You only have one more hurdle to go before you are completely debt-free! It's time to pay off your mortgage!
There isn't really much to say about this part. After you have begun contributing to your retirement plan and are saving for your child's college education, tack as much money as possible onto your principal mortgage payment each month. (Be sure you have a little fun with your money now though. After all, you are nearly debt-free including your home!)
The only thing I want to explain today is why it is ridiculous to keep your mortgage around just for the tax deduction. This concept seems to be popular these days, but in reality, it's just plain stupid. Let me explain...
Let's say your mortgage interest each year is $10,000. You can deduct that, right? Yep! Know what you'll get back? About $3,000. Hmmm...wait this doesn't make sense. So if you send $10,000 to the bank just to get a tax deduction of $3,000, you're still losing $7,000? That's right! See how stupid that is?
And here's another thing: If you are thinking about keeping your mortgage just to get a tax deduction, consider this instead: Give that $10,000 that you're wasting each year to a charity. Fully deductible and a MUCH better cause than the success of the bank!
It's up to you, of course, but it only makes sense to me. We certainly won't be keeping our mortgage payment around just for a tax deduction!
What do you think? What are your plans for your mortgage when you are debt-free? I'd love to hear input on what all of you plan to do!
Links to other parts of this series:
Part 1
Part 2
Part 3
Part 4
Part 5
Part 6
Showing posts with label Budgeting. Show all posts
Showing posts with label Budgeting. Show all posts
Monday, March 10, 2008
Monday, March 3, 2008
Money Monday - Budget, Part 6
Saving For Your Child's College Education
While many people will argue with this, I want to preface this topic with my own personal opinion: There are several successful people in the world who did not go to college. College is not an absolute necessity to having "the good life". In recent years, experience has begun to weigh more and more heavily over having a college degree in one's line of work. While it's possible that you might start out making more money with a college degree under your belt, that isn't always the case. And to be blunt: Life isn't about the money (although, sadly, our culture seems to think it is).
That being said, it is important to plan for your child's future. Even though life isn't about the money, we can't exactly live without money either. If you are in a mess of debt due to mountains of student loans, you can easily understand why sending your child out of the house with NO debt is the absolute best plan for them. (Of course, in order to keep them out of debt you need to teach them BY EXAMPLE how to manage their money wisely before they leave the house - but that's a whole different topic).
You may be wondering how much you need to save for your child's college education. I recommend using a monthly college planning form to figure this out. Once you have determined how much you need to save, you need to take a look at the options for saving for your child's college education:
ESAs (Education Savings Accounts a.k.a. the Education IRA)
This account grows tax-free when used for higher education. You can invest your money anywhere, in any fund or any mix of funds, and change it at will. It is the most flexible form of college savings plans. The ESA currently (someone please correct me if it has gone up) allows you to invest up to $2000 each year per child if your house hold income is under $200,000. If funded in a growth-stock mutual fund average 12 percent return when invested long-term, $2000/year (that's about $42/week) over an 18-year span would give you $126,000 for you child's college education!
529s
This is a state plan, but most allow you to use the money at any institution of higher learning in any state. There are several plans within this plan.
1. The "life phase" plan allows the plan administrator to control your money and move it to more conservative investments as the child ages. These perform at around 8 percent because they are very conservative.
2. The "fixed portfolio" plan set a fixed percentage of your investment in a group of mutual funds and locks you in until you need the money. You can't move the money, so if you ge tinto some stinky funds, you're stuck with them. This type may yield better returns, but it gives you less control.
3. The "flexible" plan allows you to move your investment around periodically with a certain family of funds. A family of funds is a brand name of mutual fund. You could pick from virtually any mututal fund in the American Funds Group or Vanguard or Fidelity. You are stuck in one brand, but you can choose the type of fund, the amount in each, and move it around if you want. (This one seems like the best option to me).
We originally started with ESAs for our two oldest children but, since we are still on Baby Step 2 of Dave Ramsey's plan and saving for college is Baby Step 5, we have put that on hold. We are also reconsidering where we want to invest for our children's future. What if our children decide they don't want to go to college? What if our girls want to be stay-at-home-moms? What if our children receive full scholarships to the college of their choice and would prefer to use the money we have saved for their wedding? We don't want to have to pay the fees for pulling that money for uses other than higher education, so we are considering other options, mainly mutual funds. But we have a little bit of time before we need to decide.
If you don't have very much money to set aside for your child's college savings, never fear. There are other options for them such as scholarships, grants, and *gasp* a job. We actually don't plan on paying for all of our children's college tuition. We plan on paying half and having them pay the other half. No loans. Just a job. We will teach them to save their money if they have a job in high school and go to school while working if they choose to go to college. Of all the legacies we plan on passing on to our children, we certainly do NOT plan on passing on the legacy of student loans. UGH!
