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The One Simple Habit That Can Help You Enjoy a Great Financial Future

June 26, 2017 debtmanagement

Do you want to work until you’re 67 ½?

We didn’t think so.

You’d probably prefer to retire early and this is possible, even if you’re currently close to dead broke.

The answer is to create one simple habit – planning ahead.

What statistics tell us

People who said they thought about retirement “a lot,” or even “a little” – got to retirement age with twice the amount of money as people who didn’t plan for retirement. This is according to a study done in 2007 by the Pension Research Council.

Here’s another fascinating statistic. Parents who had a plan as to how they would pay for their kids’ college education ended up saving 76% more than parents who saved for their child’s’ education but didn’t have an actual plan. This is according to Sally Mae’s 2016 report How America Saves for College 2016.

And a study done in 2015 by the Center for Financial Services Innovation (CFSI) found that U.S. families who plan for big emergency expenses were 10 times as likely to be healthy financially as those that don’t.

Financial health defined

How did the CFSI define financial health? It defined it as having retirement savings and an emergency fund, high credit scores, a sustainable debt load, and property, health, and life, insurance.

People who do plan don’t focus just on long-term goals, either. They also plan and save for near-term expenses such as those that will come up in the next week, or the next six months. The fact is that you can’t dream about having a future free of debt if you don’t first have a plan for paying tomorrow’s bills.

If you can’t plan because you’re too worried

If you’re so broke you’re having a hard time just coping with today’s expenses, it’s hard to plan. In fact, according to two college professors – one from Harvard and the other from Princeton – our brains are wired in such a way that we tend to make matters worse when we don’t have enough of what we require.

If you’re having a tough time making ends meet, you will be so focused on solving today’s problems you’ll actually have less mental energy available for much else. This preoccupation actually makes it more likely that you’ll forget things and make mistakes because you’re so preoccupied with immediate problems. For example, some people take out high-interest loans that make it even tougher for them to pay their next month’s bills. In fact, believe it or not, if you’re preoccupied with financial problems, your IQ can drop by as many as 13 points, which is about equivalent to being up all night. In addition, this can have a negative effect on our ability to control our impulses and resist temptation.

Find some breathing room

The two professors mentioned above have also said we need “slack,” or time that can lessen our cognitive loads. If you’re time-strapped, this could mean keeping open a couple of 30-minute slots during the day to deal with unexpected events. If you are financially strapped, “slack” means creating at least a small emergency fund. Having just a couple of hundred dollars put away could cover an insurance deductible or a car repair. But what’s really important is that this can ease the mental strain that comes from living from payday to payday.

Develop the saving habit

Once you’ve developed some slack in your financial life, you need to develop the habit of saving. What financial advisors say is that we need to pay ourselves first. This means saving some money each month or each payday before paying your bills. Households that are financially healthy often use other plans for saving money, such as banking all of one spouse’s income while living on the other’s. Other people say their tax refunds, bonuses, or money gifts.

The important thing is that just doing it’s more important than how you do it. Once you develop the savings habit, you can then begin planning – even if it’s for just a few weeks ahead.

In summary

Many financial articles stress that it’s important to not overspend today so you can be saving for the future. However, what people most often need is to save and plan for the near-future. When you do this, you should find it much easier to manage the long term.

The 7 Rules of Personal Finance You Absolutely Need to Follow

December 26, 2016 debtmanagement

There are some parts of personal finance that can get pretty complicated – especially those that have to do with investing. There is an almost bewildering array of ways to invest money, all of which have their upsides and downsides. There are people who make literally hundreds of thousands of dollars by picking just the right stock at the right time. Then there are others who lost thousands of dollars picking the wrong stock at the wrong time. Then, in addition to investing in individual stocks there are mutual funds, index funds. bonds, bond funds. Options, a thing called FOREX, gold, silver, real estate – the list goes on and on.

However, there are some things about personal finance that are not at all complicated. In fact, there are rules that have been developed over the years that are pretty darn simple but that you should absolutely follow. And here are seven of them

Don’t think your salary is the same as your savings

A simple truth that many people fail to understand is that your net worth is a lot more important than your salary. Just because you have a big salary doesn’t mean that you’re automatically rich. And you’re not automatically poor if you have a low salary.

