Wednesday, May 12, 2010

It's still Okay

Dave Ramsey often using a saying, "When it doesn't work, it still works out." It's kind of a confusing way of saying that if things don't go as planned, you still come out okay.

This is a really good philosophy for life- kind of like when of those quotes you here and then forget. So let's look at it in different contexts and maybe that will help it stick...

I recently met a woman who's family is living below the poverty line. They didn't have very much debt, but considering their income, it was probably more than they could handle. She wanted to go back to school and take out Federally insured student loans to get her through. Then when she graduated it would be easy for her to pay off the student loans and their other debt. Sounds great, right? Except that Federally insured student loans are not bankrupt able, they don't go away, and unless she becomes disabled or dies they are there for life.

If her plan to finish school by taking out student loans doesn't work out, where will that put her family? With a pile of debt that's not going away and the same income. It's probably a plan that wouldn't pass Dave's test- "When it doesn't work, it still works out." Anyway I tried to talk to her about that, but she sounds like she's going to do it anyway. That's fine, it's her choice, but she's banking on everything working out and everything going as planned. How often does that really happen?

Then I met a couple that pad off all their debt, saved up a six month emergency fund and a huge down payment for a home. They got a smaller home than what the bank qualified them for so that if one of them lost their income, they could still make their payments. If both of them lost their income, they had a six month emergency fund. If she got pregnant, or one of them had health issues, car issues, house issues, or family issues- they had a back up plan. Like Dave says, "if it doesn't work, it still works out."

There have been so many times in my marriage where my husband and I have had this perfect plan. And really it was perfect. If everything went exactly as planned, things would turn out great. I'm almost ashamed to admit it, but it has taken me about three years to finally realize that long term things never go exactly as planned. But now that I get it, I always try to have a work out plan, just in case things don't work out.

What about you?

Monday, April 26, 2010

Student Loan Debt

Several people have been asking me about student loans, so I felt it was appropriate to write about it.

People's opinions of student loans commonly fall into the "acceptable" side of debt. How else are you supposed to get a college education? Well quite honestly there is no other way for you to get a college education without student loans if you refuse to look at the other options...

I know we all know the "other" options but I'll repeat them just for a quick refresher:

*Get a job. Get a 2nd job. Get a 3rd job even. Work through the Summer.
*Take fewer classes, but take them year around. It makes it easier to work a full time job and go to school.
*Ask your employer for a scholarship.
*Ask potential employers for a scholarship.
*Get your general's from a community college. Make sure it's actually cheaper though :)
*Apply for scholarships. Every scholarship that you qualify for.
*Talk to the school's financial aid office to see what scholarships and grants are available for students in your situation.

Even then it may be hard to find the money to pay for school so if you're still looking at the student loan option here are some important statistics to look at:
According to USU Today, "The average college senior graduated this year with more than $19,000 in debt." So if you and spouse both go to school using student loans, you're looking at nearly $38,000 in debt. That won't be easy to pay off when the average household income in America is only $48,000 a year.

According to Matrix News "About 42 percent of students entering four-year colleges or universities graduate..."

That means that you can start school, get loans, and then not even get the degree that you were planning on. I know, I know, you're certain that you won't give up, you won't quit- but sometimes it isn't you that is stopping you from going to college. Surprise pregnancies, health issues, deaths, disabilities, etc. all can happen without your consent.

Also remember that going to school takes time. For most of us just getting a bachelors degree can take four to six years. A lot of things that can change in that time frame. Think back 4 years ago, are you were you thought you would be now? For most of us, I think we can say no. So why would we expect the next four years to go as planned?

One last thought on student loans-
With the recent recession that America has gone though, jobs have been extremely scarce in some areas. My husband and I had some friends that graduated in 2009. Student loans and all. And then, he couldn't find a job in his chosen field. In fact, he couldn't find a better paying job PERIOD. So he ended up having to pay on his student loans, plus all his other bills on the same income he had the whole time he was going through school.

He couldn't pay his way through college, but he could find the money to pay on student loans when it was the same income.

I'm not saying that when you finally graduate you won't be able to find a job... chances are we'll be beyond the recession by the time you graduate, but sometimes just having the degree and the will to get through college aren't going to put you where you want to be.

If you still want to get student loans, by all means do. Personal finances are personal and you should make your own decisions on the matter. Just make sure they are well informed decisions.

