Congratulations new high school graduate! You’ve come a long way and I’m sure you have many aspirations for your bright future. Unfortunately, most of us need some sort of credit to help achieve our personal and professional goals. If that sounds like you, then investing in your credit now can be just as important—if not more important—than investing in your finances. For folks like us, good credit is the key to securing an automobile, activating utilities, buying or renting a home, and even getting hired for a job. Those things are all somewhat possible with bad credit, but that usually means lots of hassle, longer processing times, ridiculously high interest rates, co-signers, and substandard products/services.
One of the problems you will face is not having any credit. Lenders won’t know if you’re a risk, so it will be much more difficult for you to get approved for the things you want. Don’t worry, there are ways to invest in your credit score early so you’re set up for success later. There are both short and long-term benefits to investing in your credit immediately upon reaching legal age to do so. To get your credit history started, you need to (1) understand how credit scoring works; (2) understand the risks/rewards; and (3) take some simple steps toward success.
Understand how your credit scoring works!
As a certified professional coach (CPC), I often ask clients about their credit when they share their goals. Knowing and understanding your credit score allows you to make informed, realistic decisions about how to design a personal strategy to achieve your goals. Unfortunately, a lot of people (a) don’t know their credit score and (b) don’t truly understand why their score is what it is.
Your credit score—depending on the credit bureau—ranges from 300 to 850 (TransUnion & Equifax) or 330 to 830 (Experian). Although each bureau scores slightly differently, the following will serve a solid basic foundation.
In short: (a) having more credit with lower balances, (b) the right kind of credit, (c) less new credit, (d) a longer credit history, and (e) paying reportable bills on time will maximize your credit score. There are some other factors, depending on the bureau, such as average credit limit. It is also important to note that some bills, such as utility and cell phone bills, are not reported unless you fail to pay them on-time so they need to be paid just to stay out of trouble! So as long as you are paying, these bills do not count toward your good score but can count toward a bad one.
Understand the risks and rewards associated with credit.
Credit is not free money! You might be thinking, “yeah, I know that—thanks Jason”; but you’d be surprised at the number of people who use credit as free money when times get tough. Part of building your credit history, especially as a new adult, is being strategic about your approach to spending and using the advantages of credit without being caught up with debt, annual fees, or higher interest payments.
Debt – When you use credit, you incur a debt to the creditor. You must pay your obligation, on time, or you credit score will drop; this makes you a higher risk to lenders.
Annual Fees – Bottom line: stay away from any credit that comes with an annual fee! There are too many fee-free opportunities out there for you to start your credit history with. Read the terms of agreement carefully; some creditors offer 12-month specials with low interest rates or annual fees that later change to increased amounts.
Interest Rates – This is the percentage of the amount you borrowed that will have to be paid to the lender in addition to the amount borrowed. For example, if you have a credit card with a 15% interest rate and you spend $100.00. If you do not pay the card off before the grace period, you will owe $115 to the lender. You can avoid interest rates on credit cards by paying them off before the grace period which varies, but is often 20 days after the date you are billed. The higher your credit score, the lower your interest rates will be. So the main benefit of establishing good credit early is benefit of lower interest rates later when you go to buy a house or vehicle; for which there are usually no grace periods. A low credit score vs. a high credit score can be the difference between paying $15,000 for a car or $18,000—for the same car! That extra $3,000 in your pocket can be used to invest in other things, like a house, replacement vehicle, or investment accounts.
Predators – There are plenty of lenders around that deliberately target borrowers with low or no credit so they can profit from the absurd interest rates they charge as a result. You are better off saving up and going somewhere else vs. being prey to such lenders. Some auto dealerships and rent-to-own type businesses are examples of what you should watch out for.
Some simple steps toward success!
OK, so now that you have a fundamental understanding of how your credit works. What do you do? A lot of people say, “I’ll get a cell phone to establish credit!”—NOT! Contrary to popular belief, a cell phone bill (or any other utility for that matter) does not go on your credit report unless you don’t pay it! Try this instead:
- Pull a current credit report from the major credit bureaus. You get one of these per year for free so take advantage of it by using the free report to track your progress.