Investing is less important than saving

Our second important rule is to first pay yourself. This may sound like the height of simplicity but it’s absolutely essential. Maxing out your savings is the best investment decision you can make because that will give you a big margin of safety in your life. Many financial experts say that before you start investing you need to have the equivalent of six months of your net income tucked away in an emergency fund. This may sound like too ambitious a goal but if you start saving money out of every paycheck you should be able to accomplish it much quicker than you might imagine.

Avoid debt like Ebola

You should try your best to avoid all debt but the one type of debt to avoid like Ebola is credit card debt. This is because it’s just about the number one way to reduce your net worth. Credit card debt can have interest rates as high as 17% or even 19%. Here’s what these interest rates translate into. Say that you owe $5000 on a credit card at 17% interest and make just a minimum payment of $100 each month. Do this and it will take you 87 months to pay off the debt assuming you charge nothing more on that card.

Always get your employer’s 401(k) match

If your employer offers a 401(k) and will match the money you deposit each month up to a certain percentage then take advantage of this without fail. Money your employer contributes is basically free money. If you turn this down it’s like turning down a tax deferred part of your salary each year. While you should max out your retirement contributions if at all possible you should always – at the minimum – save enough to get the match.

Learn your spending habits

Do you understand your priorities? If not, you need to look at where you spend money every month. If you ever want to get your finances under control you have to learn your spending habits. Your goal should be to spend money on cut back on everything but the important things. If you cover your essential expenses and then pay yourself, you’ll never really have to think about budgeting. You can then just spend whatever is left over.

Automate everything you can

If you want to make your life easier, avoid late fees and save more money you need to automate all of your financial life. You should be able to automate your bill paying and saving through your bank. If you find that there are some bills you cannot automate through your bank, you should be able to do it by contacting those companies directly. Once you get everything automated it should take you no more than 60 to 70 minutes a month to keep track of everything.

Get your big purchases right

You can save money by brown bagging your lunches, by eliminating those drive-through lattes, and dining out less but none of these will save you a lot of money. The places where you can save big money is in your big purchases. When it comes time to buy a new vehicle you could spend $50,000 or $60,000 on one of those humongous SUVs or you could buy a nice four-door sedan for $25,000 – and save $25,000. Plus, you’d have much lower monthly payments, which should free up money you could tuck away in your savings account.

Budgeting Mistakes and How to Fix Them

October 25, 2016 debtmanagement

You have a budget? Congratulations. Having a budget is the first and most important step towards smart money management. In fact, it’s virtually impossible to do a good job of managing your money without a budget. However, creating a good budget is not an easy task. And even after you have one it’s easy to make mistakes. Here are eight of the biggest blunders people make in budgeting and how they can be fixed.

Neglecting to have a system

What system do you use for tracking your spending? If you don’t have one, it’s important to get one. You could use a budgeting app such as Mint or an old school system like Mvelopes. The fact is that if you don’t have a system for tracking your spending you won’t know where your money’s going and won’t be able to make adjustments to your budget as prove necessary. It really doesn’t matter which system you use. The critical thing is to pick one and then stick with it.

Creating too rigid a budget

Despite what you might think you won’t spend the identical amount of money in the same categories every month. You need to have enough space in your budget to accommodate seasonal fluctuations such as Christmas holiday shopping and summer vacations. If you create a budget that’s too rigid you may find it hard to stick to it, which would derail all of your best planning.

Impulse purchasing

Even the best of budgets will prove useless if you refuse to stick with it. You will need to cut down considerably – or even totally eliminate – impulse shopping and the habits that lead you to it. For example, if your Achilles’ heel is jewelry, stay away from jewelry stores. If you just can’t pass up the latest and most fashionable shoes, then don’t go to shoe stores or the mall.

Not accounting for quarterly and semiannual bills

One of the biggest blunders made by even the smartest of budgeters is forgetting their quarterly and semiannual bills. You need to leave room in your budget to cover them so that they don’t jump up and poke a hole in your budget when they’re due. Bills in this category include things such as annual tax bills, insurance payments and vehicle maintenance payments. Next time you have a few minutes, sit down, go over your old checking account records and make a list of your semiannual and quarterly payments. Then adjust your budget to make sure the money will be there when those payments come due.

