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Tips for Maintaining Your Spending Plan (Budget)
Fundamentals in Money Management
Identify and state your goals. You cannot get to where you want to go if you don't know where you are going. Knowing what you want out of life and when you want to achieve your goals is the first step in establishing and maintaining your spending plan.
Create a spending plan (budget) and work with
it. Using the spending plan (budget) worksheet, to develop a spending plan. Be realistic. The spending plan can be in an electronic or paper format.
Get organized. Keep all your financial records in a safe place. Set up separate files for your bank statements, credit card bills, phone bills, gas and electric bills, insurance payments, financial aid papers, correspondence from your college's financial aid administrator, and loan documents. Put the original of document like promissory notes, loan applications, insurance policies, credit card and bank account numbers, and birth certificates in a safe deposit box or fireproof storage lock box.
Know where your money is going.
Take a couple of weeks to a month to record where and when you spend your money. It's not only good to know how much you spend but why you spend. Do you do a lot of impulse buying to reward yourself or may yourself feel better. What can you do without-or with less? Are you addicted to ATM withdrawals? Is your budget realistic or is it padded? Can you spend less or earn more? Be sure you understand the consequences of both.
Borrow smart and borrow less. Before you borrow, estimate how much you will really need, not just spend to the maximum of the school budget. When you borrow estimate what your monthly payments will be, what you can expect to earn after graduating, and what your living expenses are. Set borrowing limits based upon your goals. Keep track of how much you borrow and when and how much you are expected to repay.
If possible pay the interest on unsubsidized loan as you
go. Deferring your student loan interest payments may be necessary and easy, but compounding interest accumulation will have you paying a lot more in the long run. If you are not able to pay interest as you go, prepaying or accelerate payment on loans when you can. You can save a great deal of money in interest. Interest accrues over time, and the more time you take to repay your loans, the more interest that accrues. On a loan at 8% interest, paying an extra $50 a month - $600 over the course of the first year - ultimately amounts to a savings of $1,300 in principal and interest over the nine years you are making payments.
Take advantage of tax breaks. Find out if you or your family qualify for any of the federal tax breaks such as the Hope or Lifetime Learning tax credit. In addition, find out if you are eligible to deduct your student loan interest payments on your tax return.
Make savings money and becoming money savvy a priority. Money not borrowed is like creating your own scholarship because it does not have to be repaid. Understanding the time value of money and how money can make money to be used in achieving your goals is fundamental in achieving success. Saving money and gaining money savvy is both attitude and acquired skill. Always make payments of time. Be wary of plans with low monthly payments. Lower monthly payments mean a longer period of repayment, which means more interest. Build and maintain a cash reserve. Develop an effective "cash flow system". Use the domino approach to debt pay down: Set a fixed debt reduction amount in your bill account; Set an order to pay off bills: and Stay the course until you are out of debt. Utilize consolidation loans, and home equity when available for tax benefits and simplification. Warning… research these thoroughly before taking action. Consolidation will affect your ability to defer student loans in the future and you are putting your home up for collateral when you take an equity loan. Maintain a balance between debt reduction and asset accumulation. Remember that the goal is to minimize debt, grow your net worth and achieve your goals. Employer sponsored retirement plans often provide free money, and tax leverage Read debt management information and use calculators found on websites such as
www.ed.gov and www.finaid.org
Tips for Keeping College Debt Under Control
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Don't borrow more than you need to cover college cost. If your financial aid package includes a student loan for a specified amount, you do not have to borrow the full amount of the loan for which you qualified. If you can make do by borrowing less, request a reduction in your loan amount. Avoid high-interest loans and credit cards to pay college bills. To help you avoid additional college debt, ask your school if it offers a tuition payment plan that allows you to pay your tuition in several installments, rather than in one or two lump sums. If your aid package does not include work-study consider asking the financial aid office to reduce higher-interest and/or unsubsidized loans with work-study.
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If possible pay the interest as it comes due on unsubsidized loans as it comes
due. If you receive an unsubsidized Stafford loan, you are responsible for paying all the interest that accrues. If you can afford to pay the interest as it accrues while you are in school, you will be dollars ahead when it comes time to repay your student loan. Accrued interest can add $50 to $70 per year for every $1,000 of education debt. Make arrangements with your lender to pay the interest as it accrues. If you are not able to pay interest as you go, prepaying or accelerate payment on loans when you can. You can save a great deal of money in interest. Interest accrues over time, and the more time you take to repay your loans, the more interest that accrues.