By the way, I was very excited to see that, according to last week's poll, 1/4 of my readers are already debt-free! Kudos to you!
Links to other parts of this series:
Part 1
Part 2
Part 3
Part 4
Part 5
Part 7
(Many stats and information quoted on this page were taken from Dave Ramsey's book The Total Money Makeover).
While many people will argue with this, I want to preface this topic with my own personal opinion: There are several successful people in the world who did not go to college. College is not an absolute necessity to having "the good life". In recent years, experience has begun to weigh more and more heavily over having a college degree in one's line of work. While it's possible that you might start out making more money with a college degree under your belt, that isn't always the case. And to be blunt: Life isn't about the money (although, sadly, our culture seems to think it is).
That being said, it is important to plan for your child's future. Even though life isn't about the money, we can't exactly live without money either. If you are in a mess of debt due to mountains of student loans, you can easily understand why sending your child out of the house with NO debt is the absolute best plan for them. (Of course, in order to keep them out of debt you need to teach them BY EXAMPLE how to manage their money wisely before they leave the house - but that's a whole different topic).
You may be wondering how much you need to save for your child's college education. I recommend using a monthly college planning form to figure this out. Once you have determined how much you need to save, you need to take a look at the options for saving for your child's college education:
ESAs (Education Savings Accounts a.k.a. the Education IRA)
This account grows tax-free when used for higher education. You can invest your money anywhere, in any fund or any mix of funds, and change it at will. It is the most flexible form of college savings plans. The ESA currently (someone please correct me if it has gone up) allows you to invest up to $2000 each year per child if your house hold income is under $200,000. If funded in a growth-stock mutual fund average 12 percent return when invested long-term, $2000/year (that's about $42/week) over an 18-year span would give you $126,000 for you child's college education!
529s
This is a state plan, but most allow you to use the money at any institution of higher learning in any state. There are several plans within this plan.
1. The "life phase" plan allows the plan administrator to control your money and move it to more conservative investments as the child ages. These perform at around 8 percent because they are very conservative.
2. The "fixed portfolio" plan set a fixed percentage of your investment in a group of mutual funds and locks you in until you need the money. You can't move the money, so if you ge tinto some stinky funds, you're stuck with them. This type may yield better returns, but it gives you less control.
3. The "flexible" plan allows you to move your investment around periodically with a certain family of funds. A family of funds is a brand name of mutual fund. You could pick from virtually any mututal fund in the American Funds Group or Vanguard or Fidelity. You are stuck in one brand, but you can choose the type of fund, the amount in each, and move it around if you want. (This one seems like the best option to me).
We originally started with ESAs for our two oldest children but, since we are still on Baby Step 2 of Dave Ramsey's plan and saving for college is Baby Step 5, we have put that on hold. We are also reconsidering where we want to invest for our children's future. What if our children decide they don't want to go to college? What if our girls want to be stay-at-home-moms? What if our children receive full scholarships to the college of their choice and would prefer to use the money we have saved for their wedding? We don't want to have to pay the fees for pulling that money for uses other than higher education, so we are considering other options, mainly mutual funds. But we have a little bit of time before we need to decide.
If you don't have very much money to set aside for your child's college savings, never fear. There are other options for them such as scholarships, grants, and *gasp* a job. We actually don't plan on paying for all of our children's college tuition. We plan on paying half and having them pay the other half. No loans. Just a job. We will teach them to save their money if they have a job in high school and go to school while working if they choose to go to college. Of all the legacies we plan on passing on to our children, we certainly do NOT plan on passing on the legacy of student loans. UGH!
By the way, I was very excited to see that, according to last week's poll, 1/4 of my readers are already debt-free! Kudos to you!
Links to other parts of this series:
Part 1
Part 2
Part 3
Part 4
Part 5
Part 7
(Many stats and information quoted on this page were taken from Dave Ramsey's book The Total Money Makeover).
Monday, February 25, 2008
Money Monday - Budget, Part 5
Last week we talked about funding a FFEF (Fully Funded Emergency Fund) with at least 3-6 months of living expenses. Today we will discuss what to do once you have established your FFEF.
Investing: USA Today reported recently that 56 percent of Americans do not systematically prepare for retirement age by investing. Consumer Federation of America found that, of pepole making less than $35,000 per year, 40 percent said the best way for them to have $500,000 at retirement age is to win the Lotto. To top that, Wealth Builder magazine's poll found 80 percent of Americans believe their standard of living will go up at retirement. Talk about living in a fantasy! You must invest now if you want to spend your golden years in dignity.
