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Wednesday, January 4, 2012

Money, Learning To Make It Work For You, Killing The Debt Beast

      How do you make your money work for you.  The first thing you need is a budget.  Budgets suck and they are a pain, but they work.  Why do you need a budget.  It tells you where your money is really going versus where you think it is going.  As I said in my previous blog, you need a plan and a budget.  With a plan you figure out where you want to go.  With a budget you figure out how you can get to where you want to go.  Budgets have three parts.  At least ones for planning things.  The first part is to figure out how much you need to achieve your goals. How much do you want to retire on.  How much is your favorite car going to cost.  How much for your dream home or vacation.  That is part A.  Part B is the important part.  You need to account for every penny you have and how you spend it.  If you already have bills.  How much goes on the principal and reduces what you owe.  Next figure how much you pay in interest on each bill every month. This part helps you figure out what your cost are.  Which things can you change and cut back on.  Or better yet totally eliminate. Finishing Plan B helps you do Part C.  Part C is where you figure out the difference between A and  B and establish how much you need to save or earn to realize your goal.
     It is not uncommon for people to owe as much as one quarter of their income in interest on their home, car and credit cards.  That means that half of your income is not yours.  How is that?  Remember what I said in my previous blog.  The borrower is the slave of the lender.  Unfortunately it is a truth that many people have fallen captive to.  Fortunately bills with interest can be paid off.  When the debt is eliminated the money becomes yours again.  The money that was obligated for bills becomes yours to do with as you please.  If you  still have debt the best thing you can do is continue to pay off the debt.  As you become debt free you have more money to live on.  Not only that but you do not need near as much to survive. You will always have some bills like utilities and groceries but it will not take as much to pay your bills.  You are moving towards real freedom. You will feel as if a burden has been taken off your back.  There are several ways to get the interest burden off your back.  How you do it will be determined by you and how serious you are about achieving your goals or dreams. The more of your money that is really yours, the sooner you will reach your goal.
     There is another thing that is nice about living debt free.  Your credit score does not matter.  Banks charge you more if they think you "MIGHT" be a risk.  It can be over something very minor or it could be over something that was totally out of your control.  Something like a medical bill that had a very high copay or maybe you did not have insurance.  So in essence you are being punished because you were poor or at least to poor to pay a very large bill that you had to pay through no fault of your own.  I will touch on this issue again later when I discuss the cost versus the benefit of having health insurance. I am sort of getting off track.
    You will learn something when you do a budget.  The big things that most people have financed like cars, houses and credit card debt are the things that take the most out of your pay.  Fortunately all these can be dealt with over time if you are serious about achieving your goals.  There may come a point in life when your debt becomes overwhelming through no fault of your own.  If one of you becomes unemployed it can be hard.  If both it can be devastating.  If you are single it may be hard to face, but most of the time going back home can give you a chance to reorganize.
      At this point I am going to use a figure that is easy to work with to show what I am talking about.  Say you make a $1000 a week gross income or about $4000 a month. Now right up front you loose as much as 30% for taxes insurance and whatever your employer deducts.  We are already down to $2800 a month to live on.  So now you take out the house/rent payment of say $600,  the car payment of $400 a month, utilities $200, cable/TV/internet $100, groceries$400 per month,lawn care$100.  Well now we are down to $1000 a month and we have not included gas, entertainment, cell phones, pet care or many other little things that you have to do monthly.  Hopefully when you get done your total budget will be less than $4000.  However do not be shocked if the number comes  up  to say $4500 or more.  That is not uncommon.  However it is how people get in trouble.  They do not look at  the whole picture.  They look at little pieces and many have no clue how much they actually spend.  The little pieces do not seem like much. You say I can afford this.  Then you say I can afford that.  The trick is can you afford all of the this's and that's together.  When you total them all up you might be surprised.  If you are monthly robbing Peter to pay Paul that is a good sign you need to sit down and really do a budget.  It is a sign you may have passed that point where all the this's and that's total more than you make per month.  If you are going to start saving towards a dream or goal you have to have income that is not committed each month.  If that is not the case, decisions have to be made.  What do I have to have? What can I get rid of that actually helps?
