Using a Household Budget Final

7/30/2019 Using a Household Budget Final

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1

SecondEdition

PHILLIPE.DAY,AFC

AccreditedFinancialCounselor

WrittenforAcademyofFinancialLiteracy

www.academyoffinancialliteracy.net

8778332867

Copyright2010AcademyofFinancialLiteracyallrightsreserved

HouseholdBudget

&ManagingDebt


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Thisbookiswrittenforallwhohavethedesireto

learnandunderstandahouseholdbudget. Onlya

smallpercentageofhouseholdsuseawritten

budget. Forthosewhowouldliketolearnhowto

implementabudget,wehopeyouenjoythisbook.

Oureducationmission: Tomotivateand

influenceallwhohavethedesiretolearn

aboutpersonalfinances.


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3

Thenexttimeyouwalkintoalocalbankor

financialinstitution,lookforfreefinancial

educationmaterials. Thesadtruthis,veryfew

financialinstitutionsofferbasicfinancialeducation

fortheirclientsorcustomers. Thisisnottosay,

Thefinanceindustryisnoteducatingpeople.

Manyofthemajorfinancialinstitutionsdooffer

financialeducation,

but

is

it

accessible

for

every

one,orjustfortheirclients?

Wouldntitbenicetowalkintoabankandhavea

freebookavailableonbudgeting,orhowto

reduceandmanageyourpersonaldebt,and

improveyourcreditscore? Othergreattopics

oftenoverlooked,suchasmanagingyourcredit

report,shouldbeofferedaswell.

Manyparentswouldlikehelpteachingtheir

childrenaboutmoney,andhowtosavemoreand

spendless.

ThisisoneofourpassionsatAcademyofFinancial

Literacy.Wehaveadesiretomakepersonal

financeeducationavailableforeveryonewhohas

thedesire

to

learn.

Introduction


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Introduction

ThestatisticsforpersonalbankruptciesinAmerica

arealarming. Over1.5millionconsumersfiledin

2004.Thetrendofpersonalbankruptciesfollows

oureconomiccycles. In2009wewilleclipse1.4

millionpersonalbankruptcies.

Ouryoungadultsincollegeusethecarpedieminvocation: Liveforthemomentanddontworry

aboutthefuture.Over 100,000youngadultsunder

theageof25fileforbankruptcyeachyear. Student

loandebtfinanciallycripplesthousandsofcollege

graduates;manydonothaveaplantopayfortheir

unmanageabledebtload.

AhighpercentageofdivorcesinAmericacanbe

directlylinkedtothemismanagementofhouse

holdfinances.

Many

couples

lack

the

discipline

to

savefortheirfuturebylivingwithintheir

means.

Awrittenbudgetisthefinancialfoundationthat

canhelpyousucceedwithyourpersonal,and

familysgoals. Letusmotivateandinfluenceyou

tostartahouseholdbudget.Wecanshowyou

howtosaveandteachyoufinancialbalance. This

bookhasmanykeysthatwillhelpyousucceed

withyourfinancialfuture.


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PurposeandGoals...................Understandwhyyoushouldstartawritten

budget

BudgetingBenefits...................Understandingthebenefitsiskey

StartingaBudget....................

Learnhowtoimplementabudget

UsingaBudget.......................Byusingyourbudget,youwillbeginachieving

yourfinancialandpersonalgoals

BudgetReconciliation................

ChildrenandaBudget................

Yourfinanciallegacy

SampleBudgetSheet.................AnexampleofaonepageBudgetSheet

Savings.............................Savingsaccountsthatmustbeinplacetohelp

yousucceedwithyourhouseholdfinances

BuildingWealth......................

Abudgetisyourplanforbuildingfuturewealth

Contents

Page811

1213

1417

1821

22

2427

2829

3035

3638


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ManagingDebt.....................Abudgetisyourplanforbuildingfuture

wealth

DebtToIncomeRatios..............Usefulformulastoevaluatefinancialstress

DebtSnowball.....................

Asimpledebtrepaymentplan

DebtCollectors.....................Learnyourlegalrights

ManagingaCreditCard.............Theproperuseofacreditcard

CreditCounseling..................

DebtSettlement....................

ConsequencesofPayingLate........Learnwhatmayhappenifyouignoreyour

debts

DebtManagementKeyPoints........

RecommendedReading

list..........

Contents

Page3967

4244

45

4950

5153

5960

6162

6364

6567

69


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Thisisyourstartingpoint. Youmustputyour

purposeandgoalsinwriting.Whatisyour

purposeforsavingmoney?Whatisyourpurpose

fortrackingyourexpenses?Whycreateawritten

budget?Whatdoyouwanttoaccomplish?

Doyouthinkaboutyourpurposeandgoals? If

yousimplywanttomakeendsmeeteachmonth,

thisisagoal. Everyoneshouldhaveapurpose,

whichislinkedtotheirgoals.

Ashorttermfinancialgoalisoneyearorless. You

canhavegoalswithshorterterms,butafterone

yearthegoalbecomesamidtolongtermgoal.

Bepassionateaboutyourgoals! Besuretoput

yourgoalsinwriting. Dontbeshyabouttelling

othersaboutyourgoals.

Goalswillhelpyouwithmoneymanagement.

Withoutpurposeandgoals,manyjustspend

moneywithoutareason.Areyouspending

withoutareason?

Goalsshouldbeapartofeverythingwedoinour

life. Goalscanhelpyousucceedwithyourneeds,

plusputyouclosertoyourwants.

PurposeandGoals


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Inmanycases,theplantoachieveyourgoalsisas

importantasthegoalitself. Example: ItsJanuary

andmygoalistosave$10,000foradownpayment

onahouse,byDecemberofthisyear. Iwillusea

monthlywrittenbudgetsheettoseewhereIcan

reducemymonthlyexpenses. Iwillputmy

moneyinhighinterestsavingsorchecking

accounts,and

each

paycheck

Iwill

chart

my

savingsgoals.(TherearebankspayinghigherAPY

inhighyieldingcheckingaccounts.) Iwillreduce,

oreliminatediningout. Iwillreducemyvacation

spendingthisyearand findwaystoearnextra

money,suchasaweekend,oreveningjob.

Makingsacrifices,suchasforgoingshortterm

pleasuresforayear,isacceptingresponsibilityto

achievegoals. Beaggressive,passionateanddrivenaboutyourgoals.Mapyourstepswitha

writtenbudget,thenturnyourgoalsintoreality.

Dontbecomediscouragedifyouhavesetbacks.So

whatifittakesanextramonthortwotoachieve

yourgoals! Takeprideineachaccomplishment,

andshareyourgoalswithothers. Theywillbe

inspiredbyyoursuccesses.Whenyoufindgoals

yourepassionateabout,sacrificesbecomemucheasier.

PurposeandGoals


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Itcantbestatedenoughtoputyourgoalsin

writing. First,putthreegoalsinwriting,regard

lessofthetimeframe. Theycanbeshortor

longtermgoals.

BasicExamples:

1. Iwillhave1.5milliondollarsincashwhenI

plantoretireatage65,andownmyprimary

residence. Iam27yearsfromthisgoal,andmy

monthlybudget(SpendingPlan)ismymapfor

planningandchartingthisgoalachievement.

2. Iwillpayformychildrenscollegeeducation.

Thiswilltake$100,000andwillneedtobe

availablein15years. Iplantouseseveralcollege

savingsaccountstoachievethisgoal.

3. Iplantoincreasemyincomeby$50,000 per

yearduringthenext24months,bystartingmy

ownbusinessinretailinternetsales.Myplanisto

usemyskillsandtalentsIhaveacquired. Thiswill

requireIputabusinessplaninwriting.

Beveryspecific! muchmorespecificthanthese

examples. Eachoneofthesegoalsshouldtakea

pageormoreindetails. Beveryspecificwith

dollaramounts,dates,andtimeframe.

PurposeandGoals


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Besuretoexamineandreexamineeachgoal.

Yourgoalsmustprovokepositiveemotions. They

mustgetyouexcitedandgiveyouaburning

desiretoachieveyourgoals.

Foreachlongtermgoal,youwillneedtohave

shorttermgoalsofoneyearorless. Thesewillbe

linkedtoyourprimarygoal. Thiswillhelpyou

achieveyourmaingoal. Forinstance,inthe

retirementexample,youwouldneedtostartan

investmentplan.Withinyourinvestmentplan,

youwillhavespecificgoals. Yourbudgetwillhelp

youimplementandachieveeachofthesegoals.

Eachgoalwilltakeonalifeofitsown. Dontlet

anyonetellyouyourgoalsareunrealistic! There

aretoomanyexamplesofpeopledreamingbigandsucceeding.Theirrealitybecameevenbigger

thantheiroriginalgoal largerthantheyever

imagined.

Donotlistentopeoplewhosayyourgoalsare

unrealisticdreambigandsucceed.