Remember, you don't have any debt but a house payment now and you have 3-6 months of living expenses in savings (which is thousands of dollars). With only one payment, you should have plenty of money to invest in your retirement.
When we get to this stage, we plan to invest 10 percent of our gross income. But keep in mind that we are young. Our family should be at this point financially within 18 months and my husband and I will both be under 25 years old. If you are older (over 30), I recommend investing 15 percent.
Why not pay off the house first? Having a paid-for house at age 75 with no retirement savings doesn't get you very far. Why not save for college first? Your children's college degrees won't feed you at retirement. And there's a good chance that Social Insecurity isn't going to cut it (or even be around, for that matter).
An excellent choice for long-term investing is mutual funds. They average a 10-12 percent return on your investment. Research your mutual funds carefully and look for a good track record of winning for more than five years. It's a good idea to vary your mutual funds also (Invest in some Growth and Income funds, some International Funds, some Aggressive Growth funds, etc.)
Always start investing where you have a match. When you company will give you free money, take it. If you don't have a match, or after you have invested through the match, you should next fund Roth IRAs. If you max out your Roth IRAs, go back to investing in 401ks, 403bs, 457s, or SEPPs (for the self-employed) until you have reached 15 percent of your gross income.
I know I said I would talk about saving for your children's college educations today, but I think I will save that for next week.
Also, as I mentioned last week, if you have not yet cast your vote in the "How Much Consumer Debt Do You Have?" poll on the left side of the screen, please do so. I would love to know how many of you are in the same boat as we are and how many of you have already become debt free!
(Much of what I said today is directly quoted from or summarized from the book The Total Money Makeover by Dave Ramsey).
Links to other parts of this series:
Part 1
Part 2
Part 3
Part 4
Part 6
Part 7
Investing: USA Today reported recently that 56 percent of Americans do not systematically prepare for retirement age by investing. Consumer Federation of America found that, of pepole making less than $35,000 per year, 40 percent said the best way for them to have $500,000 at retirement age is to win the Lotto. To top that, Wealth Builder magazine's poll found 80 percent of Americans believe their standard of living will go up at retirement. Talk about living in a fantasy! You must invest now if you want to spend your golden years in dignity.
Remember, you don't have any debt but a house payment now and you have 3-6 months of living expenses in savings (which is thousands of dollars). With only one payment, you should have plenty of money to invest in your retirement.
When we get to this stage, we plan to invest 10 percent of our gross income. But keep in mind that we are young. Our family should be at this point financially within 18 months and my husband and I will both be under 25 years old. If you are older (over 30), I recommend investing 15 percent.
Why not pay off the house first? Having a paid-for house at age 75 with no retirement savings doesn't get you very far. Why not save for college first? Your children's college degrees won't feed you at retirement. And there's a good chance that Social Insecurity isn't going to cut it (or even be around, for that matter).
An excellent choice for long-term investing is mutual funds. They average a 10-12 percent return on your investment. Research your mutual funds carefully and look for a good track record of winning for more than five years. It's a good idea to vary your mutual funds also (Invest in some Growth and Income funds, some International Funds, some Aggressive Growth funds, etc.)
Always start investing where you have a match. When you company will give you free money, take it. If you don't have a match, or after you have invested through the match, you should next fund Roth IRAs. If you max out your Roth IRAs, go back to investing in 401ks, 403bs, 457s, or SEPPs (for the self-employed) until you have reached 15 percent of your gross income.
I know I said I would talk about saving for your children's college educations today, but I think I will save that for next week.
Also, as I mentioned last week, if you have not yet cast your vote in the "How Much Consumer Debt Do You Have?" poll on the left side of the screen, please do so. I would love to know how many of you are in the same boat as we are and how many of you have already become debt free!
(Much of what I said today is directly quoted from or summarized from the book The Total Money Makeover by Dave Ramsey).
Links to other parts of this series:
Part 1
Part 2
Part 3
Part 4
Part 6
Part 7
Monday, February 18, 2008
Money Monday - Budget, Part 4
Today we will begin answering a question that the average American will (sadly) probably never need to ask:
What do I do with my money when I'm debt free (minus the mortgage)?
We are eagerly awaiting this day in our family and we anticipate it arriving by the end of 2008. We have been aggressively attacking our debt for 10 months now and have paid off over $14,000. We have $8,700 to go and are fairly confident that we can cover this amount by the end of this year. When we have paid off our van, what will we do with our money?
Well, our situation is a bit different than some of yours, I'm sure. Right now, my husband is working two jobs. One job is necessary for our day to day living expenses. The other is necessary to pay off our debt. When our debt is paid off, he will no longer be working his second job, so our income with decrease quite a bit.
