Fours and Sevens, Rules and Baby Steps

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Fours and Sevens; Rules and Baby Steps

 In learning to handle money, it is important to have ground rules, and SUPER IMPORTANT to set goals and shoot toward them.  In that vein, after reading and surfing for several years, I like and will be discussing Dave Ramsey’s Baby Steps and the budget program YNAB in depth.

 YNAB’s Four Rules: 

 YNAB is short for their website name:  http://www.youneedabudget.com/

Their Four Rules help you stop living paycheck to paycheck, get out of debt, and save more money.  Excellent product support and a nice blog to boot. 

 Rule One:  Give Every Dollar A Job:  YNAB uses what is called zero-based budgeting, you assign every dollar coming in a job to do down to the last penny.

 Rule Two:  Save For A Rainy Day:   In giving every dollar a job, YNAB wants to make sure that some of your assigned money is going to long-term spending (gifts, car repairs, vacations etc) and of course your Emergency Fund.  You find money to fill these buckets in your Step One, and Step Two helps you clearly see the opportunity cost of spending money outside the plan.  In no way do these Steps preclude you from having fun with some of your hard-earned dollars, just to budget your fun so you don’t go overboard.

Rule Three:  Roll With The Punches:  This is what I call the Human Rule. When you plan your money down to the last penny, everything is not going to flow exactly with your plan (Especially when you are first starting out on this “I am going to control my money” journey). Roll With The Punches simply says, “Hey, you ARE going to go over budget from time to time in a category or two”.  That is not a failure of your plan at all.  Simply shift some money dedicated to another goal to the overage, or let the overage carry over into next month, deducting the overage(s) from your available income before you give any other jobs to your funds.  Repeated punches though, point to a need to either change spending habits or adjust your cash flow plan to better fit your reality.

 Rule Four:  Live on Last Month’s Income:  This is the rule that makes you go “Hmm”.  It is not one you see too often, but if you are able to follow it, you will have comfort in your financial life.  How you do it?  Well, to achieve this you would add one more line to your budget.  YNAB calls this a BUFFER.  Every pay, toss some money into this BUFFER until it grows to an amount equal to your monthly budget.  Then, every month you use buffer money to fund your budget, while all your income refills the buffer.  How would you like to be able to pay ALL your monthly bills in one day at one session?  Think of the PEACE you’ll have, not having to time and plan which bill gets paid when.  This is a really nice goal to shoot for, but a whole month’s savings might take a while to achieve.  On second thought, tax season is fast approaching.  If you get a refund, consider tossing it into your buffer and get a leg up on Living on Last Months Income.

 That’s the four Rules of YNAB.  The program currently costs $60 to download, and the company gives you a 34 day free trial, and ongoing free webinars.

Now, onto the Dave Ramsey Babysteps!

For the record, Dave Ramsey is a Financial Guru who lives and works near Nashville Tennessee.

He has a national radio show, and several books to his name.  His live shows are something to see, I’m told.  Mr. Ramsey approaches money from a Christian perspective,  but don’t let that turn you off if that is not your flavor.  The things he talks about work from just about any direction you come from.

His seven Baby Steps are well-known to many people across the world. They are:

Baby Step 1.   $1000 Emergency Fund to Start:  See my prior posts about this step; we  recommend $2,000 and give you ways to get there.

Baby Step 2.  Pay off all your debt (expect a home mortgage) using a debt snowball.  (ooh, I feel our next post coming on)!

Baby Step 3.  Build your Emergency Fund up to three to six months of expenses.  Shoot for AT LEAST six months here, maybe longer depending on your job circumstances.  After your debts are gone, shovel the money you were throwing at debt toward this goal.  Into a money market account, you are NOT looking to make interest off of this.  This money is Murphy’s Law insurance.  As Dave says, it also kicks out his cousins Broke, Dumb and Stupid.