      How big of sacrifices are you willing to make.  If the totals come to over $4000 dollars you need to make some kind of adjustment or you will sooner or later be in bankruptcy court.  Many people have no idea how they got there.  What can go?  You can dump the cable and internet, you can start doing the yard work yourself.  You can be more frugal with the groceries and the eating out.  Where do I suggest you start. Well with you. If you are always broke and miserable you will not stay on a budget.  Give yourself say $10 a day to spend anyway you want.  Give yourself an allowance, but be reasonable.  My preferred method is to use envelopes and put in so much a day or week and stick to it.  Don't feel guilty. You work hard and you earn your money.  You deserve to be paid first not last. Now redo the bills and see where you stand.  With house, car and credit cards it is not uncommon for people to pay as much as a $1000 dollars a month in interest.  Getting rid of the interest debt is one goal you should strive for.  Eliminating bills you pay interest on will be a big help.  Do your really need the shiny new chick magnet to drive around in and stroke your ego.  Hopefully you are not upside down in the car.  If you aren't and get rid of it you are ahead.  Buy a cheaper car that you can pay cash for.  Now you no longer need the high cost full coverage insurance the bank required.  From my own experience my wife pays $1200 a year insurance on her car.  It is paid for but it is pretty new.  My car cost less than her yearly insurance.  I pay $200 a year for the insurance on my beater and I have no payment.  Just taking care of the car problem can save as much as $500 a month for the payment and insurance.  The next thing that most people do not need, but like to have are credit cards. You may have bank cards or store cards.  Store cards are okay if you pay them off every month.  If you do not they usually have high interest rates.  Bank cards vary.  Once you make up your mind to get out of debt cut up all the cards but one.  The one with the lowest interest and the lowest balance.  Start looking in the mail and on line for the no interest for 12 or 18 month deals.  Read all the fine print though. Make sure there is no annual fee. Then roll as much of the card debt as you can into a no interest card.  You will see why shortly.
     Here is how you handle the rest of the cards.  Most cards today have a section in the statement that tells you how much you have to pay to pay the balance off in three years which is a good goal.  Pay that amount as a minimum. That is not the minimum amount on your bill.  If you only pay the minimum amount which is on the bill you will never pay it off.  The credit card companies do not want you to pay them off.  They love taking that interest money. It you can not pay that much you are already in trouble.  Now take the total of the monthly payments and divide by ten.  Say the total is $1000 dollars.  You now commit by adding 10% to the total and paying $1100 a month till the debt is gone.  Here is how you do it.  Some people say to pay off the highest interest card or the largest debt card.  I prefer attacking the smallest debt card.  It will pay off quicker and you will see progress and that will encourage you to keep at it. Once you pay that small card off you roll that into attacking the next card.  Say the payment was $40 a month.  You added the extra $100 to it and paid it off in say three months.   Remember it was the little card.  Now you pick the next target.  Say its payment is $60 a month.  Now you add the $40 you paid off and the $100 extra a month to the $60 a month and you start paying $200 a month on the $60 bill. Hopefully it pays off in say four months and you go after an $80 a month bill.  Now you are paying $280 on the $80 bill.  Hopefully you see how this is working. The trick is to keep doing it till all the credit cards are paid off and hopefully torn up.  Suddenly you now have a $1000 a month that is "YOURS" and you do not owe to anyone.  You can start saving toward that dream or goal you had.  In just a year you can walk in and pay $12,000 cash for that low mileage next to new version of the car you got rid of. Buying a brand new car is like throwing money away.  As soon as you drive it, it looses several thousand dollars in value.  Is your ego that important to you?  You can buy the lower insurance and you have no payment.  Also you have the title.  You can use that title as collateral to get a loan from a bank.  Hopefully you read my earlier post and know how to do that through a credit union.  Even a regular bank should work with you if you have money in savings.  My dad used to get the banks to lower the interest rate on car loans by 2 or3 percent just by telling the banker he got a better offer at a competing bank.  It is learning how to play their game and if they are going to use your money.  Make them make it worth your while.  My next blog is about what to do if it is really drastic and you still are not in a positive income situation.  That means you owe more than you make.  Remember budgeting is something you have to stay at and  on top of.  It can make your life a lot easier.  Also there is nothing wrong with borrowing as long as you are the one who benefits.  I often borrow money to buy things I know I can sell at a profit.  In that case I do not mind using the banks money.  It is making money work for you, instead of you working for money.

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