This isn’t anything new. The stock market is always in flux and there are periods of bull and bear markets. Unfortunately, the last decade has displayed some exaggerated bull and bear markets adding more volatility than generations past had to deal with. Ultimately, this extreme volatility and human nature are what cause so many people to lose money and faith in stocks. It’s not that stocks are a bad investment, rather it’s usually the fact that people do the exact opposite of what they have  been taught that causes the pain of losing money.

It’s All in the Recent Headlines

If you want to see dumb investors in action, just check out some of the articles in the media coming on the heals of the best two year stock market rally in history. Investors flood back into stocks (March, 2011), investors ease back into stocks (November, 2010), experts say to get back into stocks (January, 2011), richest investors come back to large-cap stocks (February, 2011), main street investors change their strategies (February, 2011). These are just a few, but every week it seems like new data is coming out showing more people flooding to stocks.

If these stories weren’t so sad, it would be comical. When these articles talk to real investors it can be almost shocking to see the destruction of wealth based on nothing more than poor timing due to human emotion. A common theme can be found in this quote from the most recent story from above:

“It didn’t feel right to be back in until now,” says Richard Dukas, who heads a public relations firm in New York City. “I still don’t want to put all my money in the market, but I believe we’ve come through the worst of it.”

After the 2008 financial meltdown, Dukas and his wife converted their 401(k) retirement accounts into cash. They had been burned during the bubble in technology stocks a decade ago, and Dukas says he has been “extremely skittish” ever since.

Now Dukas, 48, says 85 percent of his portfolio is back in mutual funds, although he maintains a small cushion of cash.

If anything, this is probably the most typical scenario I’ve come across in both my time working with investors and in helping friends and family navigate their investment strategy. Just look at the quote above and you’ll see how poor of a decision that was. First, they waited until after the 2008 financial meltdown before cashing out their stocks. That’s mistake number one. By the time they sold, all the damage had been done and they locked in a 40-50% loss. Second, in the article he says it now feels like it’s finally time to get back in and now has 85% of his portfolio back in stocks. Problem number two is that they let the two best years in stock market history pass them by which would have helped them recover the bulk of their losses, and instead are now buying back in at what appears to be the peak of a bull market. They sold low and are buying high. You can’t make money that way.

The common thread is that in the past six months or so the trend is for more money to be going into stocks than cash or bonds, which has been the trend over the last couple of years. How ironic is that? In 2009 and 2010 the majority of money being invested was by far going into cash or bond assets, yet the market was tacking on gains at a record clip. Today, after the market has bounced back nearly 100% from its lows, it’s only now that investors are feeling comfortable to invest in stocks again.

To better illustrate this perilous investing behavior, here’s a quick chart:

Just like Richard in the article mentioned above, he had seen enough in late 2008 and decided it was time to bail out of the market. Well, as you can clearly see, by the time the end of 2008 rolled around the bulk of the damage had already been done. The S&P was already down between 30-40% at this point. Granted, it still had more downside yet to come and you can argue that selling then missed that, but look at how quickly the market recovered from that ultimate low. Had you not been paying attention to the news a month or two would have gone by and you wouldn’t even have known. And from that point forward the market has been going up sharply.

So, as you look at the chart you’ll notice that 2009 was the year to invest if you had the foresight to invest early in the year. The market rallied close to 65% in just nine short months. That’s unheard of, but guess what? John Q. Public investor missed out. They got shaken by the sharp drop in October of 2008 and bailed out completely, and being afraid of the volatility in the market probably let 2009 and most of 2010 go by before realizing the market rally is real and they should probably get back in. It doesn’t take rocket science to see the problem with these two circles. The “sell” circle is lower than the “buy” circle, and you don’t make money selling low and buying high.

The Missed Buying Opportunity

It isn’t just the wholesale selling of stocks and buying back in later that can cause damage to your portfolio. We all know that if you sold after the crash and waited two years after a rally to buy back in that’s a losing proposition, but there’s another layer of missed opportunity here. When most people sold their stocks back in 2008-2009, they also stopped putting new money into stocks (if they were investing at all). That’s what many of those articles referenced above point out, that for those two years the bulk of new money being invested was going to cash or bonds. Well, what a wasted opportunity.

