Archive for January, 2009

Income Tax Refund: Opportunity Knocks

January 31, 2009

This is tax filing season.  We have started gathering our papers for our accountant.  The income tax refund you receive is an “opportunity.”  What kind of opportunity?  That is up to you.  There are hundreds of ways to spend this money.  Below are some suggestions on wise ways to use your “opportunity” money:

1) Fund Your Emergency Fund.  One thing I hope you take from the current job market is to be prepare for the unexpected.  Having an emergency fund also protects you against using your credit cards for unexpected expenses.  Appliances break down.  Cars need repair.  Having an emergency fund can give you peace of mind.  I recommend a $1000 minimum for your emergency fund. 

Pay Down Outstanding Debt.  If you have a large debt load, it makes sense to apportion some of your refund to attack this.  Debt keeps you from enjoying life.  It robs you of sleep.  It puts strain on relationships.  Making a dent in some of your debt is a good idea. 

Have Fun (within reason).  You know the saying all work and no play.  It’s okay to designate some of your refund for some fun for yourself and family.  I recommend that your  fun money be less than 25% of your refund amount.  Oftentimes families allow having fun be there biggest priority with a tax refund check.  It is important that you have your priorities in order when spending this money.

Additional Tip:  Don’t spend it before you get it!  Folks make a couple errors when they do this.  First of all, you might not get the amount back that you spent.  This just adds more to your total debt.  Secondly, the unexpected can happen while you’re check is “in the mail.”  An urgent repair can pop up and you’ve already spent the check before it arrives.  Wait until the money is in your account before you spend the first dime. 

His Money? Her Money? What Gives?

January 29, 2009

I’m interested in this ever complex issue of how couples manage their money.  When a couple marries they must decide how to manage the money.  Will they have combined accounts, separate accounts, a spending allowance? 

Bottom Line: It is Your Financial Future (what benefits one benefits the other).  Who spends what isn’t as important as whether you agree on a system that works.  Mutual agreement is the main issue.

Agreement on Goals: It’s important that you both discuss your short-term and long-term financial goals.  Maybe you both agree on eliminating debt but you differ on the timelines to accomplish these goals.  You need to be on the same page.  There are times when compromising is necessary. 

What is the Payoff?  How much arguing about money does it take to finally agree on your finances?  Is one of you or both being selfish?  Are you resentful over the debt your spouse brought into the marriage?  Have one or both of you made big purchases without discussing it with the other?  It doesn’t take long before the money fights begin to take their toll.  If you want marital peace, you must work together on your financial picture

It’s about Respect.  Making financial decisions independently can put stress on your marriage.  Asking the opinion of your spouse on an upcoming decision communicates that you value and respect their input.  Respect is a 2 way street.  If you give it, you will get it back. 

The power of Teamwork.  You and your spouse are a team.  While you may feel like you’re competing against each other at times, the fact remains that working together toward a goal makes marriage more fun. You may have heard the acronym: TEAM: Together Everyone Achieves More.  The more you work as a team on finances, the more peace you’ll find in your marriage.

Do you and your spouse have a good plan that works in your day to day finances?  Please share your comments so others can gain more from this post.  Thanks

Retirement Planning: 3 Reasons To Start

January 27, 2009

Retirement for a lot of folks seems so far away.  Oftentimes this results in a lack of urgency to begin saving for the future.  There will be expenses when you retire.  There are many forces to take into consideration when you think about when to start planning for retirement.  Knowing more about these challenges can give you motivation to begin saving for your future.  Money is active and always changing.  Below are three reasons for you to learn more and start planning for your retirement.

 

 

1) Inflation

Put simply, inflation is defined as continuously rising prices, or the continual fall in the the price of a dollar.  It is measured in percentages.  We all know the price of groceries and gas went up this past year.  The last decade inflation has averaged around 3%.  However, inflation in 2008 will probably be at least 4.0%.

I went to www.usinflationcalculator.com and found that what cost $20.00 in 1988 cost $35.54 in 2008.  This is a 77% increase in price over a 20 year span.  If you are 5 or 25 years from retiring, you must take inflation’s affect into account when thinking about your future.

I’m not a mathematician but if the rate for the past 20 years remains the same for the next 20, here is what a round of golf will cost.  Today’s cost: $30.00.  2028 = $53.10.

Sometimes seeing the numbers can help us see the need for investing now.  The earlier you begin saving can help you enjoy the benefits of the next reason.

 

2) Compound Interest

This has been called the 8th wonder of the world.  The money that you invest compounds each year. Example: $1200 invested in year 1, compounded twice a year at 10% interest is 1323 (1200 + 123)

                1323 at end of year 2, same 10% rate 1323 + 135 = 1458

                1458                     3,                      1452 + 145 = 1608

This example assumes you make no new contributions to the original amount. I’m not good at math so I included a link for you to run your own numbers.  