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Prepare a budget to help you control expenses. Your budget should include direct education expenses, such as tuition and fees, books and supplies. Living expenses, such as room and board (or rent, food and utility if off campus), transportation costs and personal expenses, such as clothing and entertainment must also be included. Each month compare your actual expenses to your budget. Look to see if certain expenses are "breaking the budget," or if you can reduce some expenses even further.
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How many ways can you cut costs. Buy used textbooks. Consider public transportation as an alternative to driving a car around campus. Live at home or share off-campus housing with roommates. Eat out less. Before you buy, question whether you truly need and can afford the purchase. How many ways can you come up with?
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As long as your academic work doesn't suffer, consider working
part-time. Many colleges offer work-study and other on-campus job opportunities during the academic year. Part-time off-campus employment is also an option. If you need to concentrate on academics during the school year, plan to work the following summer to pay some of next year's college costs. Look for ways such as refereeing youth games, becoming a dorm hall resident assistant to earn extra money and reduce borrowing.
Maintain a file of your student loan documents and financial aid
information. Most student loan borrowers cannot accurately estimate their total college debt within 25 percent of the actual amount. Worse yet, many students can't find the paperwork that tells them how much they borrowed for college and to whom the money is owed. Keeping important financial aid paperwork organized while you are in school will avert big headaches when that first student loan payment comes
due
Carefully consider how much college debt you can afford to repay, based on your expected future earnings and other financial obligations. Undergraduate students are generally advised to limit their monthly student loan payments to no more than 8 to 10 percent of their estimated initial gross income. Many students overestimate the percentage of their income they will have available for repayment. Many students do not plan their borrowing according to what they will be able to afford in monthly repayment. Many students actually overestimate the amount they will be able to afford to pay per month. Many assume that they will be able to dedicate more than 8% of their estimated income to repay their loans. Research starting salaries for the field you are entering at
www.jobweb.org. Use calculators on the Internet sites such as
www.nelliemae.com and www.pncbank.com to calculate monthly payments based on different amounts of money borrowed and repayment plans.
PLASTIC AND THE GRADUATE - HOW TO ESTABLISH AND MAINTAIN GOOD CREDIT RECORDS
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Get only one card with a low limit, starting at $300 to $500, and shop around for the lowest interest rate.
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Pay off the entire balance monthly, or at least pay more than the monthly minimum.
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Record every purchase in your checkbook, so you know the money's in your account.
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Don't charge food or entertainment.
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A secured card can reduce risks. You can only charge up to the amount you deposit as security at the issuing bank. Interest rates are as low as 8 percent, or half the rates for unsecured cards.
Budget Tips - Reducing Expenses
LIVING ARRANGEMENTS
- Live with parents or other relatives.
- Shop for an apartment - consider convenience, security, lease terms and whether utilities are included or not. Share an apartment.. be careful of the 12-month lease agreement; get a subletting clause in your lease - avoid off-campus housing pitfalls.
- Hold off on the purchase of a home until you have a substantial down payment and sufficient reserves.
- Cut transportation costs. A car is a costly convenience, e.g., parking fees, registration, insurance -- use public transportation, bicycle, etc.
FURNISHINGS
- Ask around - family, friends, neighbors have things they would love to let you have.
- Garage sales can provide a wealth of treasures at bargain prices.
- Sales - watch f or sales where you can get items at discount prices or extra items free. Always, before you buy, ask yourself if you really need it or just want it.
- Do-It-Yourself Projects - ask a friend or family member who may have experience in fixing things (i.e. electricity or plumbing). Make sure they know what they are doing.
- Moving - get friends and family to help. Provide refreshments and meals as a thank you. As long as they are careful, it can save the cost of hiring professional movers.
UTILITIES
TELEPHONE
- Check various long distant carriers to identity what they have to offer. Carefully compare programs and select and monitor your billing.
- Buy your phone; it's cheaper than paying the monthly rental fee charged by the local telephone company. Be mindful of the quality of the-equipment and recognize that touch tone phones cost more.
