1. Save $1,000 to start an Emergency Fund
2. Pay off Debt using Debt Snow Ball (See Debt Snowball for further details)
3. Fully Fund Emergency Fund with 3-6 months of expenses
4. Invest 15% of household income in Roth IRA’s and Pre-Tax Retirement Plans (.e. 401K, 403B, etc.)
5. Start a college fund for children
6. Pay off home early
7. Invest in Mutual Funds and Real Estate – Build Wealth and Give!
Monday, March 3, 2008
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.
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.
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: www.annualcreditreport.com.
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.
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.
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