But let's assume that you have not picked up any extra jobs while paying off your debt and that your income will remain the same. And let's say that your debt snowball amount was $500 when you paid off your last debt. So now you have an extra $500 each month. What do you do with it?
You need a (FFEF) fully funded emergency fund. This amount of money should be at the very minimum 3 months of living expenses. I personally recommend 6 months or more. Use your debt snowball amount to fund your FFEF. Unlike the baby emergency fund you had before, this emergency fund is good for gaining interest. This isn't investment money, but go ahead and put it in an account that yields more than your average savings account. Try a money market account with no penalties and checkwriting privileges. This emergency fund is NOT for wealth building. It is simply in place for when it rains...and it will rain.
Next week, we will begin talking about investing and saving for your children's college educations.
Also, before you leave, please vote in the "How much consumer debt do you have?" poll on the left side of the screen!
Links to other parts of this series:
Part 1
Part 2
Part 3
Part 5
Part 6
Part 7
What do I do with my money when I'm debt free (minus the mortgage)?
We are eagerly awaiting this day in our family and we anticipate it arriving by the end of 2008. We have been aggressively attacking our debt for 10 months now and have paid off over $14,000. We have $8,700 to go and are fairly confident that we can cover this amount by the end of this year. When we have paid off our van, what will we do with our money?
Well, our situation is a bit different than some of yours, I'm sure. Right now, my husband is working two jobs. One job is necessary for our day to day living expenses. The other is necessary to pay off our debt. When our debt is paid off, he will no longer be working his second job, so our income with decrease quite a bit.
But let's assume that you have not picked up any extra jobs while paying off your debt and that your income will remain the same. And let's say that your debt snowball amount was $500 when you paid off your last debt. So now you have an extra $500 each month. What do you do with it?
You need a (FFEF) fully funded emergency fund. This amount of money should be at the very minimum 3 months of living expenses. I personally recommend 6 months or more. Use your debt snowball amount to fund your FFEF. Unlike the baby emergency fund you had before, this emergency fund is good for gaining interest. This isn't investment money, but go ahead and put it in an account that yields more than your average savings account. Try a money market account with no penalties and checkwriting privileges. This emergency fund is NOT for wealth building. It is simply in place for when it rains...and it will rain.
Next week, we will begin talking about investing and saving for your children's college educations.
Also, before you leave, please vote in the "How much consumer debt do you have?" poll on the left side of the screen!
Links to other parts of this series:
Part 1
Part 2
Part 3
Part 5
Part 6
Part 7
Monday, February 4, 2008
Money Monday - Budget, Part 3
As promised, today we will discuss (in more detail) the emergency fund and the debt snowball. If you are just joining in on this topic, you may want to skip back to the first and second parts of this series to catch yourself up.
Have you decided on how much you are going to have set aside in your emergency fund? As I mentioned last week, it all depends on your employment circumstances and your level of comfort.
Our family has chosen to keep an EF (emergency fund) of $1000 since my husband works 2 jobs and could conceivably pick up extra hours at either one if the other were to be suddenly terminated, which is unlikely in his field of work. Once our debt is paid off, we will "up" our EF to 6 months of living expenses.
Once you have determined how much you will be keeping in your EF, the next step is deciding where you will keep this money. The idea of an emergency fund is this: you may ONLY dip into the EF for a TRUE emergency. True emergencies would be unexpected car repairs on a necessary vehicle or your furnace going out in the middle of January - NOT a really good sale at the mall.
That being said, in case of an actual emergency, you need your money to be accessible. At the same time, you don't want it to be so accessible that you would constantly be justifying a reason to dip into it and providing yourself with that temptation. A separate savings account would be a good idea. A CD would not. You want to make sure that you will not be charged a fee for taking money out of your EF if you really need to. So keep it somewhere that fits that definition. Accessible, but not too accessible.
Throw every penny you have at your EF so you can have that in place while you are paying off debt. It is extremely important to establish the EF first because if you hit a financial bump in the midst of paying off your debt, you will have no choice but to put yourself into MORE debt in order to pay for your emergency. (And don't you DARE open a new line of credit!)
Once you have your emergency fund in place it is time to ATTACK your debt with a vengeance. If you do not feel hatred toward debt, you better work on it. Debt is a life-sucking, joy-stealing monster! Don't believe me? Get rid of it and see how much better your life is!
Now, for how to go about getting rid of your debt...