- Long distant calls cost less during the reduced rate periods. Be mindful of your time on long distant calls - know what you are going to say and keep a food timer with an alarm near the phone to help you keep track of time.
- Write notes and letters - its a great tension reliever and it cuts down on the high cost of long-distance dialing.
- Limit long distance calls -- decrease long distance calls write letters and make fewer calls and use a discount service. Consider emails and instance messaging as a substitute to long- distance calling.
ELECTRICITY/GAS/WATER
- Turn of f the lights when they are not in use. Use energy efficient bulbs.
- Set your thermostat down at in the winter, night and while away.
- Insulate your home or apartment. Windows with plastic covering will insulate the cold.
- Short showers save more money than taking a bath. Also get water saving devices for the shower and toilet.
- Turn off the water while brushing your teeth or shaving.
- Car-pooling will save money on gas. Public transportation, cycling or walking is more energy efficient and cheaper than automobile ownership or driving.
- Hang-dry clothes to avoid dryer costs.
- Do without cable or satellites.
FOOD AND SHOPPING
- Prepare and bring your lunch.
- Avoid or minimize vending machines, fast food and convenience stores.
- Learn to be a savvy shopper. Clip coupons and comparison shop. Don't just buy an item because you have a coupon. Another item of similar contents (store brand or generics) may be cheaper even without a coupon.
- Watch for sales and maximize your coupons. Double coupon offers and stock up.
- Buy nonperishable items on sale and in bulk.
- When preparing meals, make larger portions and freeze them for latter consumption. Avoid pre-made dinners, which cost more per serving.
- Use leftovers (20% of all food produced in America is thrown away).
BOOKS/TUITION
- Check out grants, scholarships, and work-study programs
- Consider taking AP (Advanced Placement) classes in high school. Passing AP exams can transfer to college credits. The cost of the exam is less expensive than most college courses.
- Buy used books instead of new.
- Consider paperbacks instead of hard covers.
ENTERTAINMENT
- Eating out - See if the restaurant has early bird specials or "all you con eat" specials.
- Community dinners at home where each friend brings a dish are fun and economical.
- Go to low cost entertainment - zoo, picnics, roller-skating, museums, free concerts, early bird movies.
- If you enjoy reading, make good use of libraries to obtain books or use a book exchange rather than buying new books.
- Rent videos and DVDs - many libraries have them for $1.00.
OTHER MONEY TIPS
- Carry larger bills - the smaller the bill, the easier it is to spend.
- Put loose change in a jar.
- Use credit cards sparingly and wisely. Use credit cards with the lowest or no annual fee and pay your bill when it's due.
You are then buying time with other people's money. Avoid paying the astronomical interest rates that are applied when you don't pay your balance on time and in full. Ask yourself and check your budget to be sure that you will be able to pay for items you want to charge before you charge them.
- Keep your money in insured interest bearing accounts. Shop and compare the interest rates on CD I s, Money Market Accounts. Choose the one best suited for your needs.
- Look for checking accounts, which give interest. Read and understand all requirements and penalties.
- Keep your checking account balanced. Checks that bounce cost up to $20 per check and defeat the purpose of saving.
- Comparative shop by phone. Check for sales and think ahead.
- Weigh paying loans early vs. losing interest.
- Talk with others and read consumer oriented publications to learn how others save money.
- Pay bills on time (Reduces Finance Charges)
- Only purchase clothes when necessary.
- Shop smartly (sale items, outlets).
Consumer Tips
Credit Cards
The first step on the road to financial security is to pay off credit card debt. Do not use credit cards as a form of borrowing; use them as a convenience. Credit card interest can be as high as 21% and up. You would be better off getting a loan from an employee credit union and having it deducted from your pay check and at a lower rate of interest and using that loan to pay off your credit card debt. But don't run the credit charges up again!
Credit cards, however, are an excellent alternative to carrying cash that can be easily lost or stolen. With credit cards, the most you can be liable for is $50.00 per card. Keep a record of all your credit card numbers and toll-free number to call in case they are stolen. Call immediately if your cards are lost or stolen and follow-up with a letter, then you won't be liable for purchases mad after the date of that call.
Avoid fraud. Do not give your account number over the phone or Internet to someone who calls you to sell you something or to use to confirm that you have won a valuable prize. This is a common scam.