- Apply for a low-balance, no annual fee, secure, major credit card (e.g. VISA, MasterCard, or American Express). They are out there, trust me, I did this when I was young and it worked. For me, I applied for a $500.00 balance, no fee, VISA through the former Providian Bank. Check with your local bank or credit union.
- Each month, use your card only for purchases that you have the cash to pay for. Do not use it as a loan! You are trying to build your credit, not use it. It takes discipline, like all investing.
- Each month, prior to the grace period, pay the card off in full. This should be easy since you did not use the card for anything that you did not already have the cash for. I still use this technique and I pay off balances about once a week to make sure I get anything from the previous week. As long as you beat the grace period, it doesn’t really matter. The point here is to use your credit card to buy what you were already going to buy with cash, and then pay it back before the bank gets interest.
The foregoing will quickly help you establish credit, and before you know it, you will be in good shape. Two major credit cards helps raise your score, but starting with one card is the best option until you raise your score a bit. In about six months, the bank will likely “reward” you for on-time payments, thus raising your credit limit. This is a good thing! Now you have a lower debt-to-credit ratio, higher average credit limit, more on-time payments, and longer credit history; all factors that will raise your score! The banks will repeat this process until you reach—about—$2,000 or so. At that point you can start requesting higher limits (that you won’t use) to keep raising your score. Again, discipline is the key here. Having higher limits opens the door to more trouble if you get behind on bills and start racking up your credit debt. Don’t let that happen.
Once your credit score is raised, typically after a year or so, you can start taking advantage of the lower interest rates for other things you want or need. The key is to always pay everything off as soon as possible, but at least on-time without ever going overdue. The earlier you start this process, the younger you will be when you finally reach an excellent credit status. It will take a few years to reach high-good/low-excellent credit, but it will take about 15 years to maximize your credit score due to the history requirements; that’s why it’s an investment. As you pay off student loans, installment accounts (auto loans), and buy a home, your score will make spiked increases with each. It’s a life-long marathon, not a sprint; invest in your credit now!
Dr. Jason M. Newcomer
Vice Chairman of the Board
& Chief Strategy Officer
“OMG, Chipotle is my life!”
A couple of weeks ago, I had the opportunity to work with a group of high school seniors who were writing scholarship applications. In between discussions on how to find scholarships and essay writing, we started to discuss saving. I was absolutely shocked to find out that many of these students have been working since they were sixteen years old yet have never had $500 in their bank account. One young lady explained how the majority of the money she earns is spent eating out at fast food restaurants like Chipotle. It made me sad, and equally angry, to know how illiterate they were about the power of earning, controlling (budgeting) and multiplying (investing) their money.
We talk a lot about education and the need for financial literacy. The right education can provide a lot of opportunity, but I would go a step further and say, that education without the knowledge to control and grow your income will not bring financial peace. And who wouldn’t want to gift their child financial peace? In this article, we will discuss how you, as a parent, can gift your child financial peace while helping them start their IRA, at any age!
First things first, let’s discuss the IRS rules for children having IRAs. There are basically two rules that you must abide by in addition to the normal IRA contribution rules: #1 they must have earned income and #2 there must be documented records for each job — date, payment, employer, etc. The first rule is usually the one that causes most confusion. How can a child (under the legal age to work) earn income? Let me explain…
Infant – Kindergarten
Parents who have businesses or have side hustles can employ their own children as models for advertisements that they use to market that business; think the Gerber baby. One rule of thumb that you can use is, if someone else will pay your child to do it then, chances are pretty good; you can pay them to do it as well. Another rule of thumb is, if you pay someone to do it you can more than likely also pay your child to do it, as long as they are capable (have the required skills). I’ll come back to this point later on. Consider this for a minute; when Beyoncé and Jay-Z added their daughter Blue Ivy to their recordings, do you think they missed the opportunity to pay her like they paid everyone else who was “featured” on the songs? Of course, I can’t say for sure what they did but I would bet that Blue Ivy has an IRA… I’m just saying!