Our family is using a method called the "debt snowball" and it is the only method I can personally recommend. Do you remember when you were a kid and you used to roll snowballs all around the yard until you couldn't push it any farther? You started out with a tiny little ball and, as you rolled the snowball, it picked up more and more snow, faster and faster because it was gaining in size so quickly. The same theory applies to the debt snowball. Here is how it works:
List your debts from the smallest to the largest balance, excluding your mortgage. (We'll come back to the mortgage thing later). Please note: This is not the smallest payment nor is it the smallest interest rate. It is the smallest balance. What you're going to do is pay minimum payments on all of your debts AND at the same time, put every extra dollar you have into the smallest debt payment. When you have paid off the smallest debt, CLOSE THE ACCOUNT and add that payment amount to your next smallest debt. When that debt is paid off, do the same thing with the next one. See how your snowball is increasing in size?
For those of you who are visual learners like me, let me give an illustration:
Let's say you have the following list of debts:
1 Credit Card 1: $250 (min. payment: $10)
2 Credit Card 2: $700 (min. payment: $35)
3 Credit Card 3: $2300 (min. payment: $90)
4 Furniture Loan: $2450 (min. payment: $50)
5 Credit Card 4: $3100 (min. payment: $150)
6 Consumer Loan: $4600 (min. payment: $45)
7 2nd Mortgage/HELOC: $18000 (min. payment: $365)
8 Auto Loan: $23500 (min. payment: $450)
9 Student Loan: $26750 ($300)
And now let's assume that, after paying all of your minimum payments on all of your debts, you have $150 each month left over for your debt snowball. In less than 2 months, you would knock out the first debt. You would then have $160 to in your debt snowball. (Add your minimum payment from the first debt on your list and the debt snowball amount: $10 + $150 = $160). In about 3 more months, you would wipe out your 2nd debt. You would then add that minimum payment ($35) to your current debt snowball amount ($160) and put all of that money into debt #3. You get the idea.
You would continue this process until all of your debt (minus the mortgage) was completely gone! If, along the way, you encounter an emergency and have to dip into your EF, simply stop the snowball (but continue to make minimum payments) long enough to cover your emergency and then replenish your EF.
And THAT, ladies and gentlemen, is what we call the debt snowball.
But wait! I'm sure by now you're wondering: Why don't I pay off the highest interest rate first? Doesn't that make more sense for my pocketbook?
Well....sometimes, yes. But studies show that the motivation gained by seeing the momentum of your growing snowball gives you much more encouragement to keep paying off your debt than waiting 8 months to pay off your highest interest card first. Oftentimes, people who go that route end up losing their motivation quickly (because they do not see any quick results and therefore feel like their debt is not going anywhere) and giving up altogether. It may not make sense on paper, but trust me - once you get going, you will understand exactly what I'm talking about.
Now, about the mortgage....
The reason you do not include your mortgage in your list of debts is that most people's mortgage is a significantly greater amount of money than any other individual debt on their list. After you pay off all of your non-mortgage debt you will begin saving and investing and, since compound interest is a key component to saving, it's important to start saving before it's too late.
We will pick up with the mortgage further down the road in this series.
For this week, continue building your EF. If you already have your EF in place, then start listing your debts in order of smallest to largest and run some numbers on a debt calculator. You will be excited to see how quickly your smallest debts will disappear!
Coming next Monday: What do I do with my money when I'm debt-free (minus the mortgage)?
Links to the rest of this series:
Part 1
Part 2
Part 4
Part 5
Part 6
Part 7
Have you decided on how much you are going to have set aside in your emergency fund? As I mentioned last week, it all depends on your employment circumstances and your level of comfort.
Our family has chosen to keep an EF (emergency fund) of $1000 since my husband works 2 jobs and could conceivably pick up extra hours at either one if the other were to be suddenly terminated, which is unlikely in his field of work. Once our debt is paid off, we will "up" our EF to 6 months of living expenses.
Once you have determined how much you will be keeping in your EF, the next step is deciding where you will keep this money. The idea of an emergency fund is this: you may ONLY dip into the EF for a TRUE emergency. True emergencies would be unexpected car repairs on a necessary vehicle or your furnace going out in the middle of January - NOT a really good sale at the mall.
That being said, in case of an actual emergency, you need your money to be accessible. At the same time, you don't want it to be so accessible that you would constantly be justifying a reason to dip into it and providing yourself with that temptation. A separate savings account would be a good idea. A CD would not. You want to make sure that you will not be charged a fee for taking money out of your EF if you really need to. So keep it somewhere that fits that definition. Accessible, but not too accessible.
Throw every penny you have at your EF so you can have that in place while you are paying off debt. It is extremely important to establish the EF first because if you hit a financial bump in the midst of paying off your debt, you will have no choice but to put yourself into MORE debt in order to pay for your emergency. (And don't you DARE open a new line of credit!)