Baby Step 4.  Invest 15% of your household income into Roth IRAs and pre-tax retirement accounts.  If you work for a company that provides a match to your 401K , 403B, or any other pre-tax retirement accounts, invest at least enough to get all the match.  Do not leave free money on the table.   Roth IRA contributions are after tax money, but if you hold the money there long enough, both the contributions AND the growth can be withdrawn TAX FREE!  Oh, and Dave’s 15% may not be high enough.  Anyone for 20%, 25% or even 30%???

Baby Step 5.  Fund college for your children.  Dave Ramsey puts this step after your own retirement investments for good reason.  Would you really want to starve in retirement or work until you are 75 so your children could go to a certain school?  It is a college degree that matters, in most circumstances, it is much less important where you matriculate.  Take care of your own house first.

Baby Step 6.  Pay off your home mortgage early.  This is the last debt you should have, and to kill it with the same zeal you killed your other debts in Baby Step 2, this is your time.  You might be saying:  “But if I pay off my mortgage, I will lose the tax deduction!”  Let’s look at the math.  You get a tax deduction (NOT A TAX CREDIT) on interest you pay on your home mortgage (presuming you itemize).  So in a year, if your paid interest is $8,000 and you are in a 25% tax bracket, you will save about $2000 on your taxes. After you paid the mortgage company $8000 in interest.  If you want to spend $8000 and get $2000 back, please let me know, I’d be glad to make that deal with you.

Baby Step Seven.  Build Wealth and Give.  Look at you.  Completely out of debt, not even a mortgage, retirement savings on overdrive, fully funded Emergency Fund.  It’s time to take that extra money and invest it, and also be generous in giving your income away.  Make some waitresses’ or waiter’s week by leaving a $200 tip.  Give a lot to your favorite charity groups and houses of worship.  Find contentment and peace, your money mistakes far behind.

And that’s Dave Ramsey’s Baby Steps!  Next post, we will look at Debt Snowballs in detail. 

See everyone soon!

Climbing the income ladder, you can do it!

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Climbing the Income Ladder?

Yes, yes you Can!

I was amazed to see a story on Bankrate.com on November 14^th that talked about a Pew Charitable Trusts study that shows a lot of poor people tend to stay that way, generation to generation.  And the article went on to say three factors were the major contributors to those people that were able to break the cycle and move up the income ladder.

The most important factor was a college degree.  Study covered a long period, 1968 through 2009.  During that time, only seven percent of the individuals studied got a college degree, of those seven percent, a whopping 86% of them went on to higher incomes than their parents.

Next factor was dual earner house holds.  Two incomes lifted 84% of the people in the study to greater income than a generation earlier.

For the purposes of this blog, it’s the third factor that might be surprising, but shouldn’t be once you think about it.  The other key factor was home equity or liquid capital.  In other words, families who lived on less than they made and put money away (even a little at a time) and were not mortgaged to the hilt BUILT A BRIGHTER FINANCIAL FUTURE FOR THEMSELVES!

This is exactly what we teach at Financial Literacy Conversations!  Great to see a huge study by the Pew group bear out our methodology so well.  Link to the Bankrate.com story below (I love the paragraph right before the “Rags to Riches….” headline)!

http://www.bankrate.com/financing/wealth/can-you-climb-the-income-ladder/

The Whats, Hows and Whys of Emergency Funds

 

     Building and maintaining an Emergency Fund can be one of the most important things you do to control the outflow of your money and keep yourself out of debt.  With a funded Emergency Fund in place, financial emergencies are simply reduced.  Simple to say, but let’s delve a bit deeper:

WHAT:  An Emergency Fund is a pile of money in a savings account or stuffed in a super safe place at home that is only USED FOR EMERGENCIES, unexpected expenses like car repairs, house repairs, or unexpected medical bills.

WHAT IT IS NOT:  It cannot function for Emergencies if you also raid it for “super fantastic sales” or those “special” gifts.  EMERGENCIES ONLY for these funds.  It is your insurance policy, your Murphy’s Law Repellent.