Forgetting to save

A good budget needs to include money for saving as well as monthly expenses. The sad fact is that if you’re not saving regularly for retirement you’ll probably never be able to retire. You also need to make room in your budget for an emergency fund. The “experts” say an emergency fund should be the equivalent of six months’ living expenses but that’s a pretty lofty goal. A good start would be to save $1000, which would be enough to at least cover an emergency auto repair or medical bill.

Not budgeting for long-term financial goals

You really need to have some long-term goals and be saving toward them. This could be as little as just $10 a month to fund a new bedroom set or summer vacation. Having a goal and seeing that you’re making progress towards realizing it can be a real motivator to help you stay on your budget.

Refusing to be flexible on your fixed expenses

You may think that your fixed expenses such as rent or your mortgage payment, cable bills, utilities and insurance premiums can’t be altered but they can be. If you’re having a problem sticking to your budget think about downsizing to a smaller house or apartment, cutting your cable or trading in your car for an older one. Getting an older car should even lower your insurance premiums. In this era of Netflix, Hulu and Amazon Prime there’s just no reason to stay with a cable company. Most of today’s TVs have built-in tuners to receive local channels so that all you need to do to enjoy network broadcasts is buy a small antenna. Couple this with a subscription to Netflix or Hulu and you will be able to get just about all the programming you could want and for a fraction of what you’re paying for cable.

Failing to review your budget

If you’re not reviewing your budget every month you’re making a big mistake. This is especially important when you begin budgeting so you will be able to catch any expenses you forgot or any miscalculations you made on your regular bills. And if you do find inaccuracies you will need to tweak your budget to fix them.

6 Important Facts to Know About Borrowing Money

July 4, 2016 debtmanagement

There are situations where you will be borrowing money. For example, if you need to buy a major appliance you will probably need to borrow the money by using a credit card or getting a revolving line of credit. Of course, you will need to borrow money to buy an automobile or a house. And you may be required to borrow money to handle an unexpected and unbudgeted expense like a big medical bill or an expensive automobile repair.

How much it will “cost” you to borrow the money

When you borrow money you will be assessed an interest charge. That’s the “cost” of borrowing money. The amount of interest you will be charged will depend on your credit history, which will depend largely on your track record for repaying the money you borrowed in the past and how well you’ve paid your bills on time. This is why it’s important to pay attention to your credit history and your credit score.

Do you know your credit score?

Your credit score is a three-digit number that basically rules your financial life. If you have a good credit score of 780 or above, you will be rewarded with low interest rates and will find it easy to get new credit. Conversely, if you have a credit score of less than 600 you’ll be charged higher interest rates and may find it difficult to get credit from some lenders.

How lenders view credit scores

This is how most lenders view credit scores.

Excellent Credit: 781 – 850
Good Credit: 661-780
Fair Credit: 601-660
Poor Credit: 501-600
Bad Credit: below 500

If you haven’t seen your credit score recently, you need to do so. It’s becoming increasingly easy to get credit scores free on sites such as CreditKarma.com and CreditSesame.com. If you have a Discover Card, you may be getting your credit score automatically each month. The three credit reporting bureaus (Experian, TransUnion and Equifax) usually provide credit scores free as well.

Be sure to also check your credit reports

In addition to knowing your credit score, it’s important to review your credit reports periodically. There are available free from the three credit reporting bureaus or on the site www.annualcreditreport.com. While reading credit reports is about as exciting as watching grass grow you need to review them carefully as they could contain errors that are negatively affecting your credit score. And if you find any it’s critical to dispute them with the appropriate bureau. All three have forms on their websites for this purpose but the experts say it’s much better to write a letter disputing the item and making sure to enclose whatever documentation would prove your case.

Comparison shop when borrowing money

One good rule of thumb is to treat borrowing money as if you were making a major purchase. This means you should shop around to get the best deal you can, which means getting a loan with the best possible terms. For example, the best deal in credit cards today is the 0% interest cards that offer from six to 22 months’ interest free. If you were able to qualify for one of these cards you could make that major purchase and then repay the balance over two, three or even four months without being charged a cent in interest.

If you need a personal loan or personal line of credit, you might be able to get an interest rate as low as 5.99% – if you have really good credit. However, it’s also important to consider the term or the length of the loan. The reason for this is simple. The longer the term of the loan the more interest you will pay.

