Missing the Financial Forest for the Trees
I was reading an article about a financial literacy class offered at a university which focused on the ins and outs of credit scores. While I think that having sound personal financial advice is important, and often neglected, I can’t help but wonder if teaching the specifics of credit scoring is a case of missing the financial forest for the trees. After all, the mechanics of a credit score changes over time and has some strange anomalies relative to having a strong balance sheet. An individual with multiple types of borrowing may have a better score than someone who saved prudently and paid everything in cash. In addition, I have to wonder if the focus on something like credit scores comes at the expense of very basic lessons of personal finance, like spending less than you earn. In thinking about saving and investment lessons that I’ve learned over the years, here are some signs that the emphasis may be on the minor issues at the expense of the big:
–In asset allocation, having too many funds or investments — a new investor is often tempted to fine tune their asset allocation too much and hold a very wide variety of funds. Not only does this usually result in holding too many funds and probably incurring higher fees than necessary, a large number of funds is more difficult to monitor and manage.
–Focusing on separate savings goals instead of an emergency fund — while there are many vehicles for saving for retirement, education, and other items, the most important savings is an emergency fund. To be used in case of unexpected expenses or disruptions of income, an emergency fund is the best thing to prevent having to go into high cost debt and getting behind on bills. If you’ve saved a reasonable emergency fund (at least 6 months is recommended), then other savings goals are appropriate.
–Shifting credit card balances and account balances frequently to try to take advantage of good rates — it is becoming increasingly difficult to have accounts without monthly fees unless substantial balances are maintained. In addition, shifting balances from card to card is risky if you are not fully aware of interest charges and late charges. I’ve known too many people who shift their balances due to a teaser rate only to find the provider changing the rates after a few months. Generally, if you have debt, one consolidation move to bring everything to the lowest rate possible is good; and keeping your main bank accounts with one provider is as well.
The more time I spend learning about personal finances, the more I see that the big picture, spending less than you earn, saving regularly, etc… should be the main focus.
shared at this week’s Carnival of Personal Finance
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Hi,
You make a lot of good points. I can’t help but think that possibly the financial literacy class you mentioned didn’t start out concentrating on credit scores, but moved in that direction based on student feedback.
Who wants to go to school just to be told something unpleasant — such as live below your income?
Better to learn the ins and outs of the system so you can manipulate it. Heck, the students probably already have plenty of credit cards. They’re worried about buying expensive cars and houses when they graduate.
Same goes with shifting credit card balances. It’s actually not a bad idea. I used to do it. The focus should be on paying off that debt. But if shifting balances will allow you to pay less in interest, then you can pay off more principal, and that’s good.
But not racking up those charges in the first place is the best idea, I agree. But some of us have to learn the hard way.
You left out one of the most important major components of personal finance — income.
Increasing it.
I hate the personal finance books and articles that simply assume people’s income is fixed. Yes, spend less than you earn — but also work harder to earn more.
I believe that’s an unsung benefit of going into debt — it pushes you to go beyond your current position in life.
My debt forced me to work overtime and a second job. Eventually my Social Security checks will be higher because of that – for the rest of my life.
It also forced me to develop new skills and ambitions. I learned how to invest for income, and how to market products and services online. Again, that will benefit me for the remainder of my life.
If I’d simply lived within the income set by my day job, I’d have avoided a lot of stress, worry and work — but also a lot of learning and stretching of my potential, and would have to spend my old age on a lot less money.
exchange traded funds
Richard,
Thanks so much for your thoughtful comment. I definitely agree on the income, and will be writing more on that in the near future. Here’s a past post on the topic:
5-step plan for a high salary
I have been trying to save but was not able to until now because of debts and loans. When my other credit cards would offer low interest rate for a balance transfer, I would transfer my recent debt to the other credit card, until a new transaction comes. So the history just repeats. Now, I am trying to pay off all my debts and hoping to save soon. I don’t always use my credit for some stuff though, like bags or shoes or dresses. I used them for food most of the time because I was jobless in a while. I realized that I should also save for emergency fund soon because we don’t know what lies ahead.
VCM, good luck.
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