Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give.

~William A. Ward

Tuesday, February 26, 2008

Let's Start the Saving Process: Step #1

The first step to becoming a "saver" and creating a realistic budget is:

Step # 1: Identify where the money goes.

To accomplish step #1: I recommend using the envelope system and retaining receipts for ALL of your expenses for 2 weeks. The envelope system is an old-fashion simplistic method of budgeting that consists of creating spending categories (i.e. groceries, entertainment, household, etc.) and storing the cash allocated for each category in an empty envelope. The idea is to NOT use your debit/credit cards for any purchases.

Before credit and debit cards were so popular people would withdrawal their paychecks to cover monthly expenses. It has been shown in various studies that we are more prone to spend more when we purchase items with our debit/credit cards due to the physiological disconnect of not "seeing" the money transfer hands. In other words: We do not realize how much money we are actually spending because the "swipe" of a credit card doesn't "sting" as much as passing the cashier a $50 dollar bill for a few gallons of gas.

Therefore, taking it back-to-basics will help you snap back into reality and become more conscious of your daily spending.

Thus, for 2 weeks I want you to do the following: create a budget that consists of the major spending categories (i.e. gas, groceries, entertainment, personal items, etc.) - withdrawal enough cash to fill all of your envelopes and as you spend in each category, account for every penny with a receipt.

Keep in mind - some expenses can not be paid with the envelope system such as rent and other payments that are automatically deducted from your account.

It should also be noted that after an accurate estimate of your monthly spending has been established, if you decide to employ the envelope system as your permanent budgeting mechanism transferring money between envelopes is not allowed, the transference of funds deteriorates the benefits of staying within your allowed amounts. See other posts about the Envelope System for more details.

Monday, February 25, 2008

Creating a Budget you can live with: Step #2

Money is a tool that enables you to reach your goals in life, but until you know where your money goes, you can’t make conscious decisions about how to use this tool effectively. A budget shows you exactly where your money goes and provides a spending plan that lets you save for the things that are important to you: a new house, a new car, a comfortable retirement, a college education, travel, or whatever your particular goals and dreams happen to be.

The first steps to creating a budget are:
1. Determining your net monthly (take-home) pay and monthly fixed expenses (i.e. Housing, Car Payments, Insurance, etc.)
2. Determine your monthly variable and discretionary expenses (i.e. Food, Transportation, Utilities, Personal, etc.)

How do I determine my monthly net income and expenses?
1. Review your monthly bank statements to calculate net monthly income and total fixed expenses
2. Review variable expenses such as utilities, cellular phone bills, transportation, etc. can be determined by averaging 3 months of statements.
3. Discretionary/Personal Expenses can be estimated by closely tracking every penny for a week or two. Using the Envelope system and retaining receipts can help with tracking impulse spending.

Tackle the Credit Card Debt! Step #3

First and Foremost I would advise you to take a hard look at your credit report! To get a copy of the credit reports go to:

After you have received a copy of your credit report total up all of your debts and prioritize them. There are two ways to sort them: By Credit Card Balance or by the Interest Rate on the Credit Card.

If you have been keeping up with my posts you will recall that I am a huge Dave Ramsey fan and an advocate of his baby steps program.

Dave would tell you to sort them by balances and start with the smallest balance. Concentrate on paying that credit card off and once you have succeeded continue on to the next on the list.

However, other financial advisors emphasize the importance of prioritizing your cards based on interest rates, focusing your efforts on the cards with the highest rates first and moving down the list.

I believe the solution depends on the person: If you are a person that must see results to say motivated then Dave’s approach will probably be best: Prioritize your cards based on the cards balance, pay the smallest balance first and once you have completely paid the card off proceed to the next. Always pay the minimums on the rest.

The goal is to improve your credit and become debt free – not ruin your credit by only making payment on one card

However, if you are very analytical and somewhat disciplined: Then I would advice you to focus first on paying down the credit card that is nearly maxed out. Pay minimums on the others. Next, start paying off the card with the highest interest rate. Pay minimums on others.

Be honest with yourself and what it takes you to stay motivated and pick one of the two. Most people need to see results to stay fired up and eventhough prioritizing your cards based on interest rates is the most “logical” answer - you may have to wait a little longer to see results.