Thereasonyoumustbepassionateaboutyour

goalsissimple: Yourdriveandpassionwillkeep

yourbudgetalivefortherestofyourlife.

PurposeandGoals


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BudgetingBenefits

Abudgetisadocument,orsetofdocuments,used

torecordbothactualandprojectedincomeand

expendituresoveraperiodoftime.

Thedefinitionofabudgetgivesagood

understandingofitspurpose.Wecandrawfrom

thisdescriptionthatabudgetlooksintoour

current

and

future

financial

picture.

Not

only

can

abudgetpredictourweekly,monthly,andannual

expenses,butourincomeandsavingsaswell.

Abudgetisourfinancialroadmap.Wecanchart

ourfinancialfuturewithasimplewrittenbudget

sheet.Abudgetcanbecomeapersonalhabitsowe

cancontroleverydollarweaccumulate.Wecan

alsocreateaplantosaveforourfinancialand

personalgoals.

Abudgetdoesonlywhatwetellittodo.Abudget

canreducefinancialstress,bygivingyouaclear

financialpicture,andmorecontroloveryour

finances.

Abudgetshouldbeahouseholdhabitthat

involvestheentirefamily.Manystudieshave

shownthatmostpeoplelearnaboutbudgingat

home.


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Thebenefitsofabudgetareeasytolist,sotake

noteandpreparetogetstarted.

Byusingahouseholdbudget,financialstress

canbereducedbyprovidingafinancialplan.

Budgetingpromotesfamilyvaluesthrough

financialdecisionsthatrelatetoafamilysgoals

andwhatisimportanttoeachofyou.

Budgetingisyourmapandplantosavemoney,

byshowingyouareasyoucanreducespending

andincreasesavingstoachieveyourgoals.

Budgetingcanhelpamiserfindfinancial

balanceandaspendersave. Remember,

financialbalanceishealthyandanimportant

goal.

BudgetingwillhelpyoubuildaRevolving

SavingsandSafetySavingsaccountincase

ofanemergency,suchasajobloss,divorce,ora

medicalsetback.

Budgetingisyourplantoavacation,newhome,

orretirement.

Also,

it

will

provide

motivation

toimproveyourincomethroughsavingsand

goalsachievement.

BudgetingBenefits


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Thestartingpointistosimplygetstarted! You

mustknowwhattoexpectfromyourbudgetand

whyyouaregoingtobudget.

Youmustbewillingtomakechangesinyourlife

whendealingwithyourfinances. Ifyoucontinue

todothesamethingsandexpectdifferentresults,

well,thisisinsanity. Bepreparedtomodifyyour

harmfulandwaste fullhabitsforusefulnewones.

Thingstoconsiderchanging:

Youdontneedanewvehicleeverythreeyears.

Buyusedandsavethousands.

Reducespendingonfoodandeatingat

restaurantslattesandentertainmentmustbe

budgeted.

BrownBaglunchesandtakeyourlunchto

work. Spendlessongiftsforyourfriends theywill

likeyoujustthesame.

StartingABudget


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Youwillbegintoseemanyareaswhereyoucan

reducespendingandchangeyourfinancial

situation.

UnderstandingthedifferencebetweenNeeds

andWants.

Example: Aneedissomethingthatisnecessary

tokeepthefamilyandhouseholdworkingproperly,suchasnewtiresforthecar,or autilitybill.

Examplesofawantwouldbeanewbigscreen

television,ornew,brandnamegolfclubs.

Weneedtoidentifysomewants,asthisisanarea

wheremanypeoplestruggle.Wewouldliketo

thinkthisiscommonsense,butitisnot;people

provethiseachdaybyspendingmorethanthey

earn,manytimesonunnecessarywants.

Examplesofunnecessarywants

thatcanbreakahouseholdbudget:

Unplannedvacationwithfriends

Anythingcustomizedonyourvehicle

Televisioncablebeyondthebasic

TelephonecallerID,callwaiting,cameraphone

iPod,Bluetooth,computergames,poolservice,

lawnservice,overgifting

Latestelectronicdevicetoshowoff

StartingABudget


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Letsstartbyfirstlookingatwhatyouhavedone

withyourpastfinances. Thiswillgiveyoua

startingpointtobuildyourfuturebudget.

1.Gatheryourprevious

bankstatementsand

checkbookrecordsfrom

thepreviousthree

months.

2.Youwillneedallyour

sourcesofincome. Gatherdocumentssuchas

paycheckstubs,SSIchecks,childsupportreceived,

dividendchecks,etc.

3.Ifyourincomevariesfromweektoweekand

monthtomonth,averageyourincomebytotaling

your

monthly

income

for

the

past

three

months,.

thendividebythree. Thisisagoodnumberto

startwith.

4.Weuseasimpleonepagebudgetsheetthat

emphasizesgoals. Formostofus,keepingour

budgetingprocesssimpleisarecipeforsuccess.

5.Startbyfillingintheincomecolumnsandenter

thetotal. UseyourNetIncome. (Thisisyour

actualtakehomepayaftertaxesandother

deductionshavebeentakenoutofyourpaycheck.)

StartingABudget


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StartingABudget

6.NextisyourFixedExpenses. Theseare

expensesthatdonotchangefrommonthto

month,butarestableforatleastsixmonths.The

budgetsheetwillcategorizetheseitems.

7.FlexibleExpensesareitemsthatyouspenda

differentamountoneachmonth. Formosthouse

holds,yourlargestFlexibleExpenseisgroceries.

Mostpeoplearesurprisedathowmuchthey

reallyspendongrocerieseachmonth.

8.Besuretoassignyourmoneytoacategoryand

putallyourmoneytowork. Ifyoufindyouhave

discretionarymoney(thisisthemoneyleftafter

yousubtractallexpensesfromyourincome)put

thistowardsincreasingyoursavings,then

reducingdebts.

9.Ifyourbudgetisnotinbalanceduetoashortage

ofmoney,thenyouwillneedtomakeadjustments;

theeasiesttargetsareFlexible Expensestoreduce

yourmonthlyexpenses.


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UsingAHouseholdBudget

10.Usingthegoalsideofyourbudgetsheet,seta

targetgoaltoreduceyourFlexibleExpenses.

Example: Youractual(current)monthlygrocery

expenseis$400. Onthegoalsideofyourbudget

sheet,setamonthlytargetgoalof$370,thenapply

the$30costreductiontoyourcreditcarddebt.

Makingsacrifices

to

achieve

your

goals

takesmaturityanddiscipline.

Usingthisprocesswillreduceexpenseswithin

yourmonthlybudget. Ifyouaretrulypassionate

aboutgoals,youwillfindareasinyourmonthly

budgettoreduceexpenses.Makingsacrificesto

achieveyour goalswilltakematurityand

discipline.

Besuretocustomizeyourbudgetsheetforyou

andyourhousehold.Additemstoyourbudget

sheetthatpertaintoyouruniquemonthly

expenses.

Examples:

Specialfoodforyourpetsnake

Specialloansowedtofamilymembers

Specialworksupplies

Letslookatmonthlyprioritiesthatmustbepaid

withoutfail.


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ExamplesofMonthlyPriorities:

Rent,mortgage,allnecessaryutilities,groceries,

transportation,Insurance,andsecureddebt.

Theseitemsmustbekeptcurrentandpaidbefore

otherexpensessuchasunsecureddebt(Credit

Cards)arepaid.

Ifyouarestrugglingtomakeendsmeetwithyour

budgeteachmonth,usetheseGeneralGuidelines

forreference:

Housingcosts....

Groceries........

Transportation ...

Utilities .........

Recreation.......

Savings..........

Debts............

Charities.........

Medical .........

Useyourgrossincometodetermineifyouare

withinthemonthlygeneralguidelines.

Example:Monthlygrossincomeaverages$3000,

andyourrentis$900. So$3000X30%=$900,and

youarewithintheguidelinesformonthlyrent.

Areastochecktoseeifyoumaybeoverspending

include:Transportation,Groceries,andHousing.

2535%

1013%

215%

510%

510%

1020%

510%

10%

510%


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Becreativeandmakethebudgetingprocessfun.

Asimpletrackingsystemfordailyandweekly

spendingexpensesistousea3x5(orlarger)

spiralnotebook.Writedownhowmuchyou

budgetedfortheweek,andsticktoyourbudget

plan.

Example:Labelapageforgroceries. Your

monthlygrocerybudgetis$400. Yougogrocery

shoppingweekoneandspend$75,sodeduct$75fromyour$400onthegrocerypage. Nowyou

have$325remainingtospendongroceriesthis

month. Youcandothisformostofyourflexible

expenses,suchas:

Groceries

Gasoline

Clothing

Entertainment

Spendingmoney

Gifts

Thisisaneasywaytokeeptrackofyourexpenses

eachweek.

Remember

to

plan

for

future

expenses,

suchasannualmemberships,autolicensetabs,

andbiannualautoinsurance.


WeeklyExpenses


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Keepingyourbudgetprocesssimple.