Here is the address:  http://www.webmath.compinterest.html.  When asked to enter how often the money compounds, I think 2 or 4 are what you find in most investments. I’m limited in the math of compound interest. However, this is valuable knowledge to grasp in regards to how money can grow.

 

3) Healthcare Costs

Medical News Reports Today reports that healthcare spending grew at a rate of  6.1% in 2007 down a little bit from 2006 rate of  6.7%.  If you breathe air you know the high cost of healthcare.  There is no sign that this rate will decline in the years ahead.  The average inflation rate in America is only half of the growth rate of healthcare costs. We will have healthcare costs in retirement.  They will be a real issue as we become older.

Here are three reasons you need retirement money for healthcare:

1) Your need for healthcare treatment increases as we age; 2) The cost of those services are going to be higher; 3) Medicare coverage will not cover all medical expenses in retirement.  The Kaiser Family Foundation reports the following expenses as uncovered by Medicare: dental care, eye exams, eyeglasses, short-term skilled nursing care, and healthcare given outside the United States.  In summary, you need to have retirement dollars set aside for healthcare expenses.

 

 

Weekend Roundup: Sites of Interest

January 24, 2009

I wanted folks to know about some great posts that I found this week.  A great post on sacrifice by Trent at www.thesimpledollar.com. He mentions his story about getting seriously out of debt.  He also mentions his transition from thinking short-term to long-term in regards to his money.   I read another great post at www.mydollarplan.com on 16 ways to do it yourself.  If you have children visit www.milliondollarjourney.com and read the article about ” 8 Money Lessons to Teach your Kids.”  If we don’t teach them, who will?  Over at www.studenomics.com the author dispels some myths about funding college.  If you or someone you know needs ideas on this topic, this website is a great place to visit.  My last recommendation is the website, www.growthtrac.com.  While it is not a blog, I have found good faith-based advice for marriage here for many years.  Give these a try and I’m sure you’ll find some solid information for your life.

Marriage Talk: A Shared Vision

January 23, 2009

What do you as a couple want to accomplish financially this year?  Save for the future?  Eliminate debt?  Start a part time job?  Being able to agree on your vision is a good first step toward getting what you want.

Power of Agreement.    At his website www.marriagebuilders.com  Dr. Harley has a link for The Policy of Joint Agreement.  To sum it up, he says that no couple should make a decision unless they both enthusiastically agree on it.  Whether it’s funding retirement or talking more like adults, you both must agree to move forward.  Whatever your vision is, you must agree on it to get traction toward your goal.  What areas of your finances would you both agree should be priority one?  Decide together on this and you are ready to move forward. 

Example:  We agree to get our budget in writing this month. 

Follow Through.  Having your priority defined is half of the battle.  The second half is following through on that priority.  What time or money is required to fulfill this priority? Discuss what changes this will require of each of you and make the changes. 

Previous Example:  Follow through by recording every purchase you and your spouse make for the next 30 days.

While this task can seem daunting, it will give you an accurate picture of where your money is going.  You don’t put a budget on paper before you first identify where the money is going.    At the end of the month get all of the receipts out and begin categorizing under headings like Housing, Groceries, Insurance and Eating Out, Clothing Utilities, etc.  Every dollar in your budget needs a designation and a destination.

Execute the Plan.  Before the first bill gets paid, create that budget on a spreadsheet or a software such as Quicken or Microsoft Money.  I use Microsoft Money and find it very user friendly.  After month 1 on your written budget sit down and review how it went.  Did the allocations work out alright?  Did any unexpected expenses arise?   How can you account for them in the future?  See my previous post on emergency funds.    

Evaluate and Adjust.  Mastering a monthly budget is about evaluating what works and what doesn’t.  The rise in the cost of items can cause you to allot for more in certain areas.  Grocery and gas costs are a couple items that have been impacted in our budget lately.  A good budget is a work in progress.  It takes time, attention and focus.

While I chose a written budget as an example for shared vision, you can address other areas such as date nights, clearer communication, or conflict resolution.  The ability to both agree is powerful in marriage.  It’s easy to fuss over differences.  A couple that can agree on something is on their way to a more enjoyable marriage.

Budget Busters: 3 Solutions

January 20, 2009

What is it about these things?  You have your budget set.  How much you spend on each expense is tucked away nicely in each category.  For some unknown reason you end up with zero dollars in your account with 5 days until payday.  Where does the money go?  Where did it get off to?  Sometimes the best laid plans can go awry at times.  So what’s the solution?  What are your budget busters?  Better yet, what can you do to remove them from your financial life?  I do believe you can overcome these budget busters with some specific actions.