I personally wouldn't recommend student loans to anyone, but if you are going to do it be smart. Don't take out more than you need to cover your basics. Work through school- even working a night or weekend shift. Pursue other options as well (see above.)

"The only guarantee is change."

Thanks for reading :)

Friday, April 16, 2010

Sticking to the Budget (Envelope system)

A written budget is all fine and dandy, but if you don't stick to it, it is borderline pointless. So how do you stick to a budget? Well for one thing, if you are married, get your spouse to look over the budget with you and give you the A-Okay nod.

If you've got your spouse's okay on the budget, then you know he or she isn't going to mess things up.

The second thing you do is give yourself the okay to change the budget. Budgets should be changed at least monthly. Like we said in the Budgeting Basics post, finances change a little from month to month.

There are four additional things that I would suggest doing with your budget. The first is to make whatever you can, as much as you can, automatic. You might have a hard time remember to pay your utility bill, but if you let the utility company zap the money from your account every month, viola you stuck to your budget. At least for that part.

The other suggestion is to use the envelope system for things that you buy in person. Things like groceries, clothes, entertainment, eating out, etc.

When you get paid, look at your written budget and see what kind of things you can easily pay cash for. Say your budgeted $200 for groceries, then take $200 out of the account and put it in an envelope marked "Groceries." When that envelope starts to run low you are done grocery shopping. Remember to budget realistically with this.

Like I said earlier, you can also use the envelope system for clothes, eating out, and entertainment. It works the same way as it does for groceries. When your clothes envelope starts to run out, you are done buying clothes for that time period.

My third suggestion is to refill the envelopes often. Especially when you are just starting out, and especially with things that you regular shop for. Perhaps your clothes envelope will be untouched for two or three months. That's fine, just let it build up. But your grocery budget might be easily spent the moment you put money in there. So if you get paid bi-monthly or every other week, try to fill it up with every pay check.

So say your written budget says you'll get $200 for groceries this month. Split it so that you get $100 with the first pay check and $100 with the next pay check. That way if you blow all your grocery money, you aren't stuck eating rice and beans until the end of the month. If needed, you can also take $100 out with one pay check, but only put $50 in the envelope, and put the other $50 in an envelope for the next week. Either way, the more often you refill the envelopes the less likely you are to feel trapped by your budget.

My last suggestion is to budget realistically and to change your budget mid-month if needed. I often use the example of someone budgeting $50 a month to feed their family of ten. Sorry hun, but that probably isn't going to work. But say you get mid-way through the month and you realize that what you budgeted for groceries (or any category for that matter) isn't going to cut it. Then change your budget. Maybe you'll put a little less than you had planned into entertainment and more into your grocery budget. Maybe you won't go to the movies, or spend $200 on clothes. Whatever it is, remember that you have a zero based budget, so if you want to add to groceries, you'll have to take away from something else unless you can find more income.

If you change your budget mid-month make sure to get your spouses approval again. That way you are both on the same page with your finances.

Also keep in mind that with a zero based budget, having your online bank account show that you have money, doesn't necessarily mean you can spend it on whatever. Yes you should keep a little cushion in there because of glitches, double billings etc. but money in your bank account has already been earmarked for something else- so don't touch it.

Use cash when you can, make it automatic when you can't.
Remember that the budget is yours. If you want to budget $1000 every month on entertainment, the only thing stopping you is your income. Budgets can be fun too.

*A special note with fuel*
We don't use the envelope system with fuel. We keep a certain amount in our checking account that is used for fuel. I know other people buy a gift card from a gas station and refill it every month. Other people don't mind paying with cash. Whatever you want to do with fuel is fine as long as you stick to it.

Budgeting Basics

I started studying personal finances when I was 12 (can you say nerd?)so of course by the time I got into my 20's I thought I knew it all. In my mind a budget was a list of all your expenses. Simple right? If you don't know what your expenses are take a look at your credit card and bank statements and you can see where most of your money is going. Then grab a piece of paper and write down where what your expenses should be for the next month.

You can also track all your expenses for a month. Tracking means that you write down everything you spend money on. Trips to the vending machine included. If you don't know where you money is going, you'll need to track it (another way of saying follow it) to find out.

For most of us, every month is about like it was the month before- financially speaking of course. But don't use the same budget month after month. There are some things that don't show up monthly- Christmas, birthdays, car insurance, taxes, etc. For some of these things you can start a revolving account for. For example, if you know you are going to need $1200 for Christmas, then every month you could save $100 towards it ($1200 divided by 12 months gives you $100.) Other things are less expensive so when you change your budget monthly, you can add it in. For example, a birthday party that will cost you $50, can probably be added in to the budget rather than saving up for it.