Manyfinancialcounselorswillhaveyoucomplete

acomplexfourpagebudget(spendingplan). This

isnotasimpleprocess. Formostofus,thiscan

takethefun,andsimplicity,outofbudgeting.

Thesebudgetswillaskforgrossincome(before

taxesandotherdeductions),thenaskforallofyourtaxinformationandotherdeductions. To

thesecounselorsIask,Whatisthepurposeofthis

exercise?WearenotlookingforaNetWorth

analysisbutasimplespendingplan.Whenwe

doaNetWorthanalysis,weneedmoredetailsand

morefinancialformsforacompletefinancial

picture.

BankswillnotcashyourGrossincome.

OnlyNetIncomeisusableforpayingbills,

Savings,andgoalattainment.

Succeedingwithyourmonthlybudgettakes

consistencyanddiscipline. Useyourbudgetona

regularbasis.Reviewittwiceperweek,andmake

sureyoureontrackbylookingatyourfinancial

accountsdaily.Aonepagebudgetsheet,asshowninthisbook,willhelpyousucceedwithyour

monthlyspendingplanandfinancialgoals.


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Mostbanksofferfree

onlinebillpayment

service. Thisisamuch

saferandlesscostly

methodofbillpayment

andaveryeasywayto

paybills.

Advantages:

Nopostageorenvelopestopurchase

Safety:Noworrythatyourmailwillbetaken

orlostfromamaildropbox

Convenienceofpayingbillsanytime,dayor

nightfromanywhere

Easytosetupautomaticrepeatbillpayment

Agoodmethodtotrackyourexpenses

Reviewaccountbalancedailyifdesired

Usingonlinebankingisagreatwaytotrackyour

monthlyexpenses. Whenreconcilingyour

monthlybudget,simplyreviewyouronlinecheck

ingstatement.Averyeasysystemtotrackall

monthlyexpenses.

OnlineBillPay


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BudgetReconciliation

Whenreconcilingyourbudget,yourecheckingto

seeifyoustayedontrackwithyourfinancial

spendingplan.

Whenyoustartamonthlybudget,youare looking

intoyourfinancialfuture.Attheendofthemonth

youwanttodoublechecktoseeifyourbudget

balanced,andyouusedgoodnumbers. Youdo

thisbylookingatyourcheckbookregister,or

onlinebankingstatement. Takeeachexpense

category,andtotalhowmuchyouspentforeach

budgetingcategoryforthemonth. Ifyouwere

trackingyourexpenseseachweek,youshouldbe

inbalance.

Example: IntheGroceriescategory,youbudgeted

$400for

the

month

and

tracked

your

spending

eachweek.Attheendofthemonth,youaddall

yourgroceryexpensesandseeyouactuallyspent

$420.Notbad,butyoumissedyourgoal. Youwill

wanttofindwhereyouspenttheextra$20.Wasit

planned? Didyousubtract$20fromanother

category,suchasclothingexpenses? Ifyoudid,

thenyourbudgetbalanced. Youdothisforeach

categoryto

see

if

your

budget

balanced

forthe

month.Movingmoneyfromoneflexibleexpense

categorytoanothercanhelpbalanceyourmonthly

budget. Thisisbeingfinanciallysavvy.


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Teachingyourchildrenthefamilysvaluesabout

moneyisafamilylegacy

Ahouseholdbudgetshouldbesharedwiththe

family. Someparentsmayfeeluncomfortable

showingtheirchildrenthehouseholdincome.

Therearewaysaroundthis. Youcanexplainabout

expensesbygoingthroughthebudgetsheetand

budgetprocesswiththefamily. Youcanexclude

theincome,andexplainthisisprivateinformation.

Otherswillhavenoproblemwiththisprocess,so

showingincomewillnotbeanissue. Involvingthe

entirefamilywillincreasetheexcitementand

interestaboutsavingandachievingthefamilys

goals. Discussfinancialissueswithyourchildren,andallowthemtolistentothedecisionmaking

process.

ChildrenandaBudget


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Example: Yourfamilyisplanningandsavingfora

triptoAustraliaintwoyears,asaLongtermgoal.

(Ashorttermgoalisoneyearorless.) Byusinga

householdbudget,youinvolveeachmemberofthe

family. Eachcancontributesavingstowardsthis

plannedvacation. Youcanalsogiveincentivesfor

moneysavingideas.

Example: Yourteenagerdecidestohelpby

watchingtheyoungerchildren,allowingyouto

savemoneyonasitterandapplythissavingsto

yourvacationgoal.

Teenagersinvolvedinthebudgetingprocesswill

learntosuccessfullymanagetheirownmoneyand

setsavingsgoals.

Thepayoffcanbebig.Childrenwithmoney

managementskillsarelesslikelytohavefinancial

problemsasyoungadults.

Parentsneedtotakeresponsibilityfortheir

childrensfinancialeducation,byteachingsound

moneyhabits. Eightyfivepercentofchildren

learnaboutmoneyfromtheirparents. The

teachingprocesscanbeeasy. Takeadvantageofthis,andbeagoodexample. Remembertouse

leveragewithallowance,andgettheirattention.

ChildrenandaBudget


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Allowyourteenagerstheresponsibilityofthe

householdbudgetforamonth. Letthemmakethe

purchasingdecisions,and helpthemastheylearn

theprocess. Orhaveyourteenagersplantheir

own financialspendinggoalsbyusingabudget.

Sinceeachsituationisdifferent,yourchallenge

maybeingettingyourteenagersmoreinvolved

withthebudgetingprocess.Makeaneffort,

becauseyourfamilysfinanciallegacymaydepend

onit.

Makesureyoushowyourteenagerthemonthly

bills. Showthecostofhouseholdamenities,such

asthetelevisioncable,internet,andelectricitybill,

comparedtoanhourofworkortheirallowance.

Whenfinancialtimesaretight,andthehousehold

budgetischallengingtobalance,involvetheentire

family.Askforideasthatcanreducemonthly

expenses. Reviewhouseholdluxuriesthatcanbe

reducedoreliminated.

Today,manyhouseholdsareoverspendingmoney

onitemsthatarenotpriorities.

Example: Computergames,iPoddownloads,or

othermonthlyexpensesassociatedwiththe

internet.Thesearenonessentialitems.

ChildrenandaBudget


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Cameraphones:Isitaphoneoracamera? These

arejustafewexamplesofmoneypits,thatcan

upsetatighthouseholdbudget.

Teachingyourchildrentosaveandplan(waitfor

anitem,insteadofimpulsebuying)canbe

priceless. Itemsmaygoonsaleatalaterdate,ora

wanted

item

may

fall

out

of

favor

with

your

child.

Givinganallowancetochildrenisagreatteaching

tool. Therearemanyparentingadvantagesto

givingyourchildrenanallowance. Leverageisabigreason,andofcoursegivingthemthechanceto

managetheirownfinancesiskey.

Usetheallowanceleveragetoyouradvantage.

Thisis

an

added

incentive

for

your

children

to

followthehouserulesandsavemoney,by

followingtheirownbudget. Thisshouldbethe

houserulesofreceivinganallowance.

Example: Anallowanceforyourfiveyearoldmay

be$3perweek. Youcanlinkchorestothemoney,

sothechildhasthethrillofearning,saving,and

spendingmoney. Oneideaistoseparatethe

moneyintofivecategories.

ChildrenandaBudget


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ChildrenandaBudget

Exampleforafiveyearold:

1. Spendingmoney

2. Shorttermgoals.(ItsImportanttostartgoal

achievementearly.)

3. Longtermgoals,suchascollegeorabike

4. Givingtocharityorchurch

5. Holidaygiftgiving

Thisexampleisverygeneral. Bespecificwithyour

children.

Makesuretheyareinvolved

ineachstepofthebudget

andsavingprocess. Keep

themexcitedabouttheir

goals.

Forchildren,ashortterm

goalwouldbe26

months. Therearevarying

pointsofviewonlinking

moneytochores.Thereare

chores eachfamilymember

mustdo,andotherchorescanbelinkedto

payment.Adults

work

for

money,

so

there

should

beaconnectionbetweenworkandmoney.