Once you have your emergency fund in place it is time to ATTACK your debt with a vengeance. If you do not feel hatred toward debt, you better work on it. Debt is a life-sucking, joy-stealing monster! Don't believe me? Get rid of it and see how much better your life is!
Now, for how to go about getting rid of your debt...
Our family is using a method called the "debt snowball" and it is the only method I can personally recommend. Do you remember when you were a kid and you used to roll snowballs all around the yard until you couldn't push it any farther? You started out with a tiny little ball and, as you rolled the snowball, it picked up more and more snow, faster and faster because it was gaining in size so quickly. The same theory applies to the debt snowball. Here is how it works:
List your debts from the smallest to the largest balance, excluding your mortgage. (We'll come back to the mortgage thing later). Please note: This is not the smallest payment nor is it the smallest interest rate. It is the smallest balance. What you're going to do is pay minimum payments on all of your debts AND at the same time, put every extra dollar you have into the smallest debt payment. When you have paid off the smallest debt, CLOSE THE ACCOUNT and add that payment amount to your next smallest debt. When that debt is paid off, do the same thing with the next one. See how your snowball is increasing in size?
For those of you who are visual learners like me, let me give an illustration:
Let's say you have the following list of debts:
1 Credit Card 1: $250 (min. payment: $10)
2 Credit Card 2: $700 (min. payment: $35)
3 Credit Card 3: $2300 (min. payment: $90)
4 Furniture Loan: $2450 (min. payment: $50)
5 Credit Card 4: $3100 (min. payment: $150)
6 Consumer Loan: $4600 (min. payment: $45)
7 2nd Mortgage/HELOC: $18000 (min. payment: $365)
8 Auto Loan: $23500 (min. payment: $450)
9 Student Loan: $26750 ($300)
And now let's assume that, after paying all of your minimum payments on all of your debts, you have $150 each month left over for your debt snowball. In less than 2 months, you would knock out the first debt. You would then have $160 to in your debt snowball. (Add your minimum payment from the first debt on your list and the debt snowball amount: $10 + $150 = $160). In about 3 more months, you would wipe out your 2nd debt. You would then add that minimum payment ($35) to your current debt snowball amount ($160) and put all of that money into debt #3. You get the idea.
You would continue this process until all of your debt (minus the mortgage) was completely gone! If, along the way, you encounter an emergency and have to dip into your EF, simply stop the snowball (but continue to make minimum payments) long enough to cover your emergency and then replenish your EF.
And THAT, ladies and gentlemen, is what we call the debt snowball.
But wait! I'm sure by now you're wondering: Why don't I pay off the highest interest rate first? Doesn't that make more sense for my pocketbook?
Well....sometimes, yes. But studies show that the motivation gained by seeing the momentum of your growing snowball gives you much more encouragement to keep paying off your debt than waiting 8 months to pay off your highest interest card first. Oftentimes, people who go that route end up losing their motivation quickly (because they do not see any quick results and therefore feel like their debt is not going anywhere) and giving up altogether. It may not make sense on paper, but trust me - once you get going, you will understand exactly what I'm talking about.
Now, about the mortgage....
The reason you do not include your mortgage in your list of debts is that most people's mortgage is a significantly greater amount of money than any other individual debt on their list. After you pay off all of your non-mortgage debt you will begin saving and investing and, since compound interest is a key component to saving, it's important to start saving before it's too late.
We will pick up with the mortgage further down the road in this series.
For this week, continue building your EF. If you already have your EF in place, then start listing your debts in order of smallest to largest and run some numbers on a debt calculator. You will be excited to see how quickly your smallest debts will disappear!
Coming next Monday: What do I do with my money when I'm debt-free (minus the mortgage)?
Links to the rest of this series:
Part 1
Part 2
Part 4
Part 5
Part 6
Part 7
Monday, January 28, 2008
Money Monday - Budget, Part 2
How are things coming along with keeping track of your expenses? I encourage you to continue doing this for at least a month to see exactly where your money is going.
For now, let's assume that month is over. You have tracked ALL of your expenses and can see where every cent of your hard-earned income has gone. Now what?
If you are spending more than you are making, you have a serious problem. And as I mentioned last week, what you need to do next is to get rid of things that are unnecessary. Cable, internet service , cell phones, movie theaters, and restaurants are a good place to start. If, even after cutting out ALL non-necessities, you are still spending more than you make, you have no option but to increase your income. Get a job delivering pizza, working at Starbucks, tutoring, babysitting neighbor kids, or doing retail. Whatever you can find to increase your income, do it.