Solution 1: Track All Expenses.  I went through a program at my church called Crown Ministries.  One of the first assignments was to record every purchase I made for 30 days.  I kept all receipts and recorded them in  a log book.  What an eye opener!  What amazed me was what I spent on eating out.  Doing this exercises will help you know any unaccounted spending in your budget.  GO ahead and get a small notebook and pencil and start following ehere every dollar goes.  You’re bound to identify some budget busters here.

Solution 2.  Budget for Non-Monthly expenses.  There are some expenses that I don’t pay every month.  Here are a few examples: newspaper subscription, laundry detergent (we buy this in bulk), printer ink cartridges, and dog grooming.  These expenses occur every other month.  What this means is I have to be careful to set money aside to cover these expenses even though I don’t make a payment every month.  You could even withdraw that money from your account and put it in an envelope until you make payment the next month.  Example: $40 for ink cartridge.  Put $20 in an envelope from one paycheck and combine the next month and you’ve got it covered. 

Solution 3.  Balance your checkbook every month. As you reconcile your checkbook and statement you may identify expenses that weren’t in your budget.  If you’re like me you’ll find several entries missing from your checkbook.  I make a debit card purchase and forget to write it in when I get home.  Balancing your checkbook every month is a good practice.  It will usually give you a clue to some changes you need to make.

Young&Married: Lessons Learned?

January 19, 2009

My wife and I will celebrate 10 years of marriage in April.  It’s been a roller coaster ride of good and bad decisions.  I wish we knew a few things then that we do know now.  We made some decisions that had long term consequences for us.  We called on Visa to get us off to a good start on the things that we “had to have.”  I recall a phone call that I got just months after getting married about a furniture sale.  I agreed to let my wife buy a couch and sofa on our credit card.  What I found out when I got there was we purchased a dining  room suite as well.  It was “too good” to pass up.  This decision and some others was our beginning of lessons learned as young and married. Below are 3 things I wish I knew then about how to handle money better.

Lesson 1: Saving Is As Important as Spending.  We had no clue as to how to save money.  We didn’t understand the idea of saving and waiting to buy it later.  We didn’t understand the unexpected expenses that would attack our finances.  Appliances and cars break down.  Who would have thought about this?  Establishing savings didn’t happen for us until 3 years after we got married.  We were slow learners.

Lesson 2: Credit Cards are a slippery slope.  As I mentioned earlier in this article, my wife and I made our choice to use credit cards early in our marriage.  They’re like a long-term illness.  They can take years to recover from.  We know from experience.  Buying stuff on credit creates a cycle of dependence on credit.  It’s only when you stop charging are start saving that the cycle can be broken.

Lesson 3: Distinguish Needs from Wants.  We had to have that new furniture.  It was a need.  Yes we did already have something to eat on but we needed more.  No.  We wanted more.  We wanted new.  We had other choices.  We made the one that we thought was best.  Looking back now we could have settled for a used set of furniture.  We just didn’t want to.  We’ve learned a few things since then.  We have bought some “used” items in the course of our marriage.  What about you?  What lessons have you learned?  If you’re no longer young and married and wish to share some of your lessons, please leave a comment for me and others to learn from.  If you are young and married, read this article again.  Please learn from my mistakes.  Best wishes.

Money & Marriage: Let’s Talk It Out

January 16, 2009

One of the biggest challenges facing marriages today is the issue of money.  Couples today struggle talking peacefully about money.  It’s pretty well documented that money fights are among the top reasons for divorce in America.  Couples find the only way to discuss money is to fight about it.  This doesn’t have to continue.  I suggest there are 3 ways to handle talking about money.  Please read on and I hope you’ll find some advice that helps your marriage.

TALK EARLY.  There are present money decisions and future money decisions.  Couples need to discuss future expenses long before they get there.  To talk early is about planning.  Oftentimes couples may see a future expense coming (putting tires on car, going on vacation, buying those new outfits) but never sit down to decide how to afford these expenses.  “We’ll get to it” seems to be the attitude.  Instead of setting aside money each month, couples get right up to the event then let VISA take care of the need.  Several months after that vacation they view that larger VISA bill and say, “Why can’t we get ahead?”  You’re not talking early.  You’re not looking at your short-term and long-term goals.  If you don’t talk about it, how can you plan for it?  Talking early will prevent such financial landmines from destroying the peace in your marriage.

2) TALK OFTEN.  Money decisions happen many times a day.  For a couple to have peace, they must be able to discuss money issues freely.  Maybe you and your partner set a limit on what you can purchase without consulting the other.  Needs can change in your family.  Adjustments are necessary in your budget.  My wife is respectful enough to call me when she’s making a purchase that wasn’t in our plan.  Because of her accountability we will oftentimes make the purchase if it’s reasonable and doesn’t bust our budget.  It’s better to discuss these things as they occur rather than one of you learning about it later.  I can promise you that NOT talking about money will NOT work.  Spending decisions are something we make everyday.  Being able to talk often about money will ensure a better relationship.

