How to Avoid Financial Hype to Build Financial Health

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While hot financial topics like Crypto, Gamestop, and timing the market to buy and sell at just the right time may be fun for some risk-taking investors, don’t let the hype distract you from focusing on your overall financial health.  

Why? 

Imagine you had 50% of your money invested in crypto and no emergency savings when suddenly, you lose your job. When you try to sell your crypto so you have enough money to live, you realize the value has dropped so much, it’s hardly worth anything. Even though the price was high just a few weeks ago. 

Now here you are, jobless and with no money. How do you pay rent, among other things? 

While that’s an extreme example, as a Financial Counselor, I see people left “high and dry” and without emergency savings far too often, plunging them into true personal and financial crisis. 

So what’s the solution? Building financial health means building financial resilience too, which helps you weather setbacks like job loss, missing work due to illness, childcare or elder care, or a global pandemic, to name a few examples.   

No matter what’s trending in the market right now, don’t forget these 3 basics when it comes to building your financial health. 

 1. Build your credit 

Even in this time of disruption, some well-established systems don’t seem like they’re going anywhere soon, like the credit system. No matter how much crypto you have, your credit can impact your ability to qualify for certain jobs, rent an apartment, buy a car or home, and more.  

Just like computer software releases newer, updated versions sometimes, both of the major credit scoring models (FICO and VantageScore) have different versions they’ve developed over the years. 

For example, the FICO® score, the most widely used credit score by lenders, now has version 10, but mortgage lenders still use FICO versions 2, 4, or 5, depending on the credit bureau. While FICO 10 can include information such as utilities, rent, and cell phone payments if reported, the older credit score versions do not include this information.   

So if you’re using a service to report rent to the credit bureaus, and you have no other account history on your credit, a mortgage lender looking at an older credit score version may think you have zero credit, and deny you a home loan because of it.  

This means when it comes to building your credit to reach your larger life goals, you may have to do it the “old school” way.  

Here are some tried-and-true ways to build your credit history: 

1. 1. Use a credit builder loan. These loans could help you build payment history, which is a major factor in your credit. They are typically open to people with no credit or bad credit, even those who get denied for other credit products.  
   2. Open a secured credit card. These cards work just like regular credit cards, but you pay a security deposit first to gain access.   
   3. Pay down existing debt. If you have high credit card balances, you may improve your credit just by paying those balances down or off, since how much of your available credit you use is another major factor in your credit score.   
   4. Review your credit reports and dispute inaccurate information. According to the Federal Trade Commission, 5% of consumers had errors on their credit reports that led to them paying more for credit products. Visit annualcreditreport.com to pull a copy of your credit reports, check them for accuracy, and dispute items if needed. 
   5. Pay your accounts on time from here on out. Making on-time payments is one of the most impactful things you can do for your credit since payment history is a major factor in your credit score.    

2. Build your savings 

Sadly, the last year opened people’s eyes to what can happen if you lose your job and don’t have a monetary cushion to fall back on. Even during normal times, it takes the average person about 9 weeks to find another job after losing one.  

If you lost your job today or faced another financial crisis, would you have the money to manage the instability? Or would you have to borrow from friends or family, take out a personal loan, or rack up credit card debt to bridge the gap? 

If you don’t already have emergency savings, now is the time to focus on building one. That way, you can turn a financial emergency into a financial inconvenience, and either avoid having to take on debt, or reduce the amount of debt you’d need to take care of yourself in a crisis. 

Here are a few ways to build emergency savings: 

1. 1. If you’re working on building credit and savings, consider a credit builder loan. While you get charged interest on the loan, you still build the savings habit and set some money aside that could be useful later. 
   2. Automate your savings so you can set it and forget it. Set a percentage of your paycheck aside to auto-deposit into your savings account so that money is out of sight, out of mind, and in savings. 
   3. Save before you spend, not after. Make your savings intentional, rather than an afterthought, and plan your spending around your savings goals, not the other way around.
   4. Cut back on expenses you don’t need or value. Align your spending with your needs and priorities, and cut back where you can. Put the money you save in savings.
   5. Find ways to grow your income. Take on a side hustle, ask for a raise, sell stuff from around your house, work extra hours at work, etc. to bring in extra money to add to your savings.  

3. Build your retirement 

Financial Journalist Stacey Tisdale says not to invest money in the stock market (or crypto, really) that you may need in the next 5 years. Reserve your investing for longer-term goals, like retirement or planning for your child’s college education.   

Why? Because if an emergency does happen, but the market is in a downturn, you may not have that money when you need it. If you have a longer investment horizon though, the money has a chance to bounce back over time. 

It’s never too early to start planning for retirement either. In fact, the sooner you start investing for retirement using an account like a 401k or an Individual Retirement Account (IRA), the better, thanks to compound interest, and the return on your investments over time.  

What is compound interest? It means you could earn interest on both the interest and principal amount in your retirement accounts, as opposed to only earning interest on the principal balance, like many other accounts. 

Here’s an example of the impact starting early can have on your retirement, created using this compound interest app:   

Say you have $6,000 in your retirement account now. Assuming that you add $300 per month to your account and have an 8% return each year, that means in 20 years you’ll have a little over $206,000 in retirement. 

If you use those same numbers but have 30 years until retirement, you’ll have about $512,000 to retire on. That’s a big difference. 

To start, use some of the same tactics I mentioned earlier about building emergency savings but apply that money to your retirement account instead. And if you have a company that offers 401k matching but don’t take advantage of it, that’s almost like leaving money on the table. Not to mention, contributing to a 401k could reduce your taxable income for that year. 

While near-term investments may be fun, do your future self a favor and plan ahead for your Golden Years by planning your retirement investments for the long-term.     

Build your dreams 

Building the basics of financial health isn’t about blocking opportunities to achieve your dreams (like the dream of owning crypto, for example), it’s about creating a stable foundation on which to build them. While it may be fun to play in the present, be sure to plan for your future too.