If you have tracked for a month and have found that you are spending less than you make, you may still want to consider cutting out unnecessary things - especially if you have the big "D" word that I'm about to address: DEBT.
There's an excellent chance that, if you live in America, you have debt. And a good amount, at that. It seems almost an impossibility in today's culture to live without debt.
The average American owns at least 5 credit cards. One in six families with credit cards pays only the minimum due every month. Roughly 70% of homes in the United States that are occupied by their owners have a mortgage. Of those homeowners with a mortgage, 22.6% of them have either a second mortgage or a home equity line of credit. It is rare to find someone who paid cash for their vehicle.
But living debt free is not as impossible as it may sound. Making sacrifices now will be well worth it later in life!
As debt soars higher and higher in America, savings has become a thing of the past. After all, who needs a savings account when there are credit cards?
A savings account is a VERY important thing to have in place for the purpose of emergencies. Many people say that they only keep their credit cards around for emergencies. But let me tell you something: That would be the absolute WORST time to use a credit card!! At the point in your life when you know you cannot pay for something, you would choose to put your life on a credit card that charges you interest up the wazoo?? That's craziness!! A savings account is a MUCH wiser decision.
If you have debt, however, you don't want to save and save and save while you continue to pay gobs of interest on your loans and credit cards.
So how much savings is enough? Well, that depends on you and your situation. Some people recommend $1000. Some people recommend 3 months of living expenses. Some recommend 6 months. So how should you decide? Let me give you a few examples:
If you and your spouse both work full time, you would probably be safe leaning toward a smaller amount in your savings account. If only one of you works, you might want to increase the amount a bit in case of an unexpected job loss or medical emergency. If one or both of you are contract workers or your income varies dramatically due to a sales position, you would probably want to keep a larger amount of money in your savings.
Do what feels comfortable to you, but don't go overboard. Remember that you are continually paying interest on all of your debts while you are building your emergency fund (savings account).
Your assignment for this week: Work on getting rid of unnecessary expenses in your life. If you are spending more than you are making, get out there and look for an additional source of income. And as you cut out the non-essentials in your life, begin building your emergency fund.
Next week, we will talk more about your emergency fund and begin looking at what I consider to be the most effective way to pay off debt: the debt snowball.
Links to the rest of this series:
Part 1
Part 3
Part 4
Part 5
Part 6
Part 7
For now, let's assume that month is over. You have tracked ALL of your expenses and can see where every cent of your hard-earned income has gone. Now what?
If you are spending more than you are making, you have a serious problem. And as I mentioned last week, what you need to do next is to get rid of things that are unnecessary. Cable, internet service , cell phones, movie theaters, and restaurants are a good place to start. If, even after cutting out ALL non-necessities, you are still spending more than you make, you have no option but to increase your income. Get a job delivering pizza, working at Starbucks, tutoring, babysitting neighbor kids, or doing retail. Whatever you can find to increase your income, do it.
If you have tracked for a month and have found that you are spending less than you make, you may still want to consider cutting out unnecessary things - especially if you have the big "D" word that I'm about to address: DEBT.
There's an excellent chance that, if you live in America, you have debt. And a good amount, at that. It seems almost an impossibility in today's culture to live without debt.
The average American owns at least 5 credit cards. One in six families with credit cards pays only the minimum due every month. Roughly 70% of homes in the United States that are occupied by their owners have a mortgage. Of those homeowners with a mortgage, 22.6% of them have either a second mortgage or a home equity line of credit. It is rare to find someone who paid cash for their vehicle.
But living debt free is not as impossible as it may sound. Making sacrifices now will be well worth it later in life!
As debt soars higher and higher in America, savings has become a thing of the past. After all, who needs a savings account when there are credit cards?
A savings account is a VERY important thing to have in place for the purpose of emergencies. Many people say that they only keep their credit cards around for emergencies. But let me tell you something: That would be the absolute WORST time to use a credit card!! At the point in your life when you know you cannot pay for something, you would choose to put your life on a credit card that charges you interest up the wazoo?? That's craziness!! A savings account is a MUCH wiser decision.
If you have debt, however, you don't want to save and save and save while you continue to pay gobs of interest on your loans and credit cards.
So how much savings is enough? Well, that depends on you and your situation. Some people recommend $1000. Some people recommend 3 months of living expenses. Some recommend 6 months. So how should you decide? Let me give you a few examples:
If you and your spouse both work full time, you would probably be safe leaning toward a smaller amount in your savings account. If only one of you works, you might want to increase the amount a bit in case of an unexpected job loss or medical emergency. If one or both of you are contract workers or your income varies dramatically due to a sales position, you would probably want to keep a larger amount of money in your savings.
