — but still keep a finger on the pulse of it.

Value investing in real estate

There are tons of investment styles when it comes to buying real estate. For mine, I borrow methods made popular in equity investing by hunting for “value.”

With stocks, value investors chase prices that are low relative to some fundamental such as book value, earnings, or dividends. With real estate investing, the fundamental I’m most concerned with is the amount I can reasonably expect in rent.

Along this dimension, an ideal investment property is one where the rent I can charge is sufficient to leave me a little bit of profit after paying all the costs involved in owning — these include interest, insurance, and taxes.

Besides positive cash flow, which is always nice, value investing in real estate has also provided me with one other big benefit made obvious over the last few years: because I’m making money, I can just hold onto the property while the real estate market recovers without ever being forced to sell.

Quantifying it

Alright, so there are a bazillion properties up for sale at any given time. How do I do anything in my day besides crunch all those numbers? Let’s start with some estimates about cost:

Obviously, these percentages can be higher or lower depending on the state you’re in, neighborhood realities, and so forth, but they’re close enough.

Take note of the monthly recurring cost of 0.8%, which has an arrow pointing at it. If you never ever rented a rental property, then every month, you could expect to lose 0.8% of your purchase price.

Thus, to make the math easy, to make a small profit, and to account for months when my rentals are empty, I only start to become interested in rental properties when their monthly rent is at least equal to 1% of their listed price. Call it a One-percent Rule if you want something that rolls off the tongue.

A New York example

All those numbers sound simple enough, right? You’d be surprised how often people tell me I should go below that number….

As an example, in Brooklyn where I live, properties that can be rented for $4,000 a month cost at least $1 million — a ratio of 0.4%!

And that’s why I’m not interested in buying here….

Alright then, what am I doing wrong? And how do you invest in real estate?

What’s the right amount for uh…a friend… to spend on an engagement ring?

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Daniel Lee via Flickr

Last week, I sat on a panel led by Farnoosh Torabi to discuss money in relationships.

The conversation was a ton of fun! I’ll post a link when it’s up. It touched upon money deal-breakers and warning signs in relationships, but it stopped just short of engagement rings so I’ll share some thoughts here.

On how much other people should spend on engagement rings

I’m not going to say that it’s foolish to spend a significant amount on a ring.

It’s not my place to determine how much a couple should value something. It’s not a stretch to think that some couples could put a lot of value into a ring that they’ll ostensibly keep forever and want to spend a lot on it.

I will say that my own values are that I’d rather spend more on

  • The wedding (an experience shared with friends),
  • The honeymoon (an experience shared between the couple), or
  • Saved for the future (Any amount saved in your late 20s will likely have grown 10 times by the time you retire).

What I will say is that the decision should hinge on communication. I imagine there are lots of men who don’t communicate and grossly overestimate how much ring their partner will want. If they DID speak with each other and perhaps even shop together, maybe he’d find she would actually prefer a stone other than a diamond, a vintage or heirloom ring, wholesale diamonds, or that she too would rather spend it on the wedding, honeymoon, or save for the future.

After all, if you’re about to get married, then you’ll be connecting finances soon enough, so in a way, she’s effectively paying for half of her own ring anyway.

As for being worried that not spending a lot on a ring is a symbol that you don’t care, think of it this way: Your love gives meaning to the engagement ring, not the other way around.

On how much I will spend on engagement rings

I imagine you want a hard number here. Instead, I’ll dodge by suggesting that when I get to that phase, we’ll figure out that number together by forcing ourselves to have the tough conversations about individual and joint personal finance goals.

Maybe those conversations will expose that she’d rather have an engagement guitar rather than an engagement ring anyway. Or maybe an engagement unlimited travel pass. I think either of those would be pretty cool.

As a closing thought, I’ll point to this white paper, written by researchers at Emory University, which found — after correcting for other factors such as household income and length of time dating before the engagement — that generally, the amount spent on engagement rings had no significant association with the likelihood of the marriage staying together, although the study did find specifically that men who spent between $2,000 and $4,000 on an engagement ring were 1.3 times MORE likely to end their marriage than those who spent somewhere between $500 and $2,000.