There is more to a budget than just expenses though. There is also the income side of it. So figure out what your income is as well. It's okay to estimate low, or average it out, but this is very important. Sometimes your income is less than your expenses meaning you are short on cash every month. Ouch. That is definitively something that you need to be aware of. Having a written budget can show you where to cut back. Cancel cable perhaps? Eat out less? Temporarily find another part time job?

There is a concept that my "brilliant" self once thought, was almost pointless. It's called a zero based budget. When it comes to managing your money, if you know about what your income will be, you can potentially "spend" all of your income on paper before you actually get the money. So you know you have a $1000 pay check coming in at the end of the month, you can sit down and decide that $800 is going here, $50 here, $75 there, and another $75 there.

A zero based budget gives you a plan for every single dollar of your income. I have met a lot of people that want help with their budget and then they want a $50 or a $100, or even a $200 slush fund left over. Just in case. But the question then is, in case of what? Usually the response is, well in case we want to eat out, or in case something happens and we need the extra money, or in case we underestimated something in our budget, things like that. All of those things should be in your budget though.

If you want to eat out, give yourself "x" amount to eat out with. Yes there will be an emergency, so start budgeting for one. And of course, budget high for variable expenses (expenses that vary from month to month)like utilities, cell phone bill, etc. And then budget a little bit in a miscellaneous category because you will forget to budget for something- especially at first.

Now the question is, why should you budget? Remember when we talked about money being like water. That's why you should budget. A budget lays down the pipe work to get the "water" (money) where you want it to go. If you don't have one, the money literally just flows away. You had no control of it.

Right now the average household income in America is $48,000 a year. If you make that from 25 to 65 (40 years) you'll have nearly Two Million dollars flow through your hands, yet you never developed a plan for how to spend it. And what if you only budget for some of it? Say 80% of it... well then you let $40,000 slip away. That's insane! If you're going to work hard for your money, then make your money work hard for you. Yes, every dollar of it.

Click here to see how to stick to a budget

Sunday, April 4, 2010

The Art of Being Patiently Impatient

The best way to get anything accomplished is to focus on that one task; and as much as possible let everything else go.

How does that apply to getting out of debt? Simple, start focusing on it. You'll find that the more that you think about getting out of debt, the more you'll find ways to cut your budget, and create more income. But there is an art to accomplishing a task that could take as long as two years if not more. The art of it is learning to be patiently impatient.

The art requires that you be patient. It's going to take a while to get out of debt, so you have to be in it for the long haul. Yes it might take you "x" amount of time, but you and your spouse must commit to doing what it takes to get out of debt regardless of how long it takes.

And then you must be impatient. When our family first started working on getting out of debt (March of '09) we thought it would take us 2 1/2 to 3 years. As we continued working on it, we got impatient. There is no way I am living like this for another two to three years! What else can we cut out of our budget to get it done sooner.

But then it comes back to being patient. I will use my family as an example. When we first started out I honestly had our grocery budget at $65 a month. Granted we had food storage as well, so I wasn't starving our family, I just wasn't exactly feeding them either. Seven months later, we moved it up to $100, and then $150, and now it's at $240 a month.

Currently we have $500 left to pay off and I am growing more and more impatient with paying off our debt. What can we cut from our budget? How can we get this done sooner? Well once again, I cut our grocery budget. I thought if we could live off $65 a month for 7 months, why can't we live off of $27 for two weeks. Let me tell you that was the wrong answer for our family.

So while we're sitting here with less than $500 to pay off, I have to, once again, learn to be patient. With Summer semester coming and no 2nd job insight, I have to realize that it might actually take our family two to three months to pay off the last of our debt.

Before you can get out of debt, you have to plan for the future, and even the present. Groceries, car maintenance and repair, tuition etc. has to come first in order to keep you from going back into debt, or living off of food storage- or even just to keep your significant other from getting mad at you. Trust me, it's a lot easier to stick to a debt free plan if most of your upcoming expenses are already planned for. Be impatient with getting out of debt, patient with the process.

Really what I'm trying to say is just be smart. It's good to get out of debt, but some things do need to come first.