HOW:   Build your Emergency Fund to at least $2000.00 ASAP.  Yes, $2,000.00, even if you are deeply in debt.  The first step in getting out of debt is to stop borrowing money.  More on the debt topic in future posts.  An unexpected car repair of $900 can easily derail your getting out of debt progress if you have to grab a credit card to pay for this repair.  If instead, you have your Emergency Fund in place, you pay for the repair, rebuild your Emergency Fund back up over the next few pay periods AND YOU HAVE NO NEW DEBT.

HOW Part 2:  Build up $2000 and leave it alone?!?!?  How, how how?

There are several ways to build this fund up quickly.  First, look at your spending plan and find room in it to fund part of your emergency fund every payday.  (This is also the source of re-funding the fund if you need to raid it for an emergency).

For a one-time, instant lift to your Emergency Fund, look around where you live.  What do you own that you no longer need, play with or barely even look at?  Sell a bunch of that stuff!  Yard sales, Ebay, Ebay Classifieds, Craigslist, classified ads in bargain papers (free!), sell the stuff you no longer need.

I’m going to paraphrase a tagline by Dave Ramsey:  “Sell so much stuff that the kids think they are next”!

Getting it to $2,000 and not touching it for non emergencies requires a certain level of grown-up-ness.  Open a savings account at a different bank or credit union if that will help.  Dave Ramsey tells a story of a lady who put $100 bills into an 8×10 photo frame, stuck a label on it with the words “BREAK GLASS IN CASE OF EMERGENCY” and stuck it on the back wall of her closet.

Hold to whatever level of discipline it takes to keep your WANTS away from this Emergency Fund.  When you have a financial emergency, you will be very glad you did.

WHY:  Murphy’s Law says that whatever can go wrong, will go wrong.  Your car WILL have mechanical issues; you or your family WILL get sick or injured from time to time, where you live WILL have unexpected repairs needed.  But with an Emergency Fund in place, these challenges become financial inconveniences, instead of Budget Bombs that dig you ever deeper in debt to others.

If you are out of debt, or once you are out of debt, build this fund to 6 months of take-home pay.  When that is done, you now have not only the minor emergencies covered, but bigger challenges like job loss covered by a warm and fuzzy Emergency Fund.  Think of the comfort that would bring to your life, just knowing it is there, no more financial Murphys.

We welcome questions and comments!  Thanks for reading, see everyone next week!

The Mechanics of Building Your First Cash Flow Plan

If you do not currently tell your money where to go, this post is for you.  In it, we’ll go through a step by step walk through of how you can get started to a better, brighter financial future.

My wife and I started to build a monthly cash flow plan after years of money just flowing through our hands with no understanding for many years.  Not controlling our expenses or tracking where our money was going caused problems we are still paying for today.  But 5 years ago, something changed.  Either through the TV or radio, we got wind of a guy named Dave Ramsey.  After reading his book, Financial Peace, we were determined to change.  But how to start?  With a cash flow plan, a budget, and an agreement between us that we would give our money work to do, and track its progress, instead of getting deeper and deeper into debt.

Here are steps you can take to begin down the road to financial freedom; building your first cash flow plan.

The first step in building your monthly spending plan is to gather 3 months of statements, checking accounts, credit cards, any other transactional accounts that you use.  With those in hand, let’s talk about categories!

Borrowing both income and expense categories from FinancialGeek.com, here’s a list for you:

Income

Paycheck

Bonus

Expense reimbursements

Investment income

Rental income

Interest earned (on accounts, loans to others)

Dividends and capital gains

Misc.

Expenses

Savings

Emergency fund

Retirement

Investments

Charity/Giving

Clothing

Automobile

Gasoline

Maintenance

Registration/License fees

Auto insurance

tolls

Food

Groceries

Restaurants

Household

Rent / Mortgage payment

Homeowner’s association dues

Furniture

Supplies

Decorating

Tools

Home maintenance and repair

Home improvement

Utilities

Water

Sewer

Electricity

Gas

Television (e.g. cable, satellite, etc.)