Credit cards are a good way to keep records for budget and tax purposes, but shop around f or the best deal. Some have no annual fees. Some offer a rebate. Usually these will charge higher interest rates, but if you pay off your bill each month, you don't need to worry about high interest rates. If you have a card that offers a rebate, use it on all your purchases, including gas, instead of your gas card, which usually doesn't offer a rebate. Again, remember to pay the full balance on time, each month. Otherwise, a finance charge is applied to all charges.
Keep your receipts and check them against your bill every month. These companies do make an occasional mistake and credit card number thief and fraud are on the rise.
Destroy all carbon copies of your receipts. Thieves can obtain your account number and produce fraudulent cards so to charge items to your account. Do not allow your credit card to be used out of your sight. Thieves are taking electronic imprints of credit card information using small scanners. The thieves then will use the information to buy other products or even steal your identity.
Try to reframe from borrowing cash on your credit card, there is of ten a transaction fee and interest begins accruing the next day. Check with your bank or credit union to find an alternative to borrowing on your credit card.
Car Buying
On of the major causes of student loan default is the purchase of a new car. Borrowers are discovering they cannot afford a new car and keep up their loan payments. Student loan repayment has the highest priority. A new car is a luxury, not a necessity.
An important fact to remember is that buying a car is not an investment. It is a liability. The depreciation is so great, that you could not hope to sell your car f or a large enough amount to pay of f the remaining debt. Your insurance costs are higher because you must purchase collision, which is the most expensive part of car insurance policies.
Insurance
Owning too much insurance can weaken your financial position, but not having enough insurance or having the wrong kind does not provide you with the "risk" management we all need.
Most people should only consider five policies:
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Automobile (if you own a car).
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Homeowners or Renters.
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Health.
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Life (if you have dependents)
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Disability.
Automobile Insurance
There are five major coverages in a typical auto insurance policy:
- Bodily injury liability (including Personal Injury Protection in no-fault states), in case you injure someone;
- Property Damage liability, in case you damage someone else's car or other property;
- Collision, in case you damage your own car;
- Comprehensive, in case your car is stolen, vandalized or otherwise damaged other than in an accident;
- Uninsured Motorists, in case you are hit by someone with no insurance.
Some ways to save are:
- Don't buy Collision if you have an older car. This is often the most expensive coverage.
- Increase deductibles. Increasing the deductible from $100 to $250 you 20%, or to $500 which could save you about 35%.
- Don't buy incidental coverage. If you have adequate medical insurance, consider skipping the Medical Payments Coverage - Memberships in auto clubs sold by agents often are of little value.
- Check out different companies. Surveys have shown that the cost of identical coverage can vary from nearly 50%.
- Choose the right car. Insurance companies give discounts for certain cars and add surcharges for others. Ask for a list of discounted or surcharged cars.
- Beat the ratings game. Sometimes the youth factor can be countered if you are married, so be sure your agent knows if you are married.
- If you car-pool or take the bus to work, be sure your agent knows, your payments could be lowered up to 25%.
- Avoid duplication. Policies can offer special coverage for limited life insurance, disability, towing, theft, it usually covers items stolen from your car. If you have life insurance and disability, you don't need it on your automobile policy.
- Take advantage of discounts. For example: a 10% reduction for drivers who have completed an approved driver-education course, good students who have a B average or better, discounts for automatic seat belts, air bags and anti-theft devices, or a multi-policy discount if you also carry the company's homeowners insurance.
- Obey traffic and highway laws. Every infraction counts as insurance points.
Disability insurance is a must once you begin full-time practice or employment. The odds are greater that you will be disabled before age 65 than die before age 65. The younger your are the greater the odds. Assuming your medical bills would be covered by health insurance, you must assess what an illness or injury might mean to you in terms of lost income. You should have 80% your total monthly expenses covered while you are disabled.
Facts to look for in a policy:
- "Non-cancelable". Means the insurance company can't cancel the policy or change the rate. "Guaranteed renewable" is not the same thing. The company must renew, but it could change the rate.
- Definition of disability. "Inability to engage in any occupation" is not a good disability definition. Find one that states "inability to engage in your own occupation" or words to that effect.
- Does the policy make up for any differences if you can only work on a reduced schedule?
- Does the company distinguish between disability as a result of illness and disability as a result of accident?