Other Tips:

- Call your credit card companies, tell them you've got offers for cards at lower rates and ask them to lower your rate. If you've paid regularly, they are likely to negotiate.
- Stick credit cards in a drawer. Don't use them, but don't close accounts. Closing these accounts can lower your credit score. I highly recommend cutting the cards so you don’t have access to them at all! Out of Site – Out of Mind!
- Do automatic withdrawal from your checking account to your credit cards so you're never late.
- Use only debit cards. Money comes straight out of your checking account. You're not charging anything.
- As you continually pay off cards and free up cash make sure you put any additional cash toward your debt. Do NOT use it toward anything else. You monthly credit card payments should increase as you make progress.

Sunday, February 24, 2008

Step #4: Saving for Retirement: Building a Nest Egg

Most people panic in retirement planning because they think they have to replace their entire salary. You don't. You have to replace your current cash flow, and that's a big difference.

Let's assume that you earn $60,000 a year. You won't need $60,000 from your investments, because you probably didn't live off $60,000. You can adjust your needs downward for:

•Taxes. You paid Social Security and Medicare taxes while you were working, but you won't when you retire. So you can get along with 7.65% less than $60,000, or about $55,000, says Ray Ferrara, a financial planner in Clearwater, Fla. If you're self-employed, the tax was 15.3%.

•Savings. If you put a percentage of your salary into a 401(k) savings plan at work, you won't be able to any more. If you contributed $4,200 to your 401(k) annually, 7% of your salary, that's another big expense you won't have. Assuming you did just fine while you were paying Social Security taxes and saving for retirement, you can adjust your income goal down to $51,000.

•Social Security and pensions. You may not believe you will get Social Security, but you probably will get some benefit. Social Security's online Quick Calculator ( says a 50-year-old earning $60,000 today would get about $1,214 a month in benefits if she retired at 62. That's $14,568 a year in benefits. So you'll really only need to replace about $36,500 in income. Any additional pension you get would reduce that even more.

Before you get too giddy, remember that you'll have to buy health insurance if you retire before age 65, when Medicare kicks in. A 62-year-old male or female in Washington, D.C., would have to pay about $640 a month, or $7,680 a year, for health insurance, Ferrara says. And that's a policy with a $2,500 deductible and a 20% co-pay until you hit $3,500 in deductibles and co-payments.

Assuming our person with $60,000 income gets Social Security and pays for insurance, she will need to replace about $44,200 a year in income at retirement.

It's the big things

What can you do to reduce that more?

•Pay off your mortgage by retirement. Most people pay a quarter or more of their income to their mortgage. If your mortgage is $12,000 a year, that's $12,000 a year that won't have to come from savings.

•Think about moving. If you've made scads of money on your house, consider cashing out — by moving somewhere more affordable. Granted, it's possible only if you would like living elsewhere, but it may be one way to cut expenses.

Retire later. If you retire after 65, you won't have to buy private insurance until Medicare kicks in. (Medigap insurance, which pays what Medicare doesn't, is another story.) And you'll collect more in Social Security benefits.

•Kick the new car habit. Car payments can eat up $300 or more a month. Keeping your car an extra few years can reduce your expenses in retirement.

•Don't lend money you couldn't give away. THIS IS MY MOTTO! I HONESTLY DO LIVE BY THIS! All too often, loans to friends or children become gifts. That's fine, if you can afford it. If you can't, then be leery of lending it. "One of the best retirement investments is making sure your children are financially independent," Shine says.


Every little bit helps, whether you save $5, $50 or $500 you must start somewhere.

Monday, February 18, 2008

Why an Emergency Fund is Imperative

Having an emergency fund can save you a lot of heart ache! Everyone has their rainy days and we all know that bad luck comes in three's. To prevent an unforeseen event from ruining your week, month or even year; save at least 3-6 months of living expenses in a liquid investment.

These funds are not to be used for holiday savings, birthday savings or any other event that is not considered an "emergency". A good place to save the money would be an online savings account, normally they pay a higher rate of interest than your regular saving account with your bank and the money isn't as easily accessible as you don't have a ATM card and normally a transfer from your saving account to your checking account takes a day or two.

Wednesday, February 13, 2008

Question: How can I improve my credit score

Your first step in repairing poor credit should be to obtain a copy of your credit report. The three major credit reporting agencies are Experian, Trans Union, and Equifax. You can obtain a copy of your report by contacting these agencies by phone, by mail, or through their websites. Check the report carefully for any errors and make sure that all the information contained in the report is correct.