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Monthly Take Home Pay(Net Income) Take Home Pay

Child Support / Alimony ReceivedOther Income, Bonuses

Total Net Income $4,500.00

FIXED EXPENSESConstant forSix Months

Mortgage / Rent $1,300.00Insurance: Auto, Home, Life $140.00Long Term Savings, IRA, 401(k)

Emergency Savings $300/Goal $15,000Church Donations

Legal / Child Support / Alimony

Car Payment $300.00

Total Fixed Expenses $2,040.00

FLEXIBLE EXPENSESChange Month

To MonthGroceries: Household Items, Pet Food $470.00Cell Phone / Telephone $150.00Electricity $150.00Water/ Gas / Heat / Utility $75.00Bundle Package / Cable TV $120.00Internet Service Included

Transportation: Gas, Oil Changes, Car Maintenance $150.00Credit Card Payment $60.00Other Unsecured Debt Payment Student loan, Bank

loanChildcare / Daycare $400.00Prescriptions, Medical / Dental $25 CopayPet Care, Postage, Office Supplies $10.00Clothing / Dry Cleaning $40.00Memberships / Contributions

Home Maintenance

Entertainment, Dinning Out Hobbies, Latte's, Movies $300.00Revolving Savings $1000 GoalSavings - College

Spending Money: Hair, Smokes $50.00Gifts / Holidays / Other

Total Fixed Expenses $2,040.00Total Flexible Expenses $2,000.00

TOTAL EXPENSES $4,040.00

Subtract Expenses fromIncome $460.00


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Budget Goals Budget Goals(Net Income) Take Home Pay

Child Support / AlimonyOther Income, Bonuses

Total Income

FIXED EXPENSESConstant forSix Months

MonthlySavings

Mortgage / Rent

Insurance: Auto, Home, Life

Long Term Savings, IRA, 401(k)

Emergency Savings

Church Donations

Child Support / Alimony

Car Payment

Total Fixed Expenses

FLEXIBLE EXPENSESReduce Flexible

Expenses

Groceries: Household Items, Pet $420 $50Cell Phone / Telephone

Electricity

Gas / Heat / Utility

Bundle Package / Cable TV

Internet Service

Transportation: Gas, Oil Changes,Car Maintenance

Credit Card Payment

Other Unsecured Debt Payment

Student loan, Bank loanChildcare / Daycare

Medical / Dental

Pet, Postage, Office Supplies

Clothing / Dry Cleaning

Memberships / Contributions

Home Maintenance

Entertainment, Dinning Out Latte's,Hobbies, Movies $250 $50

Revolving Savings

Savings - College

Spending Money: Hair, Smokes

Gifts / Holidays / Other

Total Fixed ExpensesTotal Flexible Expenses

TOTAL EXPENSES

Subtract Expenses from Income Monthly Savings $10029


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Manyfinancialinstitutionsofferhighinterest

savingsaccounts.Manyhavezerofees,withno

minimumbalancerequirements. Somepay1%

5%AnnualPercentYield(APY)duringgood

economictimes. Thiscanbeagreataccountfor

SafetySavingsmoney.

Clippingcoupons

and

buying

store

brands.

Whendoneproperly,ahouseholdcansaveover

$1,000peryear.

Carryingunmanageabledebtisveryexpensive.

UseaDebtSnowballtoreduceyourdebtand

savethousandseachyear.

Raisethedeductiblelimitsonyourhomeand

autoinsurance.Makesureyouhavethismoneyinyoursafetysavingsaccount. Thiscansave

you$50to$100eachmonthoninsurance

premiums.

Staywithinyourwrittenbudgetforallbudget

expensecategories. Lookforwaystoreduce

spendinginyourflexibleexpensecategories.

W4taxform:Adjustyourexemptionsto

improveyourinterestearningsavingsaccounts.

MoneySavingIdeas


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31

Dontcountonwinningthelottery. Evenifyou

didhitthebigoneawrittenbudgetisamust.

Investyour

lottery

ticket

money

into

ahigh

yield

savingsaccount. Themoneysavedwillbeanice

accountafterafewyears.

LotteryWinner

MoneySavingIdeas


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32

Taketimetobeorganized,andestablishagood

recordkeepingsystem; thiswillsaveyoutimeand

helpwithyourmoneymanagement.Makesureto

keeptaxrecordsandimportantdocumentsina

safeplace;considerafireproofsafeforthese

documents.

Brownbaglunchcansave$50to$60permonth.

Bringyourcoffeefromhome.Notbuying

takeoutcansave$20to$30permonth,ormore.

Neverpayfullpriceforanyproductwhere

thereisacommissionedsalesperson.Always

negotiateabetterprice.

Whenpurchasingacommutercarforwork,

buyausedvehicle,withafourorsixcylinderengine,tosaveongasolineandinsurancecosts.

Ahomepurchaseishuge.Makesureyou

maintainyourFICOcreditscoreabove750.You

willsavehundredseachmonth.Ahighercredit

scoremeanslowermonthlyhousepayments.

Savebigonautoinsurancewithahighcredit

score,clean

driving

record,

andlife

insurance

foramultilinediscount.

MoneySavingIdeas


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33

12.2

$4500

$550

$4500$550

SavingsRatio

Usingamonthlyspendingplanandimplementing

aconsistentsavingsplanisagreatwaytoimprove

yournetworth. Ofcoursethiscanonlybe

accomplishedifyoureduceyourdebtloadalso.

MonthlySavings (1)$_________

MonthlyNetIncome(AfterTaxes)(2)$_________

Dividemonthlysavingsbynetincometofindyour

monthlySavingsRatio.

Example:

(1)____Divide(2)_____X100=SavingsRatio____%

12.2%SavingsRatioisacceptable.Yoursavings

ratioisageneralguideline. Therewillbeyears

thispercentagewillincreaseordecrease,

dependingonyourhouseholdeconomy.AHouse

holdeconomywillcycle,thesameastheAmerican

economy. Inyearswhereyour

householdincomeisupand

debtislow,besuretosaveand

planforyearswhenthehouse

holdincomeisdown. Yourgoalistofindfinancialbalance.


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Letslookatyoursavingsaccounts. Savingsareabig

partofachievingyourpersonalandfamilysfinancial

goals.

Emergency(safety)savingscanbeafinancial life

saverincasessuchas,jobloss,medicalsetback,etc.

Formanyhouseholds,thegeneralruleofhavinga

Safety

savings

account

of

four

to

six

months

grossincomewillapply.Grossincomeisyour

incomebeforetaxesandotherdeductionsaretaken

fromyourpay.

Thereareexceptionstothefourtosixmonthrule.

Forinstance,thosewhoareselfemployed,andthose

whohaveincomebasedonspecial,orspecific

talents,willwanttobuildalargerSafetysavings

account.Uptooneyear

ofincomeforlossofjobor

medicalemergenciesisrecommended.

Thisemergencysavingsaccountshouldbeinaliquid

(easyaccess)account.Thisaccountshouldearn

higherinterestthanapassbooksavingsaccount.

Therearemanyhighinterestsavingsaccountspaying

14%,and,dependingontheeconomy,youmaydo

better.It

usually

takes

several

years

to

build

an

emergencysavingsaccount,butitisimportantto

haveone.

SavingsAccounts


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ARevolvingSavingsAccount(TopPriority)

Arevolvingsavingsaccountis,formany,an

unfamiliarterm. Simplyput.arevolvingsavingsaccounthelpsbalanceahouseholdbudgetwhenmonthlyunexpectedfinancialsurprisesarise. Thissavingsaccountwillbeapassbooksavings

account;usuallyatthesamebankorcreditunion

linkedtoyourcheckingaccount.

Example: Youdidthehouseholdbudgetforthe

upcomingmonth. Yourbudgetisinbalance,and

yourteenagerjustrememberedtotellyou,he

needssuppliesforanupcomingsciencefair

project,costingabout$200. Ifthecosthadbeen

$50,youcouldhavemovedmoneyfromthe

entertainmentorclothingbudgetcategories.Instead, useyourRevolvingSavingsAccount.

Movethe$200tothecheckingaccounttocoverthe

addedexpense. Yourbudgetwillstayinbalance

withouttakingonadditionaldebt.

Keep20%ofyourmonthlygrossincomeinyour

revolvingsavingsaccount. Income$3,200X.20=

$640. Thisisyourfirstlineofdefensefromusingacreditcardforunexpectedexpenses. BuildaRevolvingSavingsaccountbeforeyoubuildan

Emergencyaccount.

SavingsAccounts


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Abudgetisagreatopportunitytostartbuilding

wealth. Thereareseveralstepsyoumustcomplete

beforeyoucanstartbuildingwealth.

Buildarevolvingsavingsaccountof20%of

yourmonthlygrossincome.

Haveadebt

reduction

plan,such

as

adebt

snowball,topayoffdebt.

Changethewayyouthinkaboutyourfinancial

situationandfinancialgoals.Maturityand

disciplinearerequiredtobuildwealth. Ifyou

continuetoaccumulateunmanageabledebt,by

spendingbeyondyourmeans,truefinancial

wealthwilleludeyouuntilyoumakechanges.

Createasavingsplanusingabudgetto

accumulateanemergencysavingsincaseof

joblossormedicalsetback. Thisaccount

needstobelargeenoughtolastyourfamily

fromfourmonths,toayear. Eachfamilyis

different.Asingleparentwithchildrenwould

needamuchlargersafetysavings.

Buildingwealthbysaving,investingand

leveragingyourmoneyisalifelongprocess.

BuildingWealthUsingaBudget


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Yourhouseholdbudgetcanbeusedtoaccomplish

manyfinancialgoals.Accumulatingwealthtakes

knowledgeandpatience. Thebestmethodisto

putyourmoneyintoseveralfinancialinvestment

vehicles,notjustone. Thiscanensureyouwill

neverloseallyourfinancesinoneinvestment

setback.