Had you continued to make regular investments in your 401(k) or IRA or whatever you use into your stock holdings during that down period of a year or two you would have racked up a nice amount of money that had an average purchase price well below the peak from just a few months prior. In most cases, that money would have been buying stocks at a 25-40% discount only to then rally in the coming year and earn you a hefty profit. Instead, most people turned to cash or bonds for all of their new money and while stocks were setting record gains, they were content earning 1-5% on their money.

The gains are real. As I wrote about in the lost decade of investing, those who took the tried and true approach of regularly investing over time in a diversified portfolio and rebalanced regularly, came out ahead. While the decade of stocks is “lost” on paper showing a negative total return, a real investor who didn’t make rash emotional decisions and stuck to their guns actually made money in a period where people claim it would have been better to put your money under a mattress.

Lessons to be Learned

“Those that fail to learn from history are doomed to repeat it.” That quote pretty much sums it up because it’s true. Sure, it’s easy to look back over the past few years and see where everybody went wrong. When you’re living in the moment and staring into the teeth of a bear market it can shake even the most astute investor. But as history has also shown, the world didn’t come crashing down and a rash decision often proved costly.

With every market dip there are people who proclaim that this time is different. This is the time where the country goes bankrupt, your cash is worthless, and the best investment is that of guns and ammo. Well, maybe that day will eventually come, but I’m willing to bet that’s far less likely than some would lead you to believe. We’ve had countless market downturns over the past 100 years, each caused by a different driving force, yet somehow we’ve managed.

So, the key here is to learn from history so you don’t continue to make the same mistakes. Don’t wait until the market goes down, sell all of your stocks for a loss, and then wait well into a subsequent rally to buy back in. When you react to what has already happened, you’ve already lost. The only way to make money timing the market is to be ahead of the curve. You need to sell before stocks go down and buy before they go up. For the average investor you’re probably better off going to Vegas and playing blackjack.

The rules haven’t really changed even though the economy has.

1. You need to create a diversified portfolio.
2. You need to regularly invest, in good times and bad.
3. You need to rebalance your portfolio regularly.

It’s that simple, yet adhering to it can be difficult. Ultimately, at the very least you need to diversify. Most people, especially those later in life, are overexposed to stocks. Sure, everybody wants to play catch-up since they got a late start in saving, but taking on more risk isn’t the answer. So creating a portfolio with a solid asset allocation might not be flashy or make you rich overnight, it will do the dirty work of mitigating risk so you aren’t left to your own devices and trying to time the market. Second, you need to continuously invest. When you invest on a fixed schedule it doesn’t matter what the market is doing. Sometimes you’ll be buying low and sometimes high, but in the end you’re going to end up with even more money than if you had been on the sidelines. And finally, rebalancing is important because it forces you to take profits off the table. As the investments in your portfolio do good or bad their proportion gets thrown off your target. By rebalancing you’re then taking profits from the investments that did good and shuffling them into the investments that aren’t doing so good, which is effectively selling high and buying low.

One final thought, and that has to do with Warren Buffett. He’s known for saying, “Be fearful when others are greedy, and greedy when others are fearful.” Since the public is usually the last one to the party, I’m a bit on the fearful side these days. While mainstream media says it’s time to get back in, I’m doing the opposite and pulling some of the profits from the past few years off the table. I don’t move my entire portfolio in and out of stocks like a fool, but in times like these I am extra careful about buying into the excitement.

In a real practice dealing with real people, the results are even more shocking and really hit home. I’ve worked with people, affluent people such as doctors and lawyers who are nearing age 65 and are looking to retire. When we begin to dig into their investments and retirement plans it was typical to find out that these individuals earning sometimes upwards of $200,000 a year had as little as $50,000 saved up and expected to retire inside three years. On top of that, they still had mortgages, auto loans on luxury cars, and vacation homes, yet they said they couldn’t afford to max out their 401(k).

And these are people you’d think would have it easy and built up a nice nest egg. When you work with the typical middle-class employee the situation wasn’t much better. The real problem is most of these people weren’t saving at all. The good news is that those who were saving typically put a larger percentage of their paycheck away than those who made far more money.

