Top 5 Financial Tips for African-Americans (continued)
Tip 3: Get Rid of All Those Credit Cards
I don't know what they want from me
It's like the more money we come across
the more problems we see
“Mo Money Mo Problems,” Notorious B.I.G. f/ Kelly Price,
Mase, Puff Daddy, 1997
The average American has approximately seven credit cards. Sure
it starts out easy enough. You get a Visa®
or Mastercard® and maybe another major card
like American Express® or Discover®.
Managing the interest payments is okay at first. But then you go
to that annual sale at Nordstrom and the sales person tells you
that you get 10% off your entire purchase if you open up a store
account. It sounds reasonable to you. After all you have always
paid your bills on time and often in advance. Then there’s
the time you spent too much on back to school clothes for your daughter
at The Gap – but again you got the 10% deal by opening a new
store account.
Before you know it, you have three or four major credit cards and
five or six store credit cards.
You’re credit rich! So what’s the bad news? Unless your
name really is P. Diddy, you’re probably money poor. The song
should be called “'Mo Credit, 'Mo Problems.”
“The higher the interest rate the more you ‘pay’
for a product,” Hamilton said. Thus those Via Spiga’s
that you got on sale for $80, a real bargain, will really cost you
double or triple that amount by the time you finish paying for them.
Why? Once again, it’s simple math. “If you only make
minimum payment each month on high interest credit cards, your payment
will really only cover the interest itself while a very small amount
will go to pay off the actual product you purchased,” Hamilton
said.
There is hope though. Getting out of this vicious is fairly simple,
but it takes a lot of will power and discipline.
“Get rid of the credit cards with the highest interest rates
first,” Hamilton said. Double up on payments for high interest
rate cards or pay them off with credit from your lower interest
rate credit cards. Have a plan to get this done, even if it takes
a year or two. Hamilton added that consumers should “shop
around for good interest rates.” The store credit card might
sound like a good idea at the time but the 10% discount will be
long forgotten two years later when you are still paying for the
clothes.
“Limit your cards to a manageable number like two”,
Kuti said. She added, “I have a client who only uses her American
Express® card because she knows she will be
forced to pay it off in full at the end of each month. This way
she knows she can truly afford what she is buying. She keeps a Visa®
for cases of emergency or where she can’t use Amex. This is
what I call discipline.”
Watching the number of credit cards you keep and using low interest
cards is Tip 3. To calculate just how much these
credits cards are costing you and how long it will take you to get
debt free, visit CNNMoney’s debt reduction planner calculator
at http://cgi.money.cnn.com/tools
or MSN’s debt consolidation calculator at http://moneycentral.msn.com/investor/calcs/n_debt/main.asp.
Tip 4: Acquire More Real Assets to Build Net Worth
I said give me two pairs
(cause) I need two pairs
So I can get to stomping in my Air Force Ones (big Boi)
Big Boys stomping in my Air Force Ones
“Air Force Ones,” Nelly 2002
You see it on music videos and in your favorite movie. The cars,
the bling-bling, the clothes. It all looks great. But two pairs
of Air Force Ones are just that -- shoes worth nothing once you
leave Foot Locker.
“Typically, clothes, cars, gold chains, aren’t worth
that much after you buy them,” Hamilton said. In fact the
IRS, suggests that you look at the thrift shop value for such items,
or use online auction sites like eBay or classified ads in the newspaper.
As a rule of thumb Kuti suggests that such items, which for simplicity
sake we’ll refer to as “basic assets”, depreciate
some 10-20% per year and for most ordinary items, the value after
about 5 years is negligible-- under $50. Of course, the condition
of the item is very important; designer clothes, expensive furniture,
and jewelry will have some value. But acquiring “real assets"
will put you on more solid financial footing,” Kuti said.
These real assets include such things as stocks, bonds, and real
estate. “We need to get in a whole new mind-set as to acquiring
assets,” Kuti said. These are the assets that are used to
calculate your true financial net worth – your total assets
less your total liabilities. This mind-set includes building net
worth through assets that are more likely to appreciate over time.
For example, with an extra $200 a month, you save for 5 months to
buy that new Prada purse. After five years, that $1000 purse will
have a value close to nothing – it’s simply out of style
and thanks to good ole’ wear and tear it looks very tattered.
We’ll give it a value of $200. If you had invested that same
$1000 in your company’s 401K plan, the $1,000 would be worth
approximately $1275 after 5 years. (This calculation is based on
a very conservative average investment rate of return of 5%).
Although this example is somewhat exaggerated, it’s clear
owning real assets will be worth more then everyday common items
like clothing, almost every time. Of course, if you happen to buy
a vintage dress previously worn by Dianna Ross at a yard sale, it
will probably be valued more like a real asset, but your chances
of doing so are about as good as “hitting the mega lottery,
Hamilton said. “It’s clear that over time, concentrating
an investment strategy that purchases real assets to increase net
worth is essential to any solid financial planning,” he added.
Thus, Tip 4 is acquire real assets. The Salvation
Army has a value guide for donated items at http://www.satruck.com/Index.asp.
You may be surprised at how little your used items are worth. Also,
to calculate your net worth, try Smartmoney’s calculator under
the estate planning section at http://www.smartmoney.com/estate,
Kiplinger’s calculator at
http://www.kiplinger.com/tools/networth.html, or the many financial
calculators on Mile High Accountancy’s website at http://www.execusite.com/clmjr/
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