Takethetimetolearnabouteconomiccyclesand

investmentcycles.Understandingthesetwo,may

helpyoubuildfinancialwealth.

Thosesellingamagicinvestmentsystemare

onlyproductsalespeople,nottruefinancial

educators. Iftheirmagicsystemreallyworked,

wouldtheysellittous? They

wouldbetoobusyusingtheir

systemtomakemillions.

Slowlyandsteadily,saveand

investforthelongrun.

Budgetandsave1520%of

takehomepay,dividingthis

intoseveralsavingsand

investmentportfolios. Beconsistentandpersistentto

achieveyourfinancialgoals.



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38


Planforyourfuture,andsetfinancialgoalsthat

will allowyoutoretirefromworkincomfortand

safety.Ahouseholdbudgetcanbeusedtoplan

andsavemillionsofdollarsforyourfuture.

Asstatedinthegoalssection,dreambigsave

big. Dontallowdebttodetouryoufromreaching

yourfinancialgoals. Retirementshouldbeoneof

yourlongtermsavingsgoals. Learnthepowerof

compoundinginterest,dividends,andleverage.

Setagoalofsavingatleast10%eachpaycheck.

Onceyouseeyoursavingsgrow,yourgoals

becomereality. Youwillgetmoreexcitedand

wanttosave20%eachpayday.Howdoyousavea

milliondollars? Onepaycheckatatime. Start

todayanddontlookback,onlyforward.

Howdoyoueatanelephant? Onebiteatatime.


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39

Wehaveallheardtheagelessclich: Therearetwothingsinlifethatarecertaindeathandtaxes. FormanyAmericans,wecouldaddunmanageabledebt.

Thisdebtlegacyformany familiescontinuesfor

generations,duetolackofbasicfinancialhabits.

Wecanteachyouhowtodealwithunmanageable

debtandtoreducefinancialstress. Learningto

saveforyourfutureandachievingfinancialgoalsisa

signoffinancialdisciplineandmaturity.

Manymarriedcouplesstarttheirmarriagewith

thoughtsofsavingmoremoneyandreducingtheir

debt. Theybelieve,withasecondincometheycan

eliminatetheirdebtandsavemoremoney. Theysoon

realizeeachpersonisspendingmoremoneythan

beforethey

were

married.

The

reality

is,

its

not

how

muchmoneyismade,buttheirspendinghabitsthat

count.Ahighpercentageofbrokenmarriagesis

directlylinkedtomoney.

Theoldclich, Itsnothowmuchyouearn,buthowmuchyouspend,istrueformost.Gettingmotivatedtomakebasicfinancialchangesis

easy,butmaintainingasuccessfulfinancialstrategyovertimeisthetruetestoffinancialsuccess.

ManagingDebt


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40

Managingdebtisachoice,apositivehabitthat

youcanstartatanytimeinyourlife. Obviously,

theyoungeryoustart,thebetterofffinancially

youwillbe.

Ifyoubelievethatdebtisgooddebtorbaddebt

becausethisiswhatyouhavebeentold,lets

changeyourthinking. Debtisnotouttogetyou;

debthasnoconscience.Startthinkingofdebtas

manageableorunmanageable.

Hereisanexampleofonewaymanypeopleget

intotroublewiththegooddebt,baddebtbelief:

Ahomepurchasehasalwaysbeenclassifiedasaso

calledgooddebt.Ahousewillneverlosevalue,

right?Whatdoyoutellpeoplewhohavelosttheir

homein

foreclosure

and

cant

sell

or

refinance,

becausetheirhomelostvalue?

Inatypicalyear,thereareover1million

homeforeclosuresintheU.S.

Thesepeoplelosttheirhomesforvariousreasons,

suchasajobloss,divorce,illness,orevenatragic

accident. Thebottomline: Theycouldnotafford

themonthlymortgagepayment. Thehomeisstillahome,neithergoodnorbad.

ManagingDebt


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Toomanypeoplebuymorehousethantheycan

afford,whichcanleadtoforeclosure. Itisupto

youtodecidehowmuchhouseyoucanafford,not

themortgagebroker. Inthegreatsubprimehome

lendingdebacleof20032007,manymortgage

brokersputpeopleintoriskyloansthatweremore

thanpeoplecouldafford. Theydidthisbyusing

nomoney

down,

adjustable

rate

interest

only

mortgages. Onceinterestratesstartedtoclimb,

manyfamilieswereforcedfromtheirhomes,

becausetheycouldnotaffordthehighermonthly

payment.

Letslookatsomewaysyoucanprotectyourself

andyourfamilyfromadebtdisaster.When

decidingtomakeamajorpurchase,takeinto

considerationhowthispurchasewillaffectyour

monthlycashflow.Again,thegeneralguidelines:

Remember,ifyou

choosetoexceedthese

basicfinancialrules

youwilladdfinancial

stressto

your

life.

HomeMortgage 2535%

Transportation 1015%

Food 1013%

Debt 510%

Savings 1050%

Childcare 510%

Entertainment 5%

Clothing 5%

Utilities 1015%

ManagingDebt


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DebtToIncomeRatio(BackEnd)

$3800

$1200

$350

$250

$150

$1950

$1950 $3800 51.3

Hereisausefultoolindeterminingyourfinancial

stresslevel. Dothemath,andconsiderwhereyou

arebeforetakingonfurtherdebt.

1. GrossMonthlyIncome(Totalincome,before

FederalTaxes,Statetaxes,SocialSecurity

entitlements) 1.____________

2.

Debt

Payments

(Include

charge

cards,

car

pay

ments,advancepay,loans,rent,mortgagePITI)

MonthlyExpenses:

MonthlyPayments

Mortgage/Rent $_____________

AutoLoan $_____________

CreditCards $_____________

PersonalLoans $_____________

StudentLoans $_____________Insurance $_____________

Other $_____________

Total 2._____________

3.Divideline2byline1,andmultiplyby100

(2)______Divide(1)______X100=BackRatio____%

28%

30%

Someadditional

credit

may

be

used.

31%43%Fullyextended,FHA/VAtypicallimits.

Above43%seriouslyoverextendedseekhelp!


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43

Thegeneralguidelinesarehelpful. Ifyoufind

youareoverbudgetandshortoncasheachmonth,

startbylookingatthesepercentagestoseewhere

youmaybespendingtoomuch.

Whenmakingahomepurchase,haveyour

mortgagebrokershowyousomeworstcase

scenarios. Planyourhomepurchasebasedon

whathappensifinterestratesclimbforthenext

decade.Dontloseyourhomebecauseyoudidnot

planforthefuture.

Example: $3,000monthlygrosspayX.30=$900

rent.Forsafety,keepyourhousepaymentsbelow

the30%limit.

Anothersimple,butuseful,formulatouseisa

DebttoDisposableIncomeRatio,alsoknownas

theFrontEndformula. Thiscanbeagoodway

todetermineifyouarecarryinganunmanageable

debtload.

DebttoIncomeRatioFormula: Forthisformula,

yourmonthlydebtpaymentsincludeeverything

exceptthemortgage,rent,utilities,andtaxes.

Includedarethingssuchascreditcardpayments,

studentloans,auto,medicalbills,andloanson

itemssuchasfurnitureandelectronicspurchased.

DebttoDisposableIncomeRatio(FrontEnd)


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Includetotalmonthlydebtpayments,anddivideit

byyourtotaltakehome(Net)incomeyourpay

checkaftertaxesandotherdeductionshavebeen

takenout. Thiswillgiveyouyourdebtto

disposableincomeratio.Whatdoesthismean,

andwhyshouldyoucare?

Ingeneral,creditorslookatyourdebttoincome

ratiotoseetherelationshipoftheamountofdebt

youhave,comparedtoyourincome.Manyuse

thistodetermineiftheyshouldgrantyoualoanor

giveyoucredit. Ifyourdebttoincomeratiois

below16%,youareconsideredtobeingood

financialshape.

WhenyourDebttoDisposableIncomeRatiogets

above17%,alenderwillviewyouasahigherrisk.

Usethisformula,alongwithyourpercentage

generalguidelines,

to

keep

your

budget

in

balance

andyourdebtmanageable.

Example:

1. Monthlytakehomeincomeis$3,000

2. Monthlydebtpaymentsare$450

3. Take$450(monthlydebtpayments)dividedby$3000

(takehomepay)=.15,so15%isyourDebttoIncome

Ratio.

DebttoDisposableIncomeRatio(FrontEnd)


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ADebtReductionPlan

Thefollowingchartshowsanexampleof alldebts,

listedfromthesmallesttobiggest.Firstreviewyour

monthlybudgetsheettomakesureyourneedsand

prioritieshavebeenpaid,includingyoursecureddebt,

suchasforacarloan. Next,listyourunsecureddebt

andstudentloansasintheexample.Attackthisdebt

usingaDebtSnowball.