So, the evidence is out there, and for the majority of people they simply aren’t saving nearly enough. But, that hasn’t stopped one man from proclaiming we are actually saving too much for retirement. Too much, too little. How much should you save for retirement?

The Man Behind the Claim

Laurence Kotlikoff is an economics professor at Boston University and he claims that most Americans are saving too much money for retirement while sacrificing spending money today. This is a pretty bold statement that goes against most of what we’ve been taught. But this idea isn’t new. The first time I came across it was in a 2007 Registered Rep article. “The rules of thumb are the rules of dumb,” scoffs Laurence Kotlikoff. Kotlikoff is one of the leading members of what could be termed a school of retirement heretics who question much of the conventional retirement financial-wisdom, and even received truths about the retirement period itself.

It is All About Consumption

Kotlikoff argues that current financial planning doesn’t take into account consumption smoothing. That is, most savings plans revolve around a fixed amount that is put on autopilot and doesn’t change according to what is going on in people’s lives. With major life events such as weddings, college education, career changes, and so on, the amount you need to save will fluctuate and not remain constant.

I can agree with this, and just sticking to the rules of thumb that say you need to save X percent of your income or you need to have X amount of dollars by retirement are just that–rules of thumb. Sure, rules of thumb aren’t supposed to be perfect and exact for everyone, but people need to start somewhere. Especially those who may not have much of a financial background as it can be intimidating to even fathom what kind of numbers should be considered.

To quote Kotlikoff again: “You don’t want to be putting your savings on autopilot, because if you put your saving on autopilot it means that your consumption is going to be disrupted.” And to that I have to say, “so what?” Making retirement savings automatic is the number one thing most people should be doing. The average person isn’t in a position to constantly adjust their savings amount year to year based on every little detail that’s going on in their lives so the best course of action is to set it up and let it happen automatically. So what if consuming (spending money) is affected? I’d argue that it’s better if somebody isn’t blowing a little extra money on Starbucks or a new car and instead keep putting money aside for retirement, which is probably still far short of what needs to be saved anyway.

Striking a Balance

All that being said, there is a hint of truth to this, but I don’t think people saving too much is hardly the problem as he suggests. The key takeaway is that you need to strike a balance between spending money today and planning for the future. Clearly, you don’t want live a life of poverty for 40 years just so you can retire and finally enjoy the fruits of your labor. On the other hand, you don’t want to spend like there’s no tomorrow only to realize you’re going to retire in poverty.

The fact is, most people are not saving enough, and not saving too much as Kotlikoff suggests. Just because people are using rules of thumb as a starting point for retirement savings doesn’t mean they are saving too much. Most people get a late start when it comes to saving, so even using the rules of thumb it may mean too little too late. Either way, people need to save for retirement, and it’s true they also need to be sure to enjoy life today. But I can guarantee you, the typical person making $50,000 a year and who’s putting 10% of their paycheck away (a common rule of thumb) is not going to have enough put aside by the time they retire to have the retirement they want.

Is There a Motive for This?

You bet there is. Kotlikoff has developed software that will help investors and advisors “smooth out” their consumption so that they can take into account the changes in their lives to more appropriately plan for retirement. The software is called the Economic Security Planner. The software starts at $149.00 and goes as high as $750 for the financial planner version.

It is starting to make sense now. If you make an outrageous claim that goes against everything we’ve been taught, you’ll generate a lot of attention in the media. Then, if you have developed a product that can address the concerns you mention, you can stand to make a lot of money. You’ve just created your own market for your new product. While that’s excellent marketing, I’m not so sure it’s good economics.

My Problem With This

Clearly, Kotlikoff has impeccable credentials given his background and academic qualifications, so I’m certain that many of the ideas surrounding this claim are sound. I agree that the typical retirement advice that is dished out by investment companies and many advisors is too simplistic and cookie cutter to be of much use on an individual level. But the claim that many or even most Americans are saving too much, I don’t buy that.

Maybe in the wealthy tier of individuals that Kotlikoff deals with this is true. I can see how those who can afford to save a lot may be dumping a ton of money into retirement while foregoing consuming today, but I simply cannot believe this to be true with the vast majority of your typical working Americans.