Anyhow, have you got useful thoughts or anecdotes about engagement rings?

Happy belated Giving Tuesday! May I suggest giving to Voices from War to help veterans explore their creativity?

Voices - Logo

There’s a pretty good chance you took part in a good bit of decadence over the past week — perhaps you over-ate on Thanksgiving day, went wild with consumerism on Black Friday, Small Business Saturday, or Cyber Monday, or you over-drank on Thanksgiving Eve.

Over the past couple of years, a movement has been growing in response to all this hedonism: Giving Tuesday, the Tuesday after Thanksgiving, is a national day dedicated to giving back.

If you’re still searching for a worthy Giving Tuesday charity, I suggest taking a good look at Voices from War.

Voices from War is a free writing workshop for veterans in the New York area that:

  • Offers veterans the opportunity to express their experiences of war through writing workshops
  • Builds a community among veterans that cuts across different writing levels and generations; there is much to be gained when vets who served in Iraq or Afghanistan interact with those who served decades earlier in Vietnam, Korea, and elsewhere
  • Builds bridges between veterans and civilians by creating greater opportunities for dialogue about war

The program groups experienced writers with veterans seeking to write stories for themselves or a broader audience. These can be remembered, factual stories or fictitious. Finally, through public events, conversations, and publication, the program shares those stories with a general public that often feels removed from the experiences of those who have served.

If you’re interested in learning more about the program, go to:

http://voicesfromwar.org/

If you’re ready to give, you can go directly to Voice from War’s donation page on Fractured Atlas:

https://www.fracturedatlas.org/site/fiscal/profile?id=10933

Please share this post with veterans you know and veteran supporters.



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December 2014 net worth update: Up $2,500 thanks to free money

http://picblag.com/the-most-important-thing-in-life-is-to-learn-how-to-give-out-love-and-to-let-it-come-in-morrie-schwartz/

Source: Pic Blag

Good morning, everyone, and welcome to December!

Here in the big City, the cold has finally caught up with us meaning hot chocolate, bundling up in puffy jackets, and that 2015 is just around the corner. But before the time of new beginnings, I’m looking to finish off 2014 as strongly as possible as I continue to fight to pay off debt and save for retirement.

The numbers

Here’s what I did in November:

dec2014

Debt

Uf. One number should jump right out at you as soon as you look at this; my debt didn’t go down at all this past month. Of course, this doesn’t mean that I didn’t send any money toward debt — quite the contrary, in fact. With a $105,200 balance, I have to send over $600 a month to my student loan servicers just to break even.

What’s annoyed me the most about paying off debt this year has been my inconsistency. Check out this chart:

debtpaidoff

Some months, I’ll manage to knock many thousands off my student loan debt and other months — like this past one — I’ll barely make a dent in it.

I don’t mean to look past this coming month — during which I plan to roar back to make huge gains — but I’d very much like for my 2015 performance to not look this splotchy.

Retirement savings

Of course, this begs the question: Where did that money go last month? Did I use it to buy a sweet rocket cat? Did I use it to buy 99 iPhones on Black Friday to use in a tone-deaf proposal?

Sadly, no.

Rather, nearly $200 went into my emergency fund as I completed weekly deposits of 45, 46, 47, and 48 as part of the 52-week savings challenge and $550 went into a Health Savings Account, which was immediately matched by my employer.

Neither of these do anything to pay down my debt, but having an emergency fund that is now bigger than $6,000 sure does give me a whole lot more peace of mind and I’d be a fool to turn down any investment that doubled immediately after making it. Who turns away free money?

That matched $550 plus my matched contributions to my 401(k) plus market gains put me up $2,500 for retirement savings.

Net worth

My net worth is finally above -$50,000 meaning I’m ever so slowly inching toward $0. And from this vantage point, $0 seems like a pretty sweet place to be.

And that’s that; how was your personal finance November?



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