- How long do the benefits last?
- How long can you wait before you need disability payments to begin?'
These last two questions will have a big impact on the amount of premium payment, so consider them carefully.
For more information about auto and disability insurance or f or life, health or homeowners or renters insurance, you can write for a booklet written by the National Insurance Consumer organization: ($2.00)
Buyer's Guide to Insurance
121 N. Payne Street
Alexandria, VA 22314
Also, Consumer Reports has special issues on buying insurance. The important thing is to know what you need ahead of time before you get calls form agents who may pressure you into buying insurance you don't really need.
Saving
If you have credit card debt, you should pay it off first. It is self-defeating to be saving at 3-5% when you are paying 18% and up on credit card debt.
Savings should be a habit. The secret to building healthy savings accounts is not so much the amount you save, as in the regularity with which you save. When a small amount is regularly deposited into a money market account, U.S. Savings Bonds purchased on a payroll savings plan, or CD's, interest is compounded, so your investment grows exponentially.
Consider, if you had $10,000 to invest, right now, in 15 years a 7%, it is worth $28,489 on the other hand, if you invest $100.00 each month at 7%, compounded monthly over 15 years, it would be worth $31,696.
How do you find that amount to save regularly? You should review your budget over the last 6-12 months to get a complete picture of where your money is going. Find the leaks and redirect that money to savings. For example, could you cut back on the number of magazine and newspaper subscriptions? Could you stop the extra charges on your phone bill for "call waiting" and "call forwarding"7 Do you impulse buy? Then don't go to a shopping mall unless you have a specific purchase in mind.
Smart savers are smart investors. You need to know how to manage savings just as well as you would manage an investment portfolio.
First-time savers usually must use a pass-book savings account with a bank or a share account with a credit union. These kinds of savings accounts have very low initial deposit requirements (usually $25.00-$50.00). Money-market accounts offer higher interest rates, but usually require about $1,000 to open an account.
How do you start saving?
- Set aside 10% of your net income every payday, before you spend it. The easiest way is to ask your employer to automatically deposit it to your savings or money market account. There is no charge for this service. This enforced savings will help you to live within your post-savings budget. The key to effective management of your savings is to consolidate savings in one place. Having them in one "vehicle" makes them easy to get to and easy to transfer to higher-paying investments.
- When your savings account is large enough, move it into a money market fund that offers higher interest.
- When your money market fund reaches $5, 000, for example, you could put $2,000 into a three-month DC and $2,000 into a six-month CD. These short term CD's are still considered liquid. Shop around for the best rates. You will be surprised at the differences between banks and other financial institutions.
- Always fully participate in your employers 401 (k) or similar tax deferred pension savings accounts.
Seeing Your Credit Report
To obtain a copy of your credit report, write to the following addresses:
TRW Complimentary Report
PO Box 8030
Layton, UT 8041-8030
One free copy per year, even if you are not denied credit.
Equifax Credit Information Services
PO Box 740241
Atlanta, GA 30374-0241
Each copy is $8.00
Trans Union Corporation
PO Box 390
Springfield, PA 19064-0390
Each copy is $8.00
Include: Full Name, Complete Addresses for the last 5 years, including zip codes, Social Security Number, Spouse's Full Name - if applicable, Year of Birth, Copy of Driver's License or Current Billing Statement
Building Block of Financial Planning
Estate
Conservation
Wills & Trusts
Growth Investments
Real Estate, Stocks, Bonds
And Mutual Funds
Retirement Plans
401(k), Pension, and other Qualified Plans
Liquid Reserves
Bank Accounts, Money Markets, & Government Bonds
Risk Management - Death, Disability, Lawsuit, Property Loss
Cash Flow Management - Income, Expense, and Debt Management
How to tell if someone has too much debt
- No savings, or has not made deposits to a saving vehicle (e.g. bank savings account, CD, money market, etc.) for a period of at least 6 months
- Postdates checks so that they will not bounce
- Paid bills late more than three times in the past year
- Has to sell investments or valuables, cash in CDs, or take a loan, so that he or she will have enough money to pay bills
- Paid only the minimum amount on a credit card balance for the past t months
- Taken a cash advance from a credit card to pay another bill
- At least one credit card is up to the allowable credit limit
- Lives from paycheck to paycheck
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