Telephone / Cell phone

Internet service

Garbage and recycling

Childcare

Babysitting

Child support

Bank Fees  (ooh, if you have these, get rid of them soon)!

Check orders

Service fees

Insufficient funds fee

Minimum balance fee

ATM fees

Credit Card Fees (Ooh, if you have these GET RID OF THEM SOON)!!!!!!!!

Annual fee

Finance charge

Over the limit fee

Minimum usage fee

Cash advance fee

Late fee

Rewards programs fee

Education

Tuition

Books

School supplies

Field trips

Misc. fees

Events

Wedding

Moving

Gifts

Healthcare

            Insurance

            Co-pays

            parking

Insurance

Life

Disability

Long term care

Leisure (daily / non-vacation)

Books

Magazines

Movie theater

Video rental / Pay per view

Sporting events

Sporting goods

Hobbies

Cultural events (e.g. parades, carnivals, etc.)

CD’s

Video games

Toys

Tourist attractions (e.g. amusement parks, museums, zoos, etc.)

Loans

Auto loan payment

Credit card payment

Student loan payment

Loan Payment

Late fees

Pet Care

Food

Supplies

Veterinarian

Taxes

Federal

State

Local

Vacation

Day trips

Transportation

Lodging

Entertainment

Feel free to add categories to your own list that are not listed here.  If you  have some ATM withdrawals that you’re not sure what the money was spent on, create a MISC category and park those transactions there.

What is important is that you give a category to EVERY expenditure you’ve made in the last three months.

Use an Excel type program or just write it on paper; put category titles at the top of the sheet, then add each transaction under the appropriate category as you plow through the gory details of your recent financial history.  When all your transactions are listed under categories, it’s time to add them up to a three month total.

As you look at the totals, are there category totals that surprise you?  If you’ve never done an exercise like this before, I’d be very surprised if you didn’t have any surprise totals!

This “total” list can do a few things for you.  You already know they can uncover some surprises, more on them in a bit.  Another thing they can do is tell you what your month in, month out spending is on regular categories.  For these (like utilities) you can take your total and divide by three.  Now you have an amount for that category that will go into your monthly cash flow plan.

The surprises (We really ate out that much?!?) are where your opportunities lie.  Either on your own or with a partner, set monthly limits to these categories to give you room to build a brighter financial future.

Think about the four things you NEED:  A roof over your head, clothes on your back, food in your tummy and a way to get here and there.  Beyond these four, everything else you spend money on is a WANT.    And within even these categories, there is plenty of savings opportunities (You do not NEED to get your food from a restaurant, you do not NEED a 1 year old leased car with the lease payment to match).

Sorry, I digressed.  After your totals are divided and some hacked to pieces, put your thinking caps on and figure out the payments you make that aren’t regular events:  water bills, property taxes, gifts, vacations.  Set annual goals and divide by 12, or for that big cruise you want to take,  say in three years?  $111 a month gives you $4000 in three years.  Please, please don’t sit around the Thanksgiving dinner table and slap yourself on the head because you forgot Christmas was a month away!  $167  saved every month gives you a $2000 gift budget with NO DEBT and no January credit card bills.  You can do it!

Alright.  Monthly totals done, both from your transaction history totals and your thinking cap session.  Now plug in your take home income, subtract what you want those dollars to do, and let’s see what your first cash flow plan looks like:

Money left over?  Great!  Take a look at what categories could use more funds (like the Emergency Fund) and apply that money there.   We are working to give every dollar a job to do (including fun money).

Money coming in is less than what you need to meet your plan?  Change the plan, keeping in mind the four categories that have to be met: food, housing, clothes and transportation.  Every pay make sure you put some money toward your Emergency Fund (more on that in our next post), then make sure the debt minimum payments are met.   Short term answer, work on your expenses; long-term answer, work on your income!

That’s it!  Your first cash flow plan! Now it will be time to track your expenditures for the month to make sure your money is doing what you told it to do!