The importance of the APR

When you’re shopping for a loan, whether it’s in the form of a new credit card or a personal loan, the important number to pay attention to its APR or Annual Percentage Rate. This is critical because it’s the total cost of the loan, including both interest charges and fees described as a yearly rate. In fact, APR is one of the quickest and easiest ways to compare loans. For example, if you are considering two personal loans and one has an APR of 7.99% while the other has an APR of 8.50%, you can just about bet that the one with the 7.99% APR will be a better deal.

Always pay more than the minimum amount

Finally, the biggest dirty secret of credit cards is that the card issuers want you to pay just the minimum amount each month. In fact, this is how they make their money. If you have a rewards card with cash back, points or airline miles and pay off your balance at the end of every month, you’re actually costing the card issuer money. But if you pay just the minimum amount and rollover the rest of your balance into the next month you will fall victim to the power of compounding interest and could literally end up paying more in interest than the amount of money you had borrowed.

Could Just One Number be the Answer to Your Money Management Problems?

April 13, 2016 debtmanagement

Let’s face it. Budgeting isn’t much fun. It takes time and more than a little self-discipline. For example, most budgeting apps and software require that you spend at least a month tracking all of your spending. That can be a tough task for many people and it’s just the beginning. Once you’ve logged all your spending you’ll need to divide it into categories, determine where you can make cuts and then continue tracking your spending to make sure you’re staying within your budget. Fortunately, there is an easier solution. It’s called the One Number system.

Getting started

In order to get to your One Number, you first need to write down your take-home pay or net earnings. Don’t make the mistake of calculating your income based on your salary. You need to think in terms of the money you actually take home. One easy way to know that number is to use the amount that hits your bank account each month – after your deductions and any taxes.

Add up your fixed costs

Step two is to add up your fixed costs. While this tends to vary from person to person it generally includes your mortgage or rent, child care, cell phone and Internet bills, utilities, insurance payments and transportation – if you pay a fixed amount. Now, subtract that number from your take-home pay.

Determine your financial goals

This will require some thinking but you need to determine your financial goals. This could include things such as saving for a down payment on a house, cutting your credit card debt, contributions to your retirement fund, paying back student loans and building an emergency fund. Once you determine your goals you’ll need to decide how much money you want to contribute towards each of them every month. For example, if you are saving for a $5000 down payment on a house you might allocate $100 a month this goal and then, say, another $100 a month towards reducing your credit card debt. Whatever you decide, you will need to add up these numbers and then deduct the total from your equation (take-home salary minus fixed costs).

Calculate your non-monthly expenses

Irregular or non-monthly expenses are ones that you don’t incur every month. They may be irregular expenditures but they are usually ones you can expect such as haircuts, holiday gifts, school tuition, your annual car registration fee and home maintenance (if applicable). Add up these expenses, divide the total by 12 and you’ll know your average non-monthly expenses. Now, subtract this number from your equation.

Your One Number

Congratulations, now that you’ve subtracted fixed costs, goal contributions and average non-monthly expenses from your take-home pay you’ve arrived at your One Number, which is the amount of money you’ll can spend on discretionary items every month such as groceries, eating out, clothes, concert tickets, magazines and your other forms of entertainment. Just think about this for a minute. Your One Number is the amount of money you can spend on whatever you like.

You may need to do some fine-tuning

No matter how diligently you work to get to your One Number you may discover that after a month or two you may need to do some fine-tuning. For example, you may have run into a couple of non-monthly expenses you hadn’t thought about or maybe your auto insurance premium got bumped up. Don’t fret about this. Just make the necessary corrections and you’ll have a new One Number. And in just a few minutes.

Never but never exceed your One Number

Think how much simpler this is then traditional budgeting. You are probably able to arrive at your One Number in an hour or less. Wouldn’t it be liberating to know exactly how much you can spend on the fun things of life because you now know your One Number. But – spoiler alert – it’s critical to not exceed your One Number. If you do exceed that number, you’ll have to do one of two things. You’ll have to either go back and change one or more of your numbers to get to a new One Number or second, you’ll need to find a way to increase your earnings.

Other advantages

There are several advantages to the One Number system of money management. You already know the first, which is that it’s much simpler than traditional budgeting. Another is that it removes the biggest pressure of budgeting as it eliminates the need to track all of your spending. Plus, you won’t be lying awake at night wondering whether or not those new shoes blew up your budget. This is because so long as you can fit them within your One Number you’ll know you’re okay.