Monthly Archives: June 2015
Unfortunately, human brains aren’t exactly wired to help make us wealthy. At least that’s the opinion that behavioral economists have, thanks to what they say are evolutionary quirks about how humans not only view the world but also make financial decisions. In fact, they say we often do exactly the opposite of what we should do when it comes to money and acquiring wealth.
Luckily there are a number of ways to work around these mental shortcomings that we have and, in some cases, even use them to our advantage. Below our own number of “mental patterns” that tend to make us poorer, and a number of ways that you can overcome them. Enjoy.
Mental Pattern #1: Mental Accounting
Humans tend to treat different sources of money, and different sums of money, differently, depending on the source of that money as well as how it’s used and where it’s saved. For example, have you ever noticed that you tend to spend more money when you use your credit card then when you’re using cash? Mental accounting is at fault here because we see money spent using credit cards as less “real” than cash.
The easiest way to overcome this mental pattern is simply to use cash. You can also set up sub-accounts at your bank, which most banks will allow you to do for free, and then label all of them for a different purpose. If you have one that’s labeled “Caribbean vacation” there’s a much better chance that you won’t dip into it then if it’s just labeled “savings”.
Mental Pattern #2: Hyperbolic Discounting
Humans, unfortunately, are big fans of short-term satisfaction but not so much when it comes to long-term gain. In fact, the further in the future a benefit happens to be, the less we value it. (It’s no wonder many people have trouble saving for retirement.) This hyperbolic discounting means that humans are very shortsighted when it comes to saving for the future.
One way to overcome this mental pattern is to make saving automatic. If money is taken out of your check before you even see it, and deposited into your savings, IRA or 401(k), there’s much less chance that you’ll spend it. Visualizing your goals is also an excellent idea to overcome this problem, including pictures of the place you want to retire or the beautiful home that you like to have some time in the future. This makes your goal much more “real”.
Mental Pattern #3: Loss Aversion
Interestingly, humans hate losing money about two times as much as we love gaining money. If you know someone who doesn’t invest in the stock market because they’re worried about potential losses, you know exactly what we’re talking about.
In order to get around this problem, you need to limit your exposure to the “noise” of the stock market. For example, stop checking your portfolio every day and start checking it once a quarter, or even once a year. The fact is, what’s happening today in the market will have very little bearing on what your investment will look like in 10, 20 or 30 years.
Mental pattern #4: Status Quo Bias
Another unfortunate fact about humans is that we’re rather lazy. In fact, a couple of British researchers described this problem as an ‘exaggerated preference for the status quo’. It means that, rather than taking a proactive course of action, we stick with what we have because it’s easier.
One way around this is to sign up for automatic increases of your 401(k) contributions at work. Some companies do it automatically but some don’t and, if your company doesn’t, you need to get yourself down to human resources at least once a year to make sure and boost it yourself.
Like we said at the beginning of this blog article, our brains aren’t exactly wired to make us wealthy. Hopefully the information we provided you today will enable you to convince your brain to do otherwise.
Everyone makes mistakes and fortunately, most mistakes can be fixed quickly. When it comes to having bad credit it can cost you more than high interest rates. In some cases bad credit can cost you a job. However, mistakes that damage your credit will take much longer to overcome. It is possible to rebuild your credit, but it will take work and a lot of patience. When you are working to rebuild your credit, you are letting future creditors know that you are prepared to handle your financial responsibilities, even though you failed to do so in the past.
Obtain New Credit
It may sound backwards, but the best way to repair your bad credit is to obtain new credit. You need to be able to show creditors that you can handle debt, and this is done by making payments regularly. Companies will be very selective with who they offer credit to. This may make it difficult to get new credit, but there are options available. Some types of credit to consider include secured credit cards, bank loan (from a local bank), gas station credit cards, and credit cards for people with bad credit. When you are taking out a loan from your bank, discuss with them that you are trying to rebuild your credit and let them guide you to the best type of loan to secure.
Improve Your Credit
Once you have a new line of credit, you will need to take time to improve your credit score. This is done by making payments on time with your new credit. It is important that you start small because you will likely have loans and lines of credit with higher interest rates. In addition, make sure whatever line of credit you take actually reports to the credit bureau.
It is important that you completely change your spending habits when you are rebuilding your credit. You are working to show creditors that you are aware of your financial responsibilities and will not spend more than you can afford. You never want to skip a payment, so make sure you have the ability to pay the bill in full by the due date. You can check with your creditor to determine if they allow small frequent payments to ensure the entire bill will be paid off by the due date.
Consider All Your Bills
When it comes to repairing your credit score, every bill you have matters. You want to make sure that you pay everything on time, including medical bills, rent, and school fees. Businesses who are communicating with collection agencies will see what you view as important. You do not want them to think that you do not view something as important just because it is not as vital as utilities or rent. Any debt that goes unpaid will damage your credit report, which causes you to take a step back in your rebuilding process.
