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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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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.
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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.
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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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UsingAHouseholdBudget
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.
UsingAHouseholdBudget
WeeklyExpenses
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UsingAHouseholdBudget
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.
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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.
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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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Dontcountonwinningthelottery. Evenifyou
didhitthebigoneawrittenbudgetisamust.
Investyour
lottery
ticket
money
into
ahigh
yield
savingsaccount. Themoneysavedwillbeanice
accountafterafewyears.
LotteryWinner
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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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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
BuildingWealthUsingaBudget
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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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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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.
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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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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.
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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.
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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.
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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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54
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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55
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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56
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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57
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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58
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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60
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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61
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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62
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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63
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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64
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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65
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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66
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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67
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.
DebtManagementKeyPoints
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68
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.
DebtManagementKeyPoints
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69
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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70
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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