It's been a long time since I've checked in with my roommate for advice, but when that roommate is MSNBC anchor slash financial expert Ali Velshi, well, it's only natural that I'd turn to him, right?
Ali isn’t really my roommate… but a decade or so ago, we shared an office when we were both working as correspondents at CNN.
So, you’ll have to excuse me, but I still call my old friend, “Roomie.”
Ali is the best at making the often-confusing world of finance easy to understand.
Which is why I called him to get his take on how to get your personal finances back on track.
It’s a new year. We’re all trying to be better at that, aren’t we?
ALINA CHO: We're coming out of the holidays. We all, myself included, spent a little too much on Christmas gifts. So, let's say you have debt. How do you tackle it?
ALI VELSHI: The first thing is that debt comes first. Deal with your debt before you deal with your investments. And keep in mind, interest rates are going to go up. So, this is going to become more urgent if we don't deal with it.
ALINA CHO: Right.
ALI VELSHI: And the first thing you need to do is check your credit score.
ALINA CHO: And what is a good credit score?
ALI VELSHI: Generally speaking, 650 or above.
ALINA CHO: Got it.
ALI VELSHI: If you're above 700, you're in a really good position. But you want to know where it is. Because let's say you're at 630, and you've got too much debt. Well then, do the things necessary to get your credit score high. Which you can do, by the way, in a matter of days. Credit scores can be adjusted if you fix certain things very quickly.
ALINA CHO: Such as?
ALI VELSHI: Let's say you've got a little bit of cash lying around and you can reduce the amount of money you owe by $1000. You may see an immediate bump in your credit score because credit scores are in part payment history, and in part your ratio of debt to earnings. There's all sorts of apps that'll tell you, "You're running at 32 percent of your debt to income. If you get below 30, your credit score will shoot up.”
ALINA CHO: Got it.
ALI VELSHI: Now, what do you get for that? Just paying off a little debt might raise your credit score enough to put you into a negotiating position to lower your interest rates.
ALINA CHO: I didn't know that.
ALI VELSHI: Yep. Usually, 30 percent is the limit. If you're using more than 30 percent of your available credit, it will negatively affect your credit score.
ALINA CHO: Interesting.
ALI VELSHI: Let's say you have $10,000 [in available credit]. If you're carrying more than $3000 in debt, your credit score will go down. Now, what are your answers to that? Lower the $3000 to $2750 or open another credit card. Believe it or not, [opening a new credit card can] increase your credit score because you'll have more available credit.
ALINA CHO: So, let's say you have two credit cards. Both have debt. Which one do you pay down first?
ALI VELSHI: The one with the highest interest rate.
ALINA CHO: Always.
ALI VELSHI: Don’t put the same proportion to everything. Pay off much more of your higher interest stuff and pay the minimum on your lower interest stuff.
ALINA CHO: You’re a big fan of keeping a budget.
ALI VELSHI: Most people have no idea of their budget. They know what their big expenses are, they've got a mortgage or rent, they know what that is. If they've got a car, they know what that is. But once you start getting into smaller things, people don't track it.
ALINA CHO: Right.
ALI VELSHI: So, it could be that you're blowing a lot of money on taxis.
ALINA CHO: Yeah, the so-called $5 Starbucks every day. It adds up.
ALI VELSHI: Right. So, there are apps now that do this. But I'm old school, so I do it on an Excel spreadsheet, to this day.
ALINA CHO: So, what does that do, Ali?
ALI VELSHI: It tells you where you're going wrong, or it tells you where you can go right. Let's be positive about this. It tells you where you can go right.
ALINA CHO: Right.
ALI VELSHI: Most people can find something to say, "Here's what I can prioritize." Let's say you like eating out, it allows you to say, "Look, I spend too much on eating out, and I don't clearly get the fulfillment out of it. So, why don't I limit it? Why don't I cut it in half, and enjoy the experience more?"
ALINA CHO: What’s the best way to think about saving money?
ALI VELSHI: So, I tell people, even people who remain in debt, other than just a mortgage, I do think that they should save. And save in the ways that are most advantageous, which for many people is a 401(k). Because your employer gives you a match. If somebody's giving you free money, you definitely should do that. And put in as much as you can.
ALINA CHO: Max it.