Sunday, March 28, 2010

Dave Ramsey's Baby Step One (more than just $1000 baby emergency fund)

Baby step number one in the Dave Ramsey plan is more than just a $1000. A lot of people don't realize that, but it is.

Baby step zero is getting current on everything.

Baby step one, is $1000 plus a written budget, cut up credit cards, and a commitment to being gazelle intense with getting out of debt. If you don't have all those, then don't lower your emergency fund down to $1000!

There's more to it too, if you have special family issues.... say health issues, job problems, pregnancy, or anything like that, then you need more than $1000 emergency fund.

The $1000 fund is also not a fund to cover life events. Kids out growing clothes, car repair etc. As Dave sarcastically says, "Who could see that happening!" We've all got cars that needs maintenance. So put it in the budget. Some of us have kids that are outgrowing clothes faster than we can put them on them, so budget for it.

$1000 isn't a lot. In fact, a lot of ridicule against the Dave Ramsey plan is that $1000 won't cover much. That's right, it won't. So be gazelle intense and get to your fully funded emergency fund (FFEF)as quickly as possible. Be proactive. If you can see the tires are going bald, that means you need to save up money to fix them. If you think that you or your spouse might lose your job, then you need to stop the debt snowball, go to paying minimums on everything and then start saving for the potential storm.

Being on Dave's plan is being pro-active with your life. Looking ahead, and thinking about your money.

Special notes about the Baby Emergency Fund:

1. If you make under $20,000 a year Dave says to have a $500 beginner fund.
2. Keep it liquid.
3. With your spouse, decide what an emergency is in your family.
4. Don't touch the Baby emergency fund (BEF) unless it is a true emergency.
5. If you have to use your emergency fund, then you need to go back and refill it asap.
6. Page 142 of the Total Money Makeover (3rd Edition) says, "I don't suggest you clean out your savings if everyone isn't having a Total Money Makeover. I also don't suggest you clean out your savings if you are planning to be on Baby Step Two (Start the Debt Snowball) for five years."

He also emphasis that most people take 18 to 24 months to get out of debt. if your plan looks like it will take longer, DON'T DESPAIR. The more you focus on getting out of debt the sooner it will be done. You can do this!

Monday, March 22, 2010

I can't do a budget, because the numbers won't fit

Would you believe that people actually come to me for financial tips now?
I know crazy.

A while ago there was a couple that came over and she was asking for tips on how to make their money stretch further. I suggested the basics, get on a budget, use the envelope system [I'll write more about the envelope system later] save for emergencies etc.

Meanwhile her husband is sitting there and I can just see him rolling his eyes. They (according to him)don't make enough money to make ends meet.

So what is a budget and why do you need one?

Let's look at it this way, money is a resource. The book "The Four Laws of Debt Free Prosperity" compares money to water. If you don't control it, it goes away.

A budget is like the pipes in our homes that lead water to where we want it to go.

Similarly, a written budget, shows us how the money comes in and then we decide where that money is going to go.

When you have a low income, and high expenses, or a high income and even higher expenses, it is vital that you tell your money where to go instead of just letting it go wherever.

Can you imagine trying to get water to your house without using pipes?

Well then don't manage your money that way!

To be clear I didn't look at this particular couples budget. I really don't know if they had the income to cover their necessities or not. But here's what happened:

Earlier that year four of their kids and the father had gotten sick. They had a total of $220 that they needed to pay out of pocket for their co-pays and deductibles.

He was left out of work for a few days.

When I suggested that they save a baby emergency fund (first step of the Dave Ramsey plan) he didn't think it could be done with their income.

And of course at the time they didn't have the emergency fund anyway, so it was too late to change that.

So then what happened?
Well, currently they are making payments on their medical debts.

So what he was telling me was that they couldn't save the money for an emergency, but once the emergency occurred, they could make payments on it.

I'm just saying, if money is tight, then you need a budget. Personally I think everyone needs one, but it can be extremely daunting to make a budget when the numbers don't fit.

Look, if the numbers don't fit, then make a priority list. "We only bring in "x" amount therefor we can only afford rent, utilities, food, and fuel.

Sorry kids, but we're not eating out this month."

When we first did a real written budget, we were sure the numbers wouldn't fit. We were lucky, they did fit, but things were tight.

I'm not saying everything will turn out okay if you do a budget. Honestly, your expenses might exceed your income! But if that is the case, then that is something that you truly need to be aware of.

So if you think the numbers aren't going to fit then you definitely need to have a leak proof budget. You can't afford not to!