As you work to rebuild your credit, you will be making small steps. In essence, you are replacing the bad credit with good credit. This is not something that can be done overnight, but rather with making monthly payments on a new credit card, loan, mortgage, and so forth. Everyone has the ability to improve his or her credit scores; it is just a time-consuming process. However, once you are able to manage your finances and get the ball rolling with lifestyle changes, you will see that repairing credit is easier than many people think.
The pull of retiring overseas can be a big one. Living costs can be much cheaper and the beaches much more beautiful, among other things. There are 4 questions however that you definitely need to ask, and answer, before taking the plunge and leaving the good old US of A for good. Lucky for you we’ve put together a blog on those exact 4 questions. Enjoy.
First, what exactly is your motivation? The fact is, many overseas countries lure retirees with discounts, tax breaks and lower costs of living. Dan Prescher, one of the senior editors at International Living magazine, advises that, if you’re keen on leaving the United States, saving money shouldn’t be your only motivation.
He should know, considering that he’s been living in Ecuador for quite some time. What he warns is that people should follow their heart, not their wallet, and expect to have to adjust to different way of life than they’re used to in the United States. He says that “It’s not like your hometown at half the cost,” adding that “and if you’re not ready for that, you’re going to be disappointed
Second, have you saved enough to give yourself a solid financial cushion? The fact is, most countries require that you have some type of guaranteed monthly income in order to give you a retiree visa. Even if they don’t, moving out of the country without a rather large cushion of savings to protect you is probably not a good idea.
You also need to consider that, if you want to go back and visit family and friends in the states, it’s going to cost you a bit more than if you live a few towns, or even a few states, away.
Third on our list is the question of whether the country you wish to retire in has excellent and affordable healthcare? When you consider that Medicare doesn’t cover your healthcare if you live outside the United States, the country you choose to retire in had better have a health care system that is affordable and high quality.
That being said, the cost of healthcare in some foreign countries is so low that you can actually forego healthcare insurance completely, although it is recommended that you continue paying annual premiums to Medicare to maintain your coverage, should you decide to return to the United States to have any type of major medical issue taken care of.
Our fourth and final question is, you guessed it, how much will you owe the United States in taxes? The fact is, even though you move to another country, it’s almost impossible to escape the reach of Uncle Sam.
Even though you’re not living in the States, the taxes that you would typically have to pay on any retirement income and investments that you have still need to be paid. You might also need to pay local taxes, depending on the country that you choose to live in.
John Flynn, the former president for the Association of American Residents Overseas, warns that filing tax returns can be incredibly complicated and cost thousands of dollars every year. (Insert big sigh here.)
So there you have it. If you can answer these 4 questions without any doubts, and you’ve found a country that you absolutely love, you’re ready to book your flight and make your moving arrangements. Best of luck, and don’t forget to write.
Whenever someone mentions offshore banking it often times sounds glamorous, as if it is a tool only used by the wealthy and powerful. That actually couldn’t be further from the truth. There are numerous reasons for holding money in an offshore bank account, and people of all income brackets have reasons to hold some of their cash in these accounts. Consider some of the benefits mentioned below.
Diversification! We hear about how we should diversify our investments all the time. This is precisely why target date funds were invented. An easy way for the novice investor to simply plug his money into a retirement fund that is actively managed and re-balanced by experts. The same holds true with cash and country risks. Holding all of your money in one currency within bank accounts located in the same country can subject you to unnecessary risks. We have seen the US dollar significantly strengthen against other currencies as of late, but it wasn’t that long ago that we experienced a near financial meltdown in the US either. In order to manage these ebbs and flows it helps to diversify your cash holdings.
Another benefit of having an offshore bank account is that you most likely will have access to investments that aren’t available within your own country. Again, this is along the same lines as diversifying your portfolio. You shouldn’t simply diversify with stocks in your home country, but abroad as well. With the global economy swaying back and forth between North American, Europe, and such, it can certainly help keep a natural hedge to the volatility of these markets.
Most offshore banks have wealth management services for those of you that need a little extra help. They can assist in creating a unique portfolio that meets your specific needs. This could include input like your desired retirement age, and the subsequent investment and cash mix needed in order to achieve those results. Private wealth management is becoming much more popular. As we watch companies globalize it only makes sense that consumers would be next to follow. It isn’t very difficult to do an internet search of some of the leading offshore banks and the services that they offer.
With most banking transactions being conducted online these days it makes sense that you only need online access to manage your offshore bank accounts. This is a huge step from those ominous offshore bank accounts of the old days. Now you can actively manage and view your portfolio with the click of a button.