ALI VELSHI: So, someone says, “What if I've got a 401(k) and I've got debt, how do I manage that?" You have to look at it seriously. Because if you've got debt that’s at a 10 percent interest rate, then you want to prioritize that. But the discipline of monthly saving, especially the kind that comes off your paycheck, is remarkable.
ALINA CHO: You don't feel the pinch because you don't even see it.
ALI VELSHI: The compounding benefit of money that you never see because it comes out of your paycheck and you don't even know you have it, and yet it's building in an account, and it's perhaps invested in the stock market and is doing well, is magic money.
ALINA CHO: Of course.
ALI VELSHI: People bring me their 401(k) accounts to look at, and I'm surprised at the number of them who are invested in a way that is not commensurate to who that person is.
ALINA CHO: What you mean?
ALI VELSHI: Young people who have all their money in bonds. When you're young, you should be all over the stock market.
ALINA CHO: You can take the risk.
ALI VELSHI: Correct, yeah. So, the way you do that is a risk tolerance test. Just google risk tolerance test. It's 10 to 15 questions that will determine what your risk tolerance is. Basically, what it generates at the end is a pie chart that says, "This percentage should be in stocks, this percentage should be in bonds, this percentage should be in cash." And make sure, as you're investing, that your investments reflect your risk tolerance.
ALINA CHO: Let's say you don't have a 401(k). What do you do then?
ALI VELSHI: Then you should do some version of what I call forced savings. The one thing that the 401(k) does is it forces you to save because it takes it out of your paycheck.
ALINA CHO: Right.
ALI VELSHI: Any bank will do that. Any investment company will do that for you. You can arrange for them to [take out money] on a monthly basis, or a biweekly basis as you get paid. That's just the best way to do it. Because if you have that money, it's very hard to have the discipline to save it.
ALINA CHO: Is there a percentage that you should aim to save every time you’re paid?
ALI VELSHI: No, because it depends on the budget. You have to start with your debt, then you have to start with a budget. For most people, the number will be determined because they'll say, "This is what I can…
ALINA CHO: Well, this is what's left over.
ALI VELSHI: This is what's left over, right. And you might keep some of that because you say, "I'm going to go crazy if I can't take a vacation," or whatever the case is. I never want people's savings to deprive them of the enjoyment of life. But it does protect your enjoyment of the latter part of your life.
ALINA CHO: Good point.
ALI VELSHI: You do these things that we’ve talked about, you will be much further ahead than most people. And I think it reduces stress.
ALINA CHO: The final thing I want to talk about is the labor market and the so-called great resignation. The latest numbers in January show that four-and-a-half million people left their jobs voluntarily, which is an all-time high.
ALI VELSHI: Well, look, generally speaking the high-level way to read these numbers is that when there is turnover of that nature, the worker is feeling empowered. Now, that's not 100 percent true. Some of it is mothers who can't go back to work because they don't know with consistency whether their kids are going to be in school. But generally speaking, the last couple of years has done two things. One is it has caused a lot of people to reflect on their careers and their jobs, and decide that maybe they want something else. It's given some people the opportunity to retrain and take courses.
ALINA CHO: Right.
ALI VELSHI: And there has been a real worker empowerment movement. You've seen unions forming, you've seen wages go up for restaurants. We've been battling to get the minimum wage up from $7.25 for years. It's gone up on its own. It's gone up organically, because you can't find workers.
ALINA CHO: Exactly.
ALI VELSHI: So, everybody's holding out a little bit, because they're saying, "Wow, wages are going up, I've got options, I've got choices. I nearly died the last two years, I'd like to actually do something I like." So, it's a great, great market.
ALINA CHO: The occupational world is your oyster?
ALI VELSHI: That is exactly right. It's all your oyster in a way that it's never been before.
ALINA CHO: So, you don't look at those numbers, four-and-a-half million people leaving their jobs voluntarily, and see that as a negative?
ALI VELSHI: I do not. I see it almost entirely as a positive. That a whole lot of people are able to make a decision that says, "I will find something better."
ALINA CHO: Well, you are a half glass full kind of person.
ALI VELSHI: That's correct. You have an opportunity to improve your lot in life, your economic lot in life. It's not free, you might need to do some training for it. But the point is, jobs are out there.