Next, you can try mitigating the impact of any derogatory credit you may have on your credit report by adding positive account information to your credit file. Start by contacting creditors with whom you have a good credit relationship and give them permission to release your account information to credit reporting agencies. You should then contact the credit reporting agencies and provide them with the names and telephone numbers of the creditors with whom you have good credit. For a small fee, most credit reporting agencies will call your creditors and add the positive account information to your file.

Another option is to go directly to your creditors and try to clear your credit record. If your poor credit resulted from circumstances that were beyond your control (e.g., hospitalization, layoff), and you have reconciled your account since that time, you may be able to convince your creditors to upgrade your rating.

If you have bad debts that are current, you may be able to negotiate away poor credit by agreeing to pay off your debts over a period of time. Contact your creditors and propose a deal in which you will agree to a reasonable repayment schedule if they agree to upgrade your status with the credit bureau.

You can also add a statement to your credit report that tells your side of the story. You have the right to include a 100-word statement in your credit file. The statement should list any extenuating circumstances that could possibly mitigate the negative credit information in your credit report. Perhaps you were hospitalized for a period of time and were unable to pay your bills, or maybe you were laid off from your job. If your credit history shows that you typically pay your bills on time, this statement could help to explain an isolated instance or period of derogatory credit.

Finally, you can always choose to wait out your credit problems. With some minor exceptions, derogatory credit will be purged from your credit report within seven years. However, if you can show income stability and prompt payment patterns, your situation will improve within one to three years. Keep in mind that you should avoid incurring any more derogatory credit while you try to repair your poor credit. If you do incur derogatory credit, the seven-year clock resets and starts ticking again!

Tuesday, February 12, 2008

Student Loan Fundaments

Understanding the types of loans offered to you in your financial aid package is key to managing your budget effectively. As you review loan types, it is helpful to ask yourself the following questions: "Who takes out the loan" and "Who pays the interest while I'm in school?"

There are three major types of student loans:
- Perkins Loans
- Stafford Loans
- PLUS Loans – Loan for Parents

The primary difference is that students take out Perkins and Stafford loans themselves, while PLUS loans can only be taken out by parents.

The loans that you borrow yourself are often a better deal because PLUS loans require your parents to begin repayment within sixty days of the final disbursement. With the Perkins and Stafford loans, you don't have to start paying them off until six or nine months after you graduate from school, withdraw, or fall below half-time enrollment status.

The question of whether a loan is subsidized or unsubsidized comes down to who pays the interest while you are in school.

Subsidized Stafford loans are need-based and are the BEST OPTION. The government pays the interest on these loans while you are in school and during the first 6 months after you graduate, withdrawal or fall below part-time. The government also pays the interest during any authorized deferment (i.e. if you apply to have loans deferred due to financial hardship).

Unsubsidized Stafford loans are not need-based, and you are responsible for all of the interest that accrues on the loan, including while you are in school. You may however, choose to pay the interest while you are in school.

While subsidized loans are the preferred choice, you are limited to specific amounts each year.

Question: I am a currently a college student and would like to know what is the best approach for tackling my student loan debt?


My only concern are my student loans. I predict that I will have incurred a debt of $80,000 after completing my Masters. I live a comfortable yet modest lifestyle and do not want to be bogged down with too much debt. I do not want to have student loan debt for the rest of my life.

I have not began a career yet, so at this point I feel like I can't make much of a contribution, which is probably where most people go wrong. Ideally, I would like to have my student loans paid off shortly after graduating; however, I don't know where to start.

I am interested in learning more about managing the money that I do have and also working on decreasing my student loan debt.


1st – Get a copy of your credit report to verify that student loan debt is all you have – also verify the amount of Student Loan debt you have accumulated thus far. Request a FREE copy of your report from here:

2nd – You have to create a budget to determine how much extra money you have left after expenses. Creating a budget will help you identify where you spend the most money and what categories you can cut back. After you have trimmed your expenses and accounted for every penny we now have feasible amount that can be contribute toward your debt. See other budgeting articles for details on how to create a budget.

3rd – After you have created your budget and determined how much you can start contributing, we can determine a reasonable timeframe for you to be completely out of debt. Starting now is a great ideal and will help you get out of debt quickly.