PayoffDebt#1first,usingyourdiscretionarymoney.

Once#1ispaidinfull,applythediscretionarymoneytodebt#2(alongwithdebt#1sprevious minimum

payment).Continuetheprocess(includingeachpaid

debtsminimum)untilalldebtsarepaidinfull. This

ishowadebtsnowballworks. Thisplanworkswell

formany

and

is

not

impacted

by

interest

rate

changes.

DebtSnowballExample

Balance Min.payment

1. Providiancreditcard $ 400 $ 25

2. Targetcard $ 450 $ 25

3. Searscard $ 500 $ 30

4. MasterCard $1,200 $ 50

5.Student

loan

$6,000

$150

________________________________________________

Total $8,550 $530

Startwiththe

smallestdebt

andapplythe

min.payment

to

the

next

debt.

DebtSnowball


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Livingpaychecktopaycheck

withoutaplan

Spendingmorethanyouearn

Livingonborrowedmoney

Receiving30daylatenoticesforlatepayments

Makingminimumcreditcardpaymentseach

month

Receivingcallsfromyourcreditorsaskingfor

payment

Choosingwhichbillstopayfirst,realizingthat

otherswillbepaidlate

Transferringcreditcardbalancesregularlyto

zerointerestratecardsNosavingsaccountnorcontributionstoalong

termsavingsplan

Regularlyrefinancingtotakeequityfromyour

hometopayoffunsecureddebt(creditcards)

Theseare

warning

signs

that

can

lead

to

bigger

problems.Thefirststepisrecognizingthatyouhavea

financialproblemandthatyoumayneedhelp.

Signs of Too MuchDebt

WarningSignsofTooMuchDebt


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ManagingDebt

Debtsthatcanbecomeapriorityareunpaidtax

debts,childsupport,alimony,andsecureddebts,

suchanautoloan. Thesearedebtsyoudefinitely

donotwanttoavoidpaying,asthesedebtscanbe

collectedusingmoreaggressivemeans.Makesure

youlearnthelawsinyourstatewithregardto

thesedebts. Besuretokeeppaymentscurrent. If

youcant

make

apayment

on

time

(before

the

due

date)youmustcommunicatewithyourcreditors.

Stayingindenial,continuingtoprocrastinate,will

onlycompoundyourdebtsituation.

Areyouafraidtogetacopyofyourcreditreports,

becauseyoudontwanttoseeyourtruefinancial

situation? Youmustfaceyourpast.

Itscommonforparentstoassisttheiradult

childrenduringfinancialhardshipsthenendup

bankruptthemselves. Thisisnotagoodplan.

Unlessyoumakechanges,youwillgetmoreofthe

same. DontplaytheBlameGame. Youshouldfaceuptoyourfinancialsituationandtakecharge. The

buckstopshere. Iamresponsibleformyactions,istheattitudeyoumusttaketohelpyourdebtsituation.Maturitywithdisciplinewillhelpyou

gaincontrolofyourdebtandfinances.


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Whatkeepsyoufrompayingyourdebts? Ifyou

havegoodhouseholdincomeandstillspendmore

thanyouearn,whatisyourreason?

Arebadhabitskeepingyouindebt,suchasbuying

cigarettes,alcohol,drugs,gambling,carpartsfor

yourhotrod,toomanyshoes,oranewcar? How

muchdoyouspendeatingatrestaurantseach

month?LookattheFlexibleExpensescategoryon

yourmonthlyspendingplan(Budget).

Apersonwhosmokesapackofcigaretteseachday

isneedlesslyspendingabouttwothousanddollars

everyyear. Overathirtyyearspan(sayfromage

2050),thatisnearly$50,000. Thatsagooddown

paymentonahouseor$150amonthtowards

payingoff

your

debt.

These

are

areas

in

your

life

thatneedtobeaddressed.

Denyingthatyouhaveaproblem,orjokingabout

yourspendinghabits,isawayofprocrastinating

andavoidingyourproblem. Ittakesmaturityand

selfdisciplinetoseekprofessionalhelp.

TheCostofOverSpending


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DebtCollectors

Debtpriorities,andhowtodealwithdebt

collectors,needtobeunderstood.Harassmentis

thenameofthegamefordebtcollectors,including

dailyphonecallstellingyouthatifyoudontpay

theywilltakeyourpossessions,takelegalaction,

orruinyourcredit.

TheFairDebt

Collection

Practices

Act

provides

consumersrightsandprotectionfrommanyofthe

debtcollectorstactics.Withinfivedaysaftera

debtcollectorfirstcontactsyou,

thecollectormustsendyoua

noticethattellsyouthenameof

thecreditor,howmuchyouowe

andwhatactiontotakeifyou

believeyoudontowethemoney.DebtCollectorsmustnot:

Contactyouatunreasonable

times(before8a.m.andafter9pm),

unlessyouagree.

Contactyouatworkifyoutell

thedebtcollectorthatyouremployer

disapproves.

ManagingDebt


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Contactyouafteryouwritealettertellingthemto

stop,excepttonotifyyouthatthecollectorplansto

takeaspecificaction.

Contactyourfriends,relatives,employerorothers,

excepttofindoutwhereyouliveandwork.

Harassyouthroughthreatstoharmyou,theuse

ofprofanelanguage,orrepeatedtelephonecalls.

Makeanyfalsestatementorclaimthatyouwillbe

arrested.

Ifdebtcollectorsviolateanyoftheselaws,makesure

youinformthemoftheirfederallawviolationsand

thatyouwill reportthemtotheFederalTrade

Commission:www.ftc.gov.Alsoreportthecollector

toyourandtheirStateAttorneyGeneral.

Legalactions

take

time,

and

they

can

not

take

your

personalpossessionsforcreditcarddebtormedical

bills. Thesedebtsareunsecureddebts,meaningthe

debtorshavenoclaimtoyourpossessions. Iflegal

actionistaken,andajudgmentisplaced,youcould

haveawagegarnishment. Thiscanhappen,so

ignoringthedebtisnotagoodidea. Itisadvisableto

speakwithyourdebtors. Explainyoursituation,and

besure

to

put

it

in

writing.

Donotpayforanunsecureddebtbeforeyouressentials

andbasicneedshavebeenmet,suchas

housing,utilities,andfood.

ManagingDebt


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ManagingACreditCard

Threeusesforacreditcard

1. Travel:Acreditcardissafertocarryfortravelthana

debitcard,cash,orpersonalchecks.Budgetahead

foryourtravel,sowhenyoureturnfromyourtrip,

youpayyourbalanceinfull.Also,youcanmake

paymentswhiletravelingviatheInternet.Useyour

banksonlinebillpaysystemwhiletraveling,tomake

sureyoudontaccrueinterestonyourcreditcardfortravelexpenses.Forshortvacationsandonline

purchases,werecommendyouprepayforthe

purchase.Sendthemoneyinviaonlinebanking

beforeyoucharge.Whataconcept prepayment.

2.Business:Creditcardsareusedbymanycompanies

forbusinesstravelexpenses.Creditcardsareaneasy

way

to

track

purchases,

with

the

added

protection

of

stoppaymentonpurchasesifneeded.

3.CreditReportandCreditScore:Usingyourcredit

cardinconcertwithawrittenbudgetwill,liketheabove

examples,helpbuilda

goodcredithistory.

Thiswillhelpmaintain

agoodcreditscoreand

improveapoorcreditscore,whenusedproperly.


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ManagingACreditCard

Theproperwaytouseacreditcardisseldom

taught.Wehaveallseenwhatunmanageable

creditcarddebtcandotoahouseholdsbudget.

Letslookattheproperwaytomanageacredit

card.

Creditcardsareafinancialtoolthat,whenused

properly,canbeanassetandbenefitforyou.A

creditcardshouldonlybeusedinconcertwitha

writtenbudget.

Example: Youhavebudgeted$100forclothing

thismonth. Themoneyisinyourchecking

account,whichyouplannedtousetopurchasea

pairofshoes. Instead,useyourcreditcard,then

payyourcreditcardbillwithin15days,orthe

sameweek.

Using

your

credit

card

will

show

you

canusecreditresponsiblyandisoneofthebest

waystomaintainandimproveyourcreditscore.

Useyourcreditcardforsafetyandconvenience.

Ifathiefweretogetaholdofyourdebitcardand

cleanoutyourcheckingandoverdraftprotection

savingsaccount,whosemoneydidthethiefsteal?

Yours Ifthesamethinghappenedwithyour

creditcard,whosemoneywastaken?Acreditcard

isabankloan,sothebanksmoneywastaken,not

yourmoney.


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ManagingACreditCard

Federallawsforconsumerprotectionregardinga

creditcardtheft,sayyourmaximumliabilityis

$50. Inthedebitcardexample,youcouldhave

hadoverdraftchargesalso. Banksinmostcases

protecttheconsumer,butifyourPINwasusedin

thecrime,yourbankmaytakeasecondlookatthe

crimebeforeputtingtemporarymoneyintoyour

account.