6 – 13 years old
During these formative years, there are a few aspiring young entrepreneurs that start micro-ventures beyond the traditional lemonade stand. I am sure by now you have read the stories about Mo’s Bows, Mr. Cory’s Cookies, Jewelz of Jordan, and artist Skylar Grey “The Fresh Prince of Street Art.” Their stories of success must not overshadow many other business ventures started by kids of lesser known names. Kids that are too young to work for people not related to them are just the right age to work for themselves. Billionaire Warren Buffett, was running his own businesses at 13 years old as a paperboy and selling his own horseracing tip sheets. That same year, he filed his first tax return, claiming his bike as a $35 tax deduction. Start them young and who knows what they will become! Check out our blog post School with a Side of Hustle for more business ideas for your pre-teen.
14 – 18 years old
Ahhh, the legal age to work (and pay taxes)! With their work permit in hand, the world is their oyster. There is a sense of freedom that comes from knowing that you can buy your own food and clothes. It is imperative that, during these years, children learn not only how to control their money (saving), but also how to make it work for them (investing). These years represent the last holdout before they are on their own. With that realization comes a sense of urgency unmatched with previous years. Learning to cultivate delayed gratification and saving/investing before spending is absolutely critical to the financial well-being of your budding young adult. With employment comes taxes and an IRA is a brilliant way for your child to start building wealth, tax-free.
Build a Wealthy Mindset
Building a wealthy mindset in your children is not easy. I will give you that. They have tons of outside influences (Hip-Hop Music, Celebrities, Media, etc.) that are counter-productive to becoming wealthy. Looking like ”money” seems to take precedence over actually building wealth. In my household, we have these same struggles; me against the images of “ballin’ out of control” that my son is bombarded with by the media, and the subsequent peer pressure placed on him by the children who have fallen victim to these images.
So, I have a deal with my son; he has to save/invest 50% of everything that he acquires from his entrepreneurial ventures, holiday gifts, and birthday presents. When he wants to buy an expensive item, like a new pair of Jordans, he must first buy at least one share of the stock before he can buy whatever it is that has him excited at the moment. The sequence of events goes something like this: earn/receive money, save 50% towards investments, and plan for spending. The plan for spending requirement allows him to delay the impulse to buy regardless if the funds are available in his savings account for the purchase. The reiteration of this process is just one way that I am trying to instill a wealthy mindset into my 10 year old son, if you have other strategies please share below!
Don’t Have a lot of Money Right to Invest? No Problem! You have options:
- Make Free Stock Trades (no commission fees) with companies like Loyal 3. $10 minimum investment and no fees on the stocks that they offer.
- Take advantage of Free Online Stock Trading Deals
- Buy Stocks Directly from Companies via direct reinvestment plans (DRIP). Minimum investment amount varies.
- Buy fractions of shares if you can’t afford one share right now. Check out companies like Sharebuilder
Let us know your thoughts!
The time is drawing nearer; we are two weeks away from kicking off the pilot session of our I Am An Investor! program. In this blog post we explain how you can teach your kids about investing at home.
Step 1: Make it FUN!
No one, and I mean no one, wants to be bored, especially not children! If you want your children to have a positive outlook on investing you have to make it fun and they have to be able to relate to it.
Monopoly is a popular board game because children love earning money and owning things; just like adults. Chances are, it won’t be a struggle to teach your children how to make their money multiply or owning a part (share) of their favorite company. Like Monopoly, you can even make it a competition! There is something for everyone in the stock market. You can compare quarterly and annual gains while competing for the investor title of Biggest Winner!
Step 2: Focus on What They Love!
Next, you have to make investing something they can relate to. The easiest way to do this is to encourage them to invest in companies that they already use and are excited about. The XBOX player of the house may be interested in buying stock in Microsoft (MSFT) or video game company Electronic Arts (EA). The sneaker connoisseur of the house may want shares of stock in Nike (NKE). Are your teenagers iPhone users? Apple stock (AAPL) might be a good choice. Ask your children about their most valued possessions, the brands that they are loyal to, and start the conversation about them owning a share in the companies they already love.