If I had to guess, I’d say that 9 out of 10 people I work with are not saving enough for retirement, by a long shot, let alone saving too much. Only between 60-70% of all employees are saving money at all, and the majority of those are saving a couple percent their pay. Virtually nothing. I find it very hard to believe that these working families are sacrificing things in their life today because they are saving $200 a month for retirement.

I do think that the argument about how retirement planning is too general is very true, and this is certainly a wake up call for those who blindly follow these rules of thumb, but the notion that most people are saving too much is a bit much. You should carefully examine your savings and retirement needs before reducing your retirement savings contributions or dropping a few hundred dollars on his software. Instead, start by sitting down and spending some time carefully thinking about your own situation and find out how much you need to save for retirement.

Building wealth is a part of the American Dream. We’re told that through hard work and seizing opportunities we can lead successful, healthy, and wealthy lives. But building wealth isn’t important just for the sake of having money. In fact, it’s almost a requirement these days if you want to fully retire at some point. Social Security won’t provide much of a retirement. Your kids may not be able to afford college on their own, and there’s a good chance that health care costs can wipe out even a decent nest egg during your golden years.

Since building wealth is so important for our future why is it that most people still find themselves under a mountain of debt or end up retiring broke and unhappy? It isn’t just luck. Sure, in the game of life luck does play a part, but most of the outcomes in life are directly attributable to the choices you make and financial decisions are no different. If you make smart decisions with your money your odds of success lean in your favor. Make poor decisions and you put yourself behind the 8-ball. Here are seven of the biggest money problems and mistakes most people make and if you can avoid making these mistakes you’re on the fast track toward building wealth.

1. Buying More House Than You Can Afford

This is the granddaddy of them all. For generations we’ve been told that owning a home is how you build wealth. The reasoning was simple: you buy a house, live in it for a few decades, and sell it for a large profit since it appreciated in value. For the Baby Boomers and their parents this was a reasonable expectation. People did not move around as much, had steady employment with a company, and they held on to their homes long enough that it was almost unheard of to not make money when selling your home. For our generation, things are different.

Generation X and Y are mobile creatures. Gone are the days of company loyalty and staying with the same employer for 30 years so you can retire with a big pension and a gold watch. No, today people are on their own and have to do what’s best for themselves and their families. This often means frequently changing jobs, moving, or even losing a job and being forced to look elsewhere. This means people aren’t staying in their homes nearly as long as they used to. And guess what that means? The less time you live in your home the less equity you build. The less equity you have the more likely that when you sell you’re going to be put into a position where there is little or no money to be made and it could even cost you significantly as we’ve seen in recent years.

Factor in the above chances in home ownership with the fact that banks are often willing to lend more money than you can realistically afford and you’ve created the perfect wealth destroyer. Owning a home used to mean building value and adding to your net worth, but these days more people are finding that owning a home is nothing more than a large monthly payment. Make sure you’re buying a home for the right reasons so you can avoid the next housing bubble, otherwise you could be making one of the costliest financial mistakes of your life.

2. Having a Vehicle Fetish

If you’re like most Americans you probably spend a good deal of your time driving to and from work. Thanks to the way our country and cities were built this is how most of us have to live and that means having a car (or two or three). The downside is that owning a vehicle is an expensive proposition. First, you have to buy a car, but the expenses don’t stop there. Even after putting out thousands of dollars for the vehicle itself you’re left with filling it with gas. Then you have to get regular oil changes and perform routine maintenance. And let’s not forget about insurance. Oh, and those flat tires and unexpected repairs can be costly as well. All said and done, the average person will spend over $500,000 on vehicle expenses over their lifetime. No, seriously. Most people end up spending more on their cars than they have in their retirement account by the time they are 65. Think about it.

So, don’t make the same mistake many vehicle owners are. Most of the people you see driving around $70,000 luxury SUVs are not as wealthy as their vehicle leads you to believe. Their car is likely making them poor and they probably have little more than a bunch of monthly payments that still has them living paycheck to paycheck. Buying new vs. used can be one mistake, but it goes beyond that. Spending more money on a nice vehicle leads to more interest being paid when financing, costly maintenance, and higher car insurance  premiums. To make matters worse, these are all costs associated with a depreciating asset! You will continue to throw money at something that becomes worth less every single day. I may not be a mathematician, but even I know that isn’t how you build wealth. Let fools be easily parted from their money as they sink it into hunks of plastic and steel. You can find a better use for your hard-earned money, can’t you?