Plan on several emergency meetings when your initial plan is blown up by some expenditure that this process did not catch.  That WILL HAPPEN, and happen often your first month.  Run with this plan in your second month (with adjustments in place) and you will still have some EEK moments, but not like you had during the first month.  By the third month, your cash flow plan should be adjusted and running comfortably, your savings will be growing and a sense of control will begin.  It’s a nice place to be, believe me!

Sorry so long-winded on this one.  Enjoy!

An Invasion of Privacy by a Budget Bomb

     When I talk to people about building cash flow plans, I will warn them about financial decisions they could be making that will derail their savings process.  I call these Budget Bombs.

     One of the Budget Bombs I mention is the decision to rent furniture, Tvs, computers and other items from rent-to-own stores.  Making payments on household items instead of saving up and paying cash for these things creates a budget bomb.  How do you think these places stay in business?  Well, let me tell you a bit of a story:

     A couple years ago, I interviewed with Aaron’s to become a store manager (I DID NOT take that job!); the manager who interviewed me told me with pride in his voice:  “The people who lease from Aaron’s end up paying 2 times the retail price for the items; if they go to Rent A Center, they end up paying 6 times the retail price”.

      A 200% markup and a 600% markup.  If you ever consider these “easy payments”, to get what you WANT now, here’s something you could do instead:

1. Find out what that “easy weekly payment” will be on the item you want
2. DO NOT LEASE THE ITEM!!!!  Instead, deposit that “easy payment” amount weekly into your savings account
3. Earmark those “easy payments” to yourself for that item you want
4. When your “easy payments” balance gets up to where you can BUY the item at a store, buy it with your own money!

No payment to anyone but you, no chance of collection calls or visits; and you can choose from a much wider variety of items between stores and online than you can at one of these leasing stores.

    Now, on to the invasion of privacy:  Already, financially, leasing from these places is a bad idea financially.  But recently, Aaron’s computer leasing took their customers for a different kind of ride:

     Here are two paragraphs from a Federal Trade Commission complaint against Aaron’s:

When installed on a rented computer, PC Rental Agent enabled Aaron’s
franchisees to disable a computer remotely. PC Rental Agent also enabled Aaron’s franchisees
to remotely install and activate an add-on program called Detective Mode. Using Detective
Mode, Aaron’s franchisees could – and did – surreptitiously monitor the activities of computer
users, including by logging keystrokes, capturing screenshots, and using the computer’s webcam.
Through Detective Mode, Aaron’s franchisees could – and did – secretly gather consumers’
personal information using fake software registration windows. In addition, using a different PC
Rental Agent feature, Aaron’s franchisees tracked the physical location of rented computers
using WiFi hotspot location information. Aaron’s franchisees used this illicitly gathered data to
assist in collecting past-due payments and recovering computers after default.

5. Detective Mode data sent to Aaron’s franchisees revealed private, confidential,
and personal details about consumers using rented computers. Keystroke logs displayed
usernames and passwords for access to email accounts, social media websites, and financial
institutions. Screenshots captured additional confidential details, including medical information,
applications containing Social Security numbers, and bank and credit card statements. Webcams
operating secretly inside computer users’ homes took photographs of computer users and anyone
else within view of the camera. These included images of minor children as well as individuals
not fully clothed and engaged in intimate conduct. The presence of PC Rental Agent was not
detectible to computer users and computer renters could not uninstall it. In numerous instances,
Aaron’s franchisees did not obtain consent from their rental customers and did not disclose to
them or the rental computers’ users that PC Rental Agent was installed and could be used to
track consumers’ physical locations and remotely spy on their activities.

 

     EEEEK!  There is pending litigation against Aaron’s for this behavior, and they have promised to stop spying, but oh my goodness; why is this story not getting national attention!   

       Please, please stay away from these stores!

Why Use a Cash Flow Plan?