Do what feels comfortable to you, but don't go overboard. Remember that you are continually paying interest on all of your debts while you are building your emergency fund (savings account).
Your assignment for this week: Work on getting rid of unnecessary expenses in your life. If you are spending more than you are making, get out there and look for an additional source of income. And as you cut out the non-essentials in your life, begin building your emergency fund.
Next week, we will talk more about your emergency fund and begin looking at what I consider to be the most effective way to pay off debt: the debt snowball.
Links to the rest of this series:
Part 1
Part 3
Part 4
Part 5
Part 6
Part 7
Monday, January 21, 2008
Money Monday - Budget, Part 1
The first question that needs to be answered about budgeting is: Why is a budget necessary for my life?
Let me give you a few reasons: A budget will help you tell your money where to go - not the other way around. A budget will bring peace and harmony to your home and your marriage. A budget will keep you on track with your short-term and long-term financial goals. And most notably, a budget will allow for saving, investing, giving, and paying off debt so that you can enjoy a life of financial peace.
In order to establish a budget, you must first learn to overcome the mindset that you "need" stuff. This mindset is sometimes referred to as "stuffitis" - the idea that you must constantly be getting more stuff in order to make you happy. Once you have conquered that hurdle, a budget is actually quite simple.
Begin by tracking your expenses to see where your money is going. For one month, track EVERY PENNY you spend - cash, check, and card. If you have never done this before or if it has been a while since you last did this, chances are you will be surprised where your money is actually going. When my husband and I did this 2 years ago, we realized that we were spending an average of $300/month solely on going out to eat. Yikes! That was equivalent to what we were spending on groceries each month!
After one month, if you have found your income to be greater than your outflow, Congratulations! Know that you are in the minority. I will pick back up with you next week.
However, if after tracking your expenses for a month, you discover that your outflow of money is greater than your income, you need to do one of two things (or better yet - both!):
1. Increase your income
2. Decrease your expenses
Now, I realize that in America credit cards grow on trees, and cash advances are as common as dirt. But let me tell you something else about these things: they're STUPID. Paying interest on your life is not living. It's being stupid. So stop using the dang things.
If credit cards and cash advances are not a part of your equation, you need to take a closer look to see what you can rid yourself of in order to better your financial situation. As shocking as this might be, things such as cable, cell phones, new cars, internet service, restaurants, movies, and beer are not essentials in life. In fact, all of our lives would probably be much more productive without them. At any rate, if your outflow is greater than your income you need to cut costs somewhere and I suggest starting with that list.
Get started tracking your expenses and we will pick up on Budget, Part 2 next week!
Links to the rest of this series:
Part 2
Part 3
Part 4
Part 5
Part 6
Part 7
Let me give you a few reasons: A budget will help you tell your money where to go - not the other way around. A budget will bring peace and harmony to your home and your marriage. A budget will keep you on track with your short-term and long-term financial goals. And most notably, a budget will allow for saving, investing, giving, and paying off debt so that you can enjoy a life of financial peace.
In order to establish a budget, you must first learn to overcome the mindset that you "need" stuff. This mindset is sometimes referred to as "stuffitis" - the idea that you must constantly be getting more stuff in order to make you happy. Once you have conquered that hurdle, a budget is actually quite simple.
Begin by tracking your expenses to see where your money is going. For one month, track EVERY PENNY you spend - cash, check, and card. If you have never done this before or if it has been a while since you last did this, chances are you will be surprised where your money is actually going. When my husband and I did this 2 years ago, we realized that we were spending an average of $300/month solely on going out to eat. Yikes! That was equivalent to what we were spending on groceries each month!
After one month, if you have found your income to be greater than your outflow, Congratulations! Know that you are in the minority. I will pick back up with you next week.
However, if after tracking your expenses for a month, you discover that your outflow of money is greater than your income, you need to do one of two things (or better yet - both!):
1. Increase your income
2. Decrease your expenses
Now, I realize that in America credit cards grow on trees, and cash advances are as common as dirt. But let me tell you something else about these things: they're STUPID. Paying interest on your life is not living. It's being stupid. So stop using the dang things.
If credit cards and cash advances are not a part of your equation, you need to take a closer look to see what you can rid yourself of in order to better your financial situation. As shocking as this might be, things such as cable, cell phones, new cars, internet service, restaurants, movies, and beer are not essentials in life. In fact, all of our lives would probably be much more productive without them. At any rate, if your outflow is greater than your income you need to cut costs somewhere and I suggest starting with that list.
Get started tracking your expenses and we will pick up on Budget, Part 2 next week!
Links to the rest of this series:
Part 2
Part 3
Part 4
Part 5
Part 6
Part 7
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