3) TALK PEACEFULLY.  This one is the kicker.  How can you talk peacefully about money?  You and your spouse have to define how this will work.  Think about the times and places you have talked peacefully about money issues.  Continue to visit those places and times.  If it’s not broke, don’t fix it.  You may be among those that hasn’t experienced peace in discussing money.  My first suggestion is for you both to agree that handling money right is a foundation for your marriage.  If you can agree on that issue, you can begin to make the atmosphere for healthier money talk.  You and your spouse need to block off uninterrupted time to discuss the finances of your daily life.  If you have no children, finding the place and time shouldn’t be that difficult.  Those with children may have to wait until the little ones are off to bed.  You need some ground rules for these money talks.  Here are a few suggestion: Use normal tone of voice; no blaming allowed; discuss finances only; and time outs are allowed.  Adults need time to cool down.  It’ OK to agree to discuss some items later.  Note: Discussing it “later” doesn’t mean 6 months from now.  Agree on a time no less than 2 weeks away.  Issues that linger undiscussed can become explosive landmines for your marriage.

Make the choice.  Talk about money.  Discussing it early, often and peacefully will put you on the path to a happier marriage. 

Thanks for your time.

The Lost Art of Saving

January 15, 2009

Why are families in America not saving money anymore?  Each pay period all the money comes in, all the money gors out.  Where is the discipline to save?  Below are what I think are some reasons along with solutions to deal with them.

“Gotta Have It Now” Thinking.  Consumers today are very impatient.  They see a pricy item packaged terms such as “No Payments, No Interest” and jump on the opportunity.  Having stuff is allright as long as you understand the opportunity cost of having it now.  The payments and interest do get paid (usually kick in after 90 days or so) and the already tight budget gets tighter because “I want it now” thinking prevails.

Solution: Save for big purchases.  You will be a lot more happy paying cash for it than being chained to those payments for 24-36 months.  Besides, if you’ll admit it, the one you own works quite well as it is. 

Availability of Credit.  Up until this past year, if you could breathe you could obtain credit.  While credit standards have tightened a bit lately, there are still abundant offers to sway consumers to buy.  Being in a recession hasn’t slowed down TV advertising and hundreds of offers to obtain credit.  Advertising debt is a billion dollar industry.

Solution:  Just Say No.  You can wait and save for the item and purchase it later. 

Lack of Discipline.  Today’s consumer is not interested in having a financial plan.  You’ve heard the phrase:  “Those that fail to plan, plan to fail.”  What happened to planning ahead for your financial goals?  You will need new tires in 6 months, you will retire someday, you will send Jasmine off to college, you will die (not a popular idea).  This list doesn’t even cover all the events you will go through.  It takes concentrated effort to address these issues.  

Solution:  Put these issues on paper and begin looking at your entire financial plan.  If you’re married block off an uninterrupted hour to begin talking about these topics.  You and your  family will only benefit by beginning these conversations.

Addicted to Debt? 4 Warning Signs

January 12, 2009

Are you a debt addict?  Are you out of control?  Is your debt load beyond belief?  Just as the alcoholic must deal with the drink everyday, we as consumers must maintain self-control in an environment full of opportunites to buy things.  You may wonder if you are an addict.  Is it time for you to admit you have a problem?  Here are some warning signs that indicate you need to seek help.

1) No Emergency Fund.  Not having an emergency fund is a sign that you’re suffering from a lack of self-control.  Murphy will come to visit your household.  You will have unexpected expenses.  Not having an account for the the “unexpecteds” will result in increased debt when that next event happens.

2) Excessive Credit Card Debt.  How do I define “excessive?”  Excessive credit card debt is over 50% of your annual household income.  Example:  If you make 50,000 a year, anything over 25,000 is excessive.

3) Excessive Car Debt.  If your car debt is over half of your annual income, you have a problem.  Good transportation doesn’t have to come at this kind of price.  You need to consider more affordable transportation.  Payments of this type will overload your budget and place undue stress on your financial situation.

4) House Payment that exceeds 40% of your monthly budget.  Being house rich and cash poor is not a good place to be.  Having a payment at this percentage of your income puts tremendous strain on your finances.  Servicing debt this large will undoubtedly put strain on your ability to pay all the other required expenses of raising a family. 

If 2 or more of these warnings describes your financial picture, it’s time for change.  You need to downsize your life.  You can live on less.  It’s a personal decision.  If you don’t have an emergency fund, start funding one now.  You can consult some of my previous posts on advice on how to do this.