Federallimitsofliabilityforadebitcard:

Notifyyourbankwithintwodays,$50maximum

liability.Twodaystosixtydays,$500maximum

liability.Sixtydaysorlonger,theliabilityis

unlimited.

Useacardwithnoannualnormonthlyfee.Donot

revolveabalance(carryabalancefrommonthto

month).Trynottouseyourcreditcardforemergencies.

Asafetysavingsaccountisforemergencies.

Acreditcardgraceperiodisthetimeperiodbetweenthe

postingdateofatransactionandtheduedate,within

whichanynewcreditcardpurchasesmadeduringthe

billingcyclewillavoidfinancecharges. Ifyourgrace

periodis22daysthenyouhave22daysafterpurchasebeforeintereststartsaccruing. Interestisthepenaltyfor

borrowingmoney.


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Example: Youbuyawasheranddryerwithyour

creditcard. Themoneyisinyourchecking

account,butyouuseyourcreditcard. Thesetis

delivered,theyarrivedamaged,andtheretail

merchantisnothelping. Sinceyouusedyour

creditcard,youcandisputepayment. Yourcredit

cardcompanywillcontactthemerchanttoverify

andgenerally

will

work

on

the

consumers

behalf

tocorrecttheproblem.Manycreditcard

companiescanhelpyou,evenmonthsaftera

purchase. Theonlyrealstipulationisthatthe

goodspurchasedaremorethan$50andpurchased

within100milesofyourmailingaddress.You

mustfirsttrytoresolvethedisputewiththeretail

merchantbeforecontactingyourcreditcard

companyto

dispute

payment.

Hadyouusedyourdebitcard,theseoptions

wouldnothavebeenavailable.

ManagingACreditCard


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Payingoffa$5,000balanceatdifferentinterest

rates:

Interestisthepenaltyformakingjustthe

minimumpaymentsonyourcreditcardandother

loans.

Example: ForacreditcardwithanAPRof18%

anda$1,200balance,makinga4%fixedpayment

willtakeovertwoyears,andthepenaltyisan

additional$315ininterest. Interestisthepenalty

forborrowingmoney.

ForacreditcardwithanAPRof20%anda$10,000

balance,makingjustthe4%minimumpayment

willtake15years8months,andtheinterest

penaltyis$7,050.Heresanidea:Howaboutpre

payingbeforeyouchargetoyourcreditcard?A

greatideaforonlinepurchasesorshortvacations.

UnderstandingDebt

Percentage_>>

Mo.Payment:

10% 15% 20%

$1005years,

5months

6years,

7months

9years,

1month

$200 2

years,

5months 2

years,

7months 2

years,

9months

$3001year,

7months

1year,

7months

1year,

8months


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BorrowingtoPayforDebt

Itisnotrecommended,ever,thatyouborrowfrom

theequityinyourhometopayoffunsecuredcredit

carddebt. Usingtheequityinyourhometopayoff

creditcarddebtistakingadebtthathasnosecurity

tiedtoit,andturningitintoasecureddebt. Thereality

is,

when

this

is

done,

your

home

is

now

the

securityforyourpriorcreditcarddebt.

Itwascommonformanyhouseholdstousethe

equityfromtheirhometopayofftheirunsecured

debt. Therearemanyfinancialadvisorswhohave

recommendedthisfinancialtactic. Themortgage

industrysurvivesonthistactic. Thesadtruthis,

over80%ofhouseholdsthatusetheirhomeequity

topayforcreditcarddebtarebackintoworsecreditcarddebtwithintwoyears.

The15%ofpeoplewhodothissuccessfullyarethe

oneswhohadafinancialplan. Idontwantto

throwthebabyoutwiththebathwaterwhenIsay,

Itisnotagoodideatorefinanceforthepurpose

ofpayingoffdebt. Thestatisticsshowoddsof

successare

against

most

people.

Dont

become

a

statistic.

UnderstandingDebt


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Beforeyoudothis,askyourself,AmIinthe80%

orthe20%? Onewaytotellistolookatyourpast

performanceindealingwithdebt.Haveyoudone

anythingtochangeyourfinancialhabits?Have

youtakenfinancialeducationclasses?Areyou

matureenoughtolivewithinyourmeanswitha

budget?Areyounowdisciplinedenoughto

implementand

maintain

afinancial

plan?

Theseareseriousfinancialquestionsthatonlyyou

cananswer. Donotlistentomortgagebrokers

whentheytellyou,Youcanaffordthis.They

mayputyouintoaninterestonlyARM(adjustable

ratemortgage) afteryouinformedthemyouplan

tostayinthishomeforthenexttwentyyears.

Run,runfast,fromthesepeople. Seekfinancial

advicefrompeoplewithexperienceandfinancial

certification. Behonestwithyourself;ifyouare

notgoingtosticktoa

sound financialplan,

donotrefinanceyour

housetopayoffcredit

cards. Youonlymake

themortgagebroker

happy.

UnderstandingDebt


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Example: TheBrownfamilyhas$30,000incredit

carddebtandotherunsecuredloans. Theywould

liketoeliminatetheirmonthlydebtobligations. They

decidetorefinancetheirhomeandusetheequity

fromtheirhometopayoffthisdebt.

Sixmonthslater,Mr.Brown,theonlysourceof

income

for

the

family,

loses

his

job.

The

family

has

no

safetysavingsaccount,sotheyusetheircredit

cardsforlivingexpensesuntiltheyaremaxedout

again.

Duringtheirfinancialdifficulty,

theyfellbehindontheirmortgage

paymentsandwereforcedtoshort

selltheirhomebefore foreclo

sure. But,whentheysoldtheirhome,theyactuallyowedmore

thanthesaleofthehomecould

provideandstillowedthesecond

lienholder,whowantedtheir

money.Withnoincomeandfal

lingfurtherbehindonthemonthly

bills,Mr.Browndecidedhisonly

optionwastofileforbankruptcy.

UnderstandingDebt

MUST SELL


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59

ACreditCounselingAgencyisagoodoptionto

consider. Thousandsofpeoplehaveusedthemto

payoffcreditcardsandotherunsecureddebt.

ReasonstouseaCreditCounselingAgency:

Maybeabletoreagethedebtsandeliminate

financechargesandlatefees

Freepersonalfinanceeducationforthewhole

family

Freeeducationalmaterials

Answerstomanyofyourpersonalfinance

questions

Mostarenonprofitandadheretostrictstate

andfederal(IRS)guidelinesandacodeof

ethics

Manyofthenonprofit,501(c)3s,offeradebt

managementplan(DMP)thatmayreduce

interestrates,collectonemonthlypayment

amounttodisbursetocreditors,andpossiblyhelp

payoffyourdebtsooner. Debtsmustbepaidin

fiveyearsorless.

Federallaws

require

the

consulting

or

set

up

fee

waivedwhenyouask

CreditCounseling


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Thecreditcounselingindustryoffersfree

consumereducation. Inmanycases,knowingyour

financialoptionsmayhelpyoufindasolutionto

yoursituation.Manypeoplehavehadavery

positiveexperienceworkingwithaCredit

CounselingAgency.

Formoreinformation,hereareseveralwebsites:

www.aiccca.comwww.aadmo.org

www.nfcc.org

Manyofthenonprofitcreditcounseling

companiesareapprovedasHousingandUrban

Development(HUD)housingcounselors. They

helpmillionsofhomeownersworkwiththeir

mortgageservicer

on

loan

modifications

and

foreclosureissues.

CreditCounselingusuallywillonlydealwith

unsecureddebt.Mostwillnotdealwithdebt

collectors,becausemanydebtcollectorsdonotlike

todealwiththeCreditCounselingAgencies.

TheFederalTradeCommissionhasinformationon

whattolookforinaCreditCounselingAgency.Theirwebsiteiswww.ftc.gov.

CreditCounseling


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ADebtSettlementCompanyisnot

recommended. Theywillnegotiateareduced

settlementpayoffwithyourcreditor. Theonly

wayadebtsettlementcompanycandothisisif

youstoppayingyourdebts(bills). Thenthe

creditor(creditcardcompany)realizestheymay

notgetanymoney,sotheysettleforlessthanthe

fullamount.

But,

when

you

stop

paying

your

debt,

yourcreditisruined. Youhavenowbecomeahigh

riskwhenviewedbylenders. Yourcreditscore

fallsdramatically,becauseyouhavefailedtopayasagreed,perthetermsofyourcontract.Youalsoneedtoknowthatifyoupaylessthanthe

fulldebtamount,anythingabove$600savedmay

betaxableincome.Example: Youowe$8,000oncreditcards. You

signacontractwithaDebtSettlementCompany,

andtheytellyounottopayyourcreditcardbill.