3. Letting Your Money Trickle Away

We all know that big purchases can be costly, but it’s the little things that can kill you. You need to plug your money leaks if you want to find a little extra in your budget each month to save, invest, or pay off debt. It’s the premium movie channel, the extra text message plan for your phone, the magazines you never get around to reading or the Netflix movies you find yourself holding on to for a month before watching them. Each of these may only be $10 a month individually so it doesn’t seem like much, but when you take a look at all of the little expenses that aren’t being fully utilized each month you could be sitting on a few hundred dollars that’s going to waste.

It’s like the leaky faucet in the bathroom. You may only see a single drip every few seconds and it’s hard to imagine those add up to much, but a single leaky faucet can waste over 1,000 gallons of water a year! The same thing goes for your money. A dollar here, five dollars there, and you hardly notice it on a weekly basis. But over a year and beyond you’re literally wasting thousands of dollars. Think about what it could mean if you were saving a few extra thousand dollars a year instead. It could mean an early retirement.

4. Cashing Out Retirement Funds

There is a reason these are called retirement accounts — because they are meant for retirement! This is a problem that many people face and it’s usually a result of other underlying money problems. Nobody wakes up in the morning and says, “hey, I think I’m going to go cash out my 401(k) so I can go buy a new Corvette for the heck of it.” Actually, I think there are some people like that, but this isn’t why most tap into their retirement funds. Instead, it’s usually more about a financial emergency that leads to this decision. Maybe you lost your job, encountered a major medical emergency, or are faced with any number of other hardships. But tapping into your retirement fund either by liquidating or taking a 401k loan can do more harm than good. And let’s not forget the cardinal sin of retirement savings — cashing out your old 401k instead of doing a 401k rollover.

It’s like robbing Peter to pay Paul. This is your money, but if you take something out of one account just to pay for something else you haven’t really solved any problem. Yes, you may have been able to put out a short-term crisis, but now you’ve created a long-term crisis. Ultimately, this could lead to requiring you to work much longer than expected, sell off assets when you do retire, or maybe skip retirement completely. None of those options are good ones, but it’s a reality if you rob your nest egg early. It not only takes money away from your retirement account, but it can cost you dearly in unnecessary taxes and penalties just further complicating matters. So, make sure you don’t treat your retirement funds like a savings account. They should be an absolute last resort in a time of need and you should work on plugging some of your money leaks and apply that to an emergency fund to help you in a time of need.

5. Paying Too Much for College

When you’re in high school all you keep hearing about is preparing for college. After all, these days it’s pretty much expected if you want a good job you have to get a degree. For many career paths this is true. And in some professions you need to go beyond and get a graduate degree or more. While there’s not much you can do about the fact that some professions require degrees, for the large majority of students there are steps they can take to minimize the burden of a college education.

For one, you don’t have to go to a private school to get a superb education. While some schools are going to be better than others, picking a school because of their name is like buying a $200 pair of designer jeans over a $50 pair of tried and true Levis. Both will accomplish the same thing, but one costs a lot more and it may or may not pay off in the future. And don’t neglect community colleges or state schools for the first year or two before transferring to the school of your choice. Knocking out many of the basic courses in the first two years could literally mean a savings of $100,000 on your total education bill.

Finally, don’t make the mistake of assuming you can just get student loans to pay for it all and you’ll be making enough money when you get a job after graduation that paying them off will be easy. It’s not. Ask anyone with a run-of-the-mill bachelors degree who has financed their entire education with loans. They may be well over $100,000 in debt and lucky to be making $50,000 a year. They will be spending the next ten years essentially making a mortgage payment and tying up valuable funds that could be going towards a retirement account, emergency savings, or a down payment for a house. If you’re a student thinking about college, make a wise decision and don’t think that you can just throw money at an education and that it will pay for itself when you graduate. And if you’re a parent you should start planning early and decide how and if you want to help your children out with college. This could mean starting a 529 plan or at least setting some expectations with your child so they know what to expect. But whatever you decide, make sure you weigh the pros and cons of saving for retirement vs. saving for college.