I like to explain why everyone should have a cash flow plan using the following illustration:

let’s look at a hypothetical couple that brings home $25,000 a year after taxes each,  so that theiy have a household income of $50,000 a year.

We also don’t get this couple any job changes or raises in the next 10 years. In this scenario this couple has half a million dollars flowing through their hands every decade.

Half a million dollars.  if you were going to use this same amount of money to build a new home you would have detailed plans and blueprints for that home. Your home plans with certainly outside on the grounds are plans for where trees and shrubs would go,  what the roof material will be, even the color of the shingles.  The plan would include the width and length of the driveway how much grass how much garden area details, details, details. Inside?  You certainly would send spend some time talking about the kitchen design if you have an island what shape it will be what color the counter tops will be certainly where the stove and refrigerator will go and many more details about this small section of your half million dollar house.

Half a million dollars.   If all these dollars, the same amount needed to completely build your dream house, instead were used for your daily living; if you had a plan, instead of living paycheck to paycheck and from time to time wondering where the money went, what could you accomplish with a plan, a detailed plan?

Could you get out of debt?  No more payments to ANYONE but yourself?  Absolutely!  Could you save up money for gifts, instead of going into debt every holiday season? Sure.  With the right plan, could part of the $500,000 be invested for your retirement?  You bet!

This is a call to stop handling your paycheck like the money does not matter; spending willy nllly and increasing debt obligations to others.

Start building a cash flow plan that tells your money what to do, and FOLLOW IT!  Set savings goals and get out of debt goals and use your half a million dollar pay to reach those goals and kick your debt to the curb.  Utilizing cash flow plans at any income level can create a brighter financial future for you and your family.

All for now, next post will discuss how to create a cash flow plan and what to do with it once it’s put together.  See everyone next week!

Steve

Financial Literacy Conversations

Winston Churchill

Winston Churchill once said:

“You make a living on what you get, you make a life on what you give”.

Save money and be green too!

Go to any quick change oil center and they will pull the dipstick and show you how dirty your oil in and tell you you need to change your oil every 3000 miles. do not listen to these grease monkeys; go to resource like Edmund’s  Here’s the link to Edmund’s.or your car manufacturer’s website.  They will tell you the truth about how often you really need to change your oil.

3000 miles?  Likely, your research will uncover a number more like 7500.  And that info is coming from the people who made your engine!

Unless you’re doing mountain roading constantly the wear and tear on your vehicle the always okay for almost eight thousand miles .  Go by what your vehicle’s manufacturers says not somebody in a quick quick lube change shop. 

If your ride is newer, follow the oil life indicator in your dashboard.  Follow it, not the 3000 mile oil change sticker the shop stuck up on the high side of your windshield.

But let us look at the numbers to make some financial sense of this behaviour change.

    7500 miles is 4500 more miles than 3,000 correct?  So over time let’s see how much money you’re going to spend on oil changes with the grease monkey schedule instead of the maintenance schedule in your book in the car: 
In an example we’re going to keep the car for 5 years although we recommend you keep car lot longer than that.

Okay let’s say you drive 12000 miles a year every year. 

Over 5 years you’ll drive 60,000 miles.

A 3000 miles change the oil schedule from the quick lube shop runs like this

20 oil changes over 60 months;   $40 bucks a pop that’s an initial cost of$800. $160 a year.

Changing to a  schedule of every 7500 miles you will have  only 8 changes  over those five years instead of 20 again at a cost of $40:  you’ll spend a total of $320.  $64 a year.

Wow, save almost $100 a year.  Nice!

Now, let’s talk about being green. 

Think about this:  Every time you change your oil the old oil has to go somewhere, right?

Hopefully your shop will recycle your old oil.  At what environmental cost?

If you continue changing oil every 300 miles, you’re throwing old oil away before its time  20 times over 5 years.  Give your oil a chance to complete its work and save money and the environment at the same time.

“A budget is te…

“A budget is telling your money where to go instead of wondering where it went.”

John C. Maxwell