Thesettlementcompanynegotiatesasettlementof$5,000withyourcreditcardcompany,tobepaidin

threeyearsorso. Hereiswhathappenstoyou:

YourFICOscore(creditscore)takesa

significantdrop,possibly50100points.

DebtSettlement


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YourcreditreportnowshowsaSettlementfor

thisdebt.

The$3,000dollarsyoudidnotpaymaybe

taxableincomeasforgivendebt,soyoumust

paytaxesonit.

Youpaidaveryhighfeeforthisservicethat

ruinedyourcredit.

Inmostcases,usingaDebtSettlementcompany

canbeasbadasfilingforbankruptcy.

TheDebtSettlementindustryhasbeen un

regulatedforyears. Thefailurerateofpeople

droppingoutofaDebtSettlementplanisvery

high.

Whendoingbusinesswithanycompanythathas

accesstoyourmoney,besuretoaskforreferences,

andcheckwiththeBetterBusinessBureaufor

complaints. IfyouhaveaccesstotheInternet,

alwaysdoawebsearchusingthenameofthe

company,toseewhatinformationisreveled.

Adebt

settlement

company

is

not

recommended.

DebtSettlement


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DebtConsolidation

Apopularloanofchoiceformanywithunsecured

creditcarddebt. Therearethousandsof

companiesmakingpromisestohelpeliminateyour

debt. Theirlendingstandardsareverylow,which

allowsmanyhouseholdswithalreadydamaged

creditscorestoparticipateintheirprogram.

Mostpeoplebelieveiftheyjusthadmoneytopay

offtheircreditcarddebteverythingwouldbefine

again. ThisflawedlogiciswhattheDebt

Consolidationindustrywantsyoutobelieve.

Borrowingmoneytopayforyourdebtsisalwaysa

badidea.Manybanks,creditunionsand

independentfinancialcompanieswillprovidea

debtconsolidationloan. Whathappensin90%of

thecasesis: householdswillborrowthemoney

andpayofftheircreditcards. Theircreditcard

accountsarestillopen.guesswhathappens,yes,

yourecorrect,withintwoyearsthecreditcardsare

maxedagain. Theconsolidationloanpaymentis

stilldueeachmonth,andsoarethecreditcard

payments. Inmanycases,thesehouseholdsfind

themselveswithsuchunmanageabledebt,they

finallythrowinthetowelandfileforbankruptcy.

Wenever

recommend

aloan,ordebt

consolida

tionloantopayoffcreditcarddebt,oranydebt.


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Knowwhatcanhappenifyoudecidetopaylateor

notatall:

Mortgagepaymentsfrom90120dayslatecan

resultinforeclosureandthelossofyourhome.

Autoloan,1daylate(althoughlendersmaywait60days):Repossession,lossofcar,potentialfor

collectionofunpaiddebt. Ifyourcarisrepossessed,thebankorthelenderwillsellit. If

themoneyfromthesaleisnotenoughtocoverthe

amountyouoweonthevehicle,youwillowethe

balance. Thisdebtmaygotocollectionsifyoudo

notpayinatimelymanner.

Studentloans, 270dayslate:WageandSocial

Securitygarnishment,taxrefundseizure.

Creditcards,180dayslate:Accountchargeoff,

senttocollections.

Collectionaccounts(dependsontheamountand

theaggressivenessofthecollector):Wagegarnish

ment,propertyorbankaccountseizure.

Taxdebt(dependsontheamountandthe

aggressivenessofthecollector):Wagegarnishment,propertyorbankaccountseizure.

ConsequencesofPayingLate


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Childsupport(dependsontheamountandthe

aggressivenessofthecollector): Lawsuit,wage

garnishment,jail.

Eachofthesewillhaveanegativeimpactonyour

creditreportandscore.Alwayscommunicatewith

yourcreditors.

ManyStatelawsdiffer,sobeawareofyourparticularstatelaws.

CreditCardBillingDisputes

UndertheFairCreditBillingAct

Sendaletter(certifiedmail)tothecreditor

within60daysofthepostmarkofthebillwith

thedisputedcharge.

Thecreditormustacknowledgeyourletterin

writingwithin30daysofreceivingitand

conductaninvestigationwithin90days. You

donothavetopaytheamountindispute

duringtheinvestigation.

Ifthereisanerror,thecreditormustcredityour

accountandremoveanyfees.

Ifthe

bill

is

correct,

you

must

be

told

in

writing

whatyouoweandwhy.Youmustpayitalong

withanyrelatedfinancecharges.

ConsequencesofPayingLate


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KeepitSimple

ARecipeforSuccess

1. Youmustputyourdebtreductionplanin

actionnow,today.

2. Takesimplestepstostart.Writeasimple

budget.(Reviewoursamplebudgetinthis

book).

3. Writeyourdebtsonapieceofpaperinorder

ofsmallesttolargest.

4.Makeaplantostartyourdebtsnowballtoday

bypayingoffyoursmallestdebtfirst.

5. Ifyouareoverwhelmed,considercallinga

non

profit

credit

counselingagencyfor

help.

6. Youmuststartyour

safetysavingsand

revolvingsavings

accountsASAP. This

canhelpprotectyou

andyourfamilyincaseofanemergency.

DebtManagementKeyPoints


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Debthasbeenawayoflifeformany. Sometimes

parentspassthislegacyofdebttotheirchildren,dueto

theirownlackof

financialeducation.

Manystateshave

strengthened

personalfinance

educationin

schools.However,

ourhighschoolseniorsarestillfailingyearlypersonal

financeliteracytests. (Jump$tartCoalitionforPersonal

FinanceLiteracy)

Itisimportantforparentstounderstandtheimpactof

personalfinanceeducationinthehomeandnotrelyonthe

school

system

to

teach

the

basics

of

money

management.Parentsmustsetagoodexample.

Usingasimplewrittenbudgetandlearningtopay

yourselffirst(save1020%ofyourincome)arebasics

thataresoeasytoteach.Continuetobeapositive

exampleforyourchildren.

Ahighpercentageofyoungadultsleavecollegewith

unmanageableamountsofdebt.Credit

cards,

auto

loans,andstudentloanshaveputafinancialburdenon

oursociety.



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Thiscanbe aheavyfinancialburdenwhenstartinga

newcareerorfamily.Personalfinancesarenotdifficult.

Itdoeshowevertakematurityanddisciplinetoachieve

yourpurposeandgoalsinlife.Setgoalsandmaintain

soundfinancialhabits. KeepitSimple,Silly.

Throughoutthisbook,nowheredidwesayyoumustlivetotallydebtfree.Debtisunavoidableandshouldbethoughtofasafinancialtool.Amortgageisdebt,an

insurancecontractcanbedebt,andacarloanisdebt.

Thesecontractsareawayoflifeandshouldbe

managed.Yourdebtshouldtobemanagedinaway

itdoesnotaffectyourhealthnorthewellbeingof

yourfamily.

Whenusedproperly,debtcancreatewealth,suchas

whenyou

leverage

real

estate

for

financial

gain.

A

wellplannedstudentloanisdebtthatcanhelpcreate

futurewealththroughimprovedknowledgeandskill

enhancement.

Ifyouchoosetoprocrastinate,youmaybeoneof

thethousandsofAmericanslivingindebtand

withlimitedincomeatretirement. Theaverage

socialsecuritycheckis$1,000permonth,andfor

many,thisisnotenoughtopaythebillseach

month. Setaplanintoactionassoonaspossible.



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Financialliteracyhasbeenaroundforhundredsof

years. Formany,thisinformationissomething

new.Manyhouseholdshaveneverimplementeda

writtenbudget.Manyhaveneverconsideredthe

impactfinancialeducationcouldhaveintheir

household.

Whicheverfinancialplanyoudecidetoimplement,

keepitsimple;thiswillmakeitmucheasierto

repeatandmaintain.Asuccessfulfinancialplanis

asimple,repeatableplanthatcanbetaughtto

others.

Ifyouneedprofessionalhelp,therearefinancial

counselorsyoucanspeakwith. Lookforfinancial

counselorswhoaretrainedtodealwithdebt,credit,

creditscore,

and

know

how

to

build

asimple

spendingplan(budget)youcanunderstandand

follow.Agood professionaldesignationtolookforis

anAccreditedFinancialCounselor(AFC),asthese

aresomeofthebestconsumerfinancialcounselors

available.Agoodprofessionalfinancialcounselor

willmakeyourfinanceseasytounderstand.

Youcanfindoneinyourareabygoingtothe

www.AFCPE.orgwebsite. Thekeyis,starttoday.

ClosingStatement


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ThinkLikeAWinner

Dr.WalterDoyleStaples

TheRichestManInBabylon

GeorgeS.Clason

LivingonaBudget

PeterJ.Sander

DealwithYourDebt

LizPulliamWeston

TheMillionaireNextDoor

ThomasJ.

Stanley

WilliamDanko

ReadySetRetire

&

BucketsofMoney

RaymondLucia

RecommendedReading


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Notes


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Using a Household Budget Final

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