6. Starting Too Late

Ask any 20-something what their plans are for retirement and you’ll probably get a confused look or outright laughter. When we’re young we feel as if our whole life is still ahead of us. And for the most part that’s true, but that doesn’t mean we have time to wait before starting to save. You see, there’s this little thing called compound interest that’s willing to put your money to work, but it requires one crucial element in order to do its job. Time. Without time the value of interest is virtually eliminated.

The problem is that compound interest is not linear. If you’re investing $5,000 a year you can’t just say that if you wait two years to get started you can figure your account will only be roughly $10,000 less. No. Instead, waiting just two years to start saving $5,000 could end up costing you over $50,000 by retirement. And that’s just two years. When you make the mistake that many people make by waiting five years, ten years, or even longer until the “time is right” to start saving you’re literally throwing a few hundred thousand dollars out the window.

Here’s a tip for you: there’s never a good time to start saving. I hear it all the time. People say they want to wait until they get a better job before saving. Then they want to wait until they settle down. Then suddenly there’s a child on the way, so now they want to wait until the craziness of being a new parent subsides. Then another child is on the way and they are shopping for a bigger house so they want to wait until that gets squared away… Let’s face it. There is always something going on in your life that can be used as an excuse to wait. Stop making excuses and just start! Time is either your greatest asset or your greatest enemy. It’s only up to you to decide how to utilize that time.

7. Not Setting Any Goals

The previous six money problems dealt with fairly specific financial decisions gone wrong, but the seventh bad decision isn’t as exact. Instead, it has to do with setting goals. This is a pretty broad topic and really, everyone’s goals will be different. But the problem is that most people don’t take the time to outline specific financial goals. Sure, people tell themselves that they want to save more, invest more, spend less, get out of debt, and all of that, but being that generic is not helpful.

You need to be specific and set concrete goals so that you can put a plan together to reach them and then have something to track your progress. Instead of just saying you’re going to start building an emergency fund, be specific and say you’re going to set aside $10,000 in 12 months. Ok, now that you have a specific goal set you can start putting a plan in place to reach that goal. You know exactly how much you need to set aside each month to reach that goal ($833) so every month you can track your progress. If you fall short, you’ll know and can then think about ways to make up the difference.

If you aren’t setting specific financial goals you have no real way of knowing how you’re doing. You want to retire at 60? Who doesn’t? But the real question is how are you going to get there? Just telling yourself that you need to put money into an IRA each year so you can build a nest egg is not enough. Instead, you should be calculating how much money you need to retire, how to allocate your investments so that you can reach that goal, and then hold yourself accountable over the years. Without goals you’re basically adrift in the sea and going wherever the current takes you.

Don’t Make the Same Mistakes

Hopefully you can avoid falling into these traps and make better decisions with your money, but don’t get discouraged if one or more of these apply to you. We’ve all been there, myself included. I bought a house for the wrong reasons, spent too much on a car, got a late start in saving for retirement, borrowed a ton of money to try and get a worthless graduate degree, cashed out an IRA in a time of need, and wasted thousands of dollars on useless little things. But if you can identify the problems and admit that you’ve made some mistakes you can learn from them and turn things around.

Do you need to improve your credit history? If you’re like the majority of Americans, the answer is yes. According to FICO, 60% of all people have a credit score less than 750. This means there is plenty of room for improvement for many people. There are many methods to check your FICO Score and Report.While you can’t simply fix your credit history overnight, there are many things you can do to begin building a more positive credit history. Here are 15 steps you can take:

1. Pay Your Bills on Time

This one is probably quite obvious, but it has to be mentioned right out of the gate. The single greatest factor that determines your credit score is your payment history. If you pay on time and continue to do so for years, this will lay a solid credit foundation. One thing you do have to keep in mind is that this goes beyond just paying your credit card, mortgage, or car loans on time. Even things such as utility bills, cell phone, rent, and so on will likely be reported if late. While these types of accounts don’t generally show up on your credit report if you’re in good standing, they usually will still show up as a blemish if you’re late (usually after 30 days late).