Many people make the mistake of waiting until after they complete college to start paying off student loan debt since their loans are in deferrment. The power of compounding interest works both ways! Compounding interest can either work in your favor or work against you! If you have $80,000 in loans your required payment based on a 20-year payment schedule and 5% interest rate is approximately $530/mo.

Guess What.......

About $300 of that is interest!!! If you have Subsidized Loans (you are NOT charged for interest during deferrment); therefore, any payments you make while you are in school or during that 6 month period after graduation will be used ENTIRELY to reduce your principal. I can breakdown the numbers even further to show you how beneficial it is to start early; however, I can see your eyes glazing over due to information overload so I will include that in my future post.

The moral of the story is! START EARLY!!!!

If you have any extra money - use it to pay off those loans! Every penny helps and anything you can scratch up can help you on your journey to becoming debt free.

Tax time is here. If you are receiving a refund, this is the perfect opportunity to contribute toward reducing your debt!

Friday, February 1, 2008

Question: Email your questions to or leave a comment!

Question: I just started my new job and my new employer will not match my contributions for another year. Should I still contribute to the 401k?

What should I do with my 401K from my old employer?

Since they aren’t matching your contribution it might be wise to put the money into a Roth Individual Retirement Account (IRA) for the time being, you will have a better selection of funds and it will help diversify your retirement monies, as you can withdraw funds from your Roth tax-free during retirement. Since your contributions to a 401K will be ongoing. You will mass a substantial amount of 401K funds that WILL be taxable during retirement. Contributing to a Roth and a 401K will give you the diversity of having tax-free and taxable funds to withdraw from during retirement.

As far as your 401K from your past employer: You can do a 401K rollover into an IRA at a brokerage such as Vanguard or Fidelity in which you can mange the funds yourself. If you don’t feel confident in managing the mutual funds on your own, you can contact a fund company or even your local Bank to have it actively managed. Personally I would roll them over into an IRA at Vanguard and pick a diverse group of funds. The rollover process is really simple and the Vanguard Customer Service team can help you if need be. I rolled over an IRA that I started in college into some Vanguard funds because I wasn’t getting a good return with the Bank and I just picked a few funds and “let it ride”.

If you need help picking funds let me know!

To submit your questions: Email me at
For my fellow bloggers: Feel free to use the comments to post questions or add useful tidbits.

I am changing jobs, what should I do with my 401K from my previous employer?

You have decided to change jobs! Congrats! God has a plan for you and following his will, always leads to great things.

Now that you have made the move you have three choices:

1. Cash-out the 401K and spend it on unnecessary items.
2. Leave the money in your previous employers plan
3. Rollover your 401K into an IRA ***The Best Option! ***

Starting with #1: NEVER CASH-OUT YOUR 401K! This is a NO NO! Do not withdraw money from your retirement! Do I have to repeat that……Do NOT cash-out your retirement fund?

If you withdraw your money in a lump sum from a previous employer’s retirement fund, you must pay taxes on the money you withdraw. On top of those taxes, your employer is required to take a 20% withholding from your lump sum, and if you are under age 59 ½, you may also be forced to pay a 10% penalty tax.

Now do you understand why it is important to NOT cash-out your 401K?

Oh, not to mention you will have to work for the rest of your life and never have the pleasure of retiring and leaving that job that you hate! And if you think Social Security will take care of your retirement…..Guess What….THINK AGAIN!

Your second option is to leave the money in your old company’s retirement fund, which isn’t the greatest ideal. Many 401k plan administrators charge record keeping and other fees to manage your account, regardless of whether you are still with the company. These fees can take a significant bite out of your return, especially if you have accounts maintained at several different employers.

Consolidating all of you old 401K accounts into an IRA is your best option and leads us to #3.

If you decide to roll it over (YAY!!!!), you may have the option of rolling your assets into
either an IRA (Individual Retirement Account) or your new employers plan. To avoid paying taxes and penalties, you should have these assets transferred directly to another
IRA custodian. This rollover will still have to be reported to the I.R.S. One
downside is that your retirement rollover cannot be rolled into a Roth IRA.

Since I am sure you have decided to rollover your 401k instead of choosing options 1 & 2. Stay tuned for information on how to roll the funds into an IRA.