Step 3: Stir Up Dinner Conversations
Getting the whole family involved in investing is a sure-fire way to start shifting the mindset of your children from consuming to wealth-generating. It is important that you teach them to be patient investors. Help them understand that stock prices rise and fall in cycles. As long as the earnings and management of a company are sound there is usually very little cause for concern.
It has been said that billionaire Warren Buffett made his first stock investment at age 11 — three shares of Cities Service oil company at $38 per share. The stock dropped to $27, but the young Buffett held his position, and later sold it when they reached $40 a share. I am sure he was relieved to clear at least a small profit until of course when the shares rose to nearly $200 a share, leaving Buffett with an early lesson in patient investing that he never forgot. This is a lesson that you too can drive home while grooming your young investors.
Now that you have piqued your children’s interests, stirred up conversations on investing and devised a fun and creative way to keep your children interested in investing, it is time to put your money where your mouth is!
You will need to find a broker so that you can purchase shares of stocks in the stock market. Most online brokers also offer education and additional resources to help you with your trades.
Some brokers to consider are:
Loyal 3: https://www.loyal3.com
Share Builder: https://www.sharebuilder.com/
TD Ameritrade: https://www.tdameritrade.com/
You can also review several online brokers at http://www.stockbrokers.com
Investor’s Business Daily (http://www.investors.com/) is also a very good resource for accurate information about the stock market and great articles about investing.
Still Not Convinced? Check out this article…
Meet the Ellerbroek’s. This middle-class family is making investing a family affair.
Read their story here: http://money.cnn.com/2014/11/01/investing/teach-kids-to-invest/
Leave us a comment below and let us know what you think!
Executive Director & Founder
In our blog post, How to Teach Your Kids About Investing, we presented several ways to get your kids thinking about how to multiply their money (invest). On January 29, 2015, I Am O’Kah! will teach kids how to trade and invest in stocks and real estate. In this article we will give you our top four reasons why we believe that every child should learn how to invest in stocks.
# 1 They are the targeted by most companies!
Everyone, from fast food restaurants to sneaker companies, wants customers that are loyal to their brand. What better way to create a loyal customer base than to start grooming them from they are young. Sneaker companies use children as part of their focus groups when they are testing new products. They know that children don’t have the money to buy their shoes, but children wield a lot of influence in the household when it comes to what is purchased.
#2 Investing Teaches Ownership!
Investing in a stock is like owning a small piece of the company. That sense of ownership helps children feel independent. Children love feeling independent. As they get older, they want to do more and more things for themselves. Teaching them to invest in companies that they already love helps them shifttheir mindset from consumer to business owner (no matter how small of a stock position they hold). By owning stock in the companies they use, they get to earn money when the company makes money from the products it sells.
#3 They Get It!
The basics of investing are concepts that children are able to understand: (1) Invest in companies you understand and believe in; (2) Invest in companies that earn (or will earn) a lot of money; (3) Use you money to make more money; (4) Don’t be scared (everything has risks) or a quitter (invest for the longterm) and (5) Educate yourself (know why you are buying an investment).
#4 Time Is On Their Side – Yes It Is!
The cardinal rule of investing is: Start Now. Time is the only thing that we truly have in this world. Everything that we do involves it. With investing, time can be one of the single most important factors in how large of a profit you earn in the end. Business operates in cycles of highs and lows. Picking the right stocks to ride out the tides with is often just as important as holding on for the ride. By starting early, children get a longer time to profit from the businesses they invest and potentially grow a larger nest egg.
Don’t Believe Me? Just Watch!
Meet Damon Williams: A Chicago teen that is mastering the art of investing in the stock market. According to Damon, in 2009 he already made a “shade over fifty thousand.” Damon was first motivated to invest after his mother turned down his request to get a pair of the latest Jordan sneakers on the market. Instead, she made him save his money to buy several shares of Nike before he could by another pair of shoes! From consumer to investor – Watch the video below to learn more!
Leave us a comment below and let us know your thoughts!
Executive Director & Founder