2. Don’t Bounce Checks

What does bouncing a check have to do with your credit history? On the surface, it seems like an innocent bounced check wouldn’t be of much concern other than the overdraft fee, but it can adversely affect your credit history. While your overdraft may not show up on your credit report, most banks have their own system to track customers with bad finance habits. It is called ChexSystems, and if you don’t think it will show up the next time you’re looking for an auto loan or mortgage through a bank or credit union, think again.

3. Start Small

If you have a limited or poor credit history, the likelihood of being approved for a large amount is slim. Without a proven credit record, most lenders won’t be willing to extend significant amounts, so it is in your favor to start with smaller requests. A lender would like to see that you are financially responsible with a relatively small amount before taking on more risk with a larger sum. Sometimes you have to crawl before you can walk, but even a good payment history with small amounts can go a long way towards proving you are responsible over the long run.

4. Visit Local Lenders

A local lender may be more willing to extend credit to you than a large national chain. In many cases with the large chains, your Social Security number simply gets run through a computer that checks your credit information and automatically approves or denies your application. When you work with a small and local institution, the decision may be based on more than a simple computer calculation. They may know you personally, know your employer or family, and this can potentially lead to an approval.

5. Apply for a Secured Credit Card

If you are having a hard time getting approved for any standard credit card, you may want to consider opening a secured card. To establish a secured credit card, you typically have to keep a deposit with the bank that can cover the charges you make on the card. This works as collateral just as a home or vehicle would be on a mortgage or loan. While it won’t quickly improve your credit history, it will begin to show that you are financially responsible and lead to possibly getting approved for other loans or credit cards to further build your credit.

6. Apply for a Small Loan or Credit Card with a Co-Signer

If you’re unable to get approved for a loan or card by yourself, you may consider applying with a co-signer. This is different than just adding an authorized user as it an actual joint account. Use this as a last resort and keep the limit small, but if you maintain a positive repayment history on this account, it will help you begin to establish and improve your credit history.

7. Review Your Credit Report Once a year

When you know you have bad credit, one of the last things in the world you feel like doing is pulling your credit report just to be reminded of it, but it is still important to check it annually. The information is usually accurate, but mistakes do happen on occasion, and even worse, you may notice fraudulent activity. It is in your best interest to correct these issues sooner rather than later. If too much time passes before you try to resolve an issue, it may be too late, and that inaccurate mark won’t disappear for seven years.

8. Review Your Credit Report a Few Months Before Requesting a Major Loan

When you’re thinking about applying for an auto loan or a home mortgage, make sure you give your credit report a once over a few months before going into the application process. This will give you a head’s up on any potential inaccuracies so that you can have them resolved before going into the loan, or at least help you be prepared to explain to the lender why an item is on your report and whether or not it is being resolved. The lender is certainly going to pull your report, so the last thing you want to do is go in uninformed and possibly face a surprise.

9. Avoid Letting Accounts be Turned Over to a Collection Agency

If you thought a few late payments to your lenders was bad, you don’t want to entertain the idea of letting your accounts go to collections. The last thing a lender wants is to turn over an account to a collection agency because they will only recover a fraction of the outstanding debt even if you pay the collection agency in full. Since the lender doesn’t want to turn you over to collections, it is in your best interest to work with the lender directly when problems arise. If you’re already late and foresee a problem of getting your account current, give them a call and see if they will work with you. In most cases they will work to develop a more reasonable payment plan so that this can be avoided.

10. Avoid Having Judgments Filed Against You

Being dragged into court faced with a judgment against your debt is clearly not a position you want to be in. Unfortunately, if you fail to repay a debt, this is a very real possibility. Just like with collection agencies, even if you pay what the court says you owe, the judgment will stay on your credit report for seven years. This will not help your chances of getting approved for a credit card or loans. Again, it is in your best interest to work with your lender at the first sign of a problem to avoid this from happening.

11. When Denied Credit, Review Your Credit Report

When you’re denied a loan or credit, the lender is required to offer you a copy of your credit report at no cost. While they may give a brief explanation as to why you were denied, this is a good time to pull your report and find out exactly what they saw. It could be a legitimate problem with your history, but you also want to keep an eye out for something out of the ordinary if this denial came as a surprise.

12. Try to Avoid Constantly Switching Employers

Understandably, this isn’t always possible, but if you have the option and ability to remain at an employer you should do so if you’re seeking credit. Lenders like to see stability in employment as stable income means you’ll have a better chance of making good on your payments. Once you’ve been with an employer for about five years, this really begins to improve your chances with lenders. Of course, this doesn’t mean you should stay at a dead-end job just for the sake of your credit score, but you do need to be conscious of the fact that this does play a role in your chances in being approved.

13. Try to Avoid Frequent Changes in Residence

Just like constantly moving from job to job, lenders like to see stability in residence. If you’re renting a new place every year, the lender will wonder why you need to keep moving. Lenders also look favorably upon homeowners, so if you currently do own a home, this can also help.

14. Work to Increase Your Income

Easier said than done, but your debt-to-income ratio is quite important when it comes to getting approved or not. In addition to the actual ratio, lenders like to see regular increases in your income. Whether this is through annual raises or occasional bonuses, this can help your chances of getting approved. Also, if you are expecting a bonus sometime shortly after applying for a loan, bring this up to your lender. Knowing that you’ll be receiving additional income can be a deciding factor if you are on the line of being approved or not.

15. Work to Decrease Your Debt

The debt-to-income ratio can be improved by decreasing outstanding debt. The more income you have relative to your debt, the better. So that means if you can’t easily increase your income, you can achieve the same results by decreasing your debt. If you continue to use credit cards while paying them off, your amount of debt relative to your income won’t improve. On the other hand, if you can show that you have consistently been reducing your overall debt for a period of time, this can look as good as showing regularly increasing income.

Remember, It Takes Time

It can be frustrating, but working to establish or improve your credit history takes time. There isn’t an overnight solution, so you have to approach this as a long-term goal. If you’re just beginning to establish credit for the first time, take things slow and begin by opening a few small accounts. With these initial accounts, make sure you use the credit wisely and develop sound habits. It won’t be long and you’ll be on your way to building a great credit history.

If you already have a credit history but it has been damaged by something mentioned above, don’t despair. While you won’t be able to increase your score 200 points in the span of a a couple months, following the suggestions above will put you on the right track to begin increasing your score. But whatever the situation, it is important to monitor Your FICO® score & credit report.

On the surface, this would make sense. A whole life policy does in fact build up cash value over time, whereas a term policy is “use it or lose it”, meaning if you don’t die before the term is up, you get nothing out of it. Even though building up cash may sound better than not, it is important to understand how a whole life policy actually works.

Whole Life Insurance

Whole life insurance is designed to pay out a predetermined benefit upon death, while also building cash value via an investment component. There are various types of whole life policies, from universal, variable, and traditional, but they are all the same aside from how the cash value portion is invested. The problem with whole life is that not only are you paying for the coverage premium, but you’re also paying into the cash value portion. This makes the premiums much higher than term insurance.

Rate of Return and Fees

A typical whole life policy will have an internal rate of return, which is how much interest your cash value will earn after fees and expenses are deducted. Unfortunately, most whole life policies are like mutual funds with high expense ratios; after you factor in the annual fees, the actual return is minimal. In some cases you may only earn a couple percentage points. You’ll also want to be aware of penalties or fees incurred when canceling a policy, as these can be quite steep.

Why Term is Better

Even though you may never receive a payout from your term policy, remember, you are just buying protection for your loved ones. Insurance always seems like a waste when you never see the rewards, but if you don’t have any coverage and the unfortunate does happen, the results can be devastating. So, what seems like a better deal; paying a lower premium that builds no cash value, or paying a much higher premium to earn 3% on only a fraction of the amount?

For working adults, term is almost always the way to go. Typically you purchase insurance once you get married and/or have children. Once the kids are out of the house and you’re beginning to approach retirement, your need for life insurance drops rapidly. This is why a 30 year old would be perfectly fine with a 30 year term policy.

Want to know just how affordable term life can be? Get a free quote.

Does Whole Life Have Any Use?

Whole life policies do have their place, just typically not for working adults. These policies can provide significant wealth transfer and estate planning benefits, but are more than likely far too costly for someone in their 30s or 40s. You really need to be careful when dealing with an insurance salesman as they can do a pretty good job at making whole life sound like an investment. Granted, there is an investment component, but you can save money by buying a term policy and earn far more by investing the difference elsewhere.