Patrick came to me when he realized that he didn’t have enough money saved to retire, and he doesn’t know how long he can continue to twist and turn his body into cracks and crevices to reach pipes to fix plumbing fixtures. Therefore, he was ready to take radical action to get his finances in order.
It is NEVER too late to start a financial action plan. I have seen people get their finances in order and land in top shape in three years! I have to say though that it will not be easy for most people, and extra effort and discipline are definitely mandatory.
Because Patrick was not one of the best record keepers, I had him collect all of the bills he paid over the last two years to get a picture of how he spends his money. He got a printout of the rent paid on his condo from the rental office, printouts of phone bills, insurance payments, and car repair invoices from the Honda dealer (Patrick took good care of Bessie).
After I gathered all of Patrick’s expenses that he could find, I factored in things like food (he ate out a lot), music (he loves to buy CDs), and vacations, which he took every year with his older brother and his family. They usually went somewhere out of the country like Europe or South America. After much work we determined that Patrick was not in debt, but he spent everything he had every year. I realized that in order to get Patrick to the point of saving for retirement, he had to make drastic changes in his spending habits. Patrick also told me that he could work more hours than he was actually working just by accepting more jobs, which we agreed he should do immediately.
Patrick went to the local dollar store and bought 20 little plastic boxes with tops, which he then labeled. Giving, rent, insurance, food, savings, entertainment, vacations, supplies, utilities, miscellaneous and many other labels were taped on Patrick’s boxes. He made four (4) “Miscellaneous” boxes for those irregular expenses that occur occasionally.
Patrick put all of his monthly expenses on a spreadsheet, along with his monthly income. Each time he did a plumbing job; he either received cash or cashed the check. Next, he placed the funds into the boxes based on the budget, and when one box was empty he had only a few options to rectify the situation.
For example, if the “Entertainment” box was empty because he went to the movies twice the first two weeks of the month, he could not go to the movies or pay for other entertainment that month unless the funds came from the “Vacation” box. Because Patrick looked forward to vacationing with his brother, he would not go to the movies any more that month.
As time went on, Patrick’s “Savings” box grew to the point where he was ready to invest in rental real estate by buying homes to fix up and rent out. We will discuss long term savings and retirement later in this book, but Patrick was able, within three years, to increase his income, reduce his expenses, and get his retirement portfolio together while still being able to go on lavish vacations with his family.
The envelope or box method of budgeting will also work for children, and is a good starter budget for them. We will discuss children and finances later in this book.
Now let’s talk about average family spending trends in budgeting.
Below I have listed the average family spending trends based on data from the Bureau of Labor Statistics. What you need to do is reduce these expenses, especially the housing expenses, as much as possible, and increase your savings. As you can see, the average…
Housing—32.83% Rent/Mortgage, Utilities, Taxes…
Food—12.83% Groceries and eating out
Auto—17.50% Car notes, gas…
Insurance/Pensions—10.87% Personal, pension, life…
Clothing—3.37% Self explanatory
Health Care—6.91% Self explanatory
Entertainment—5.06% Recreation, vacations…
Contributions—3.72% Tuition, tithes/offerings, alimony…
Other—6.91% Alcoholic beverages, credit cards, tobacco…
You don’t want to be average, and the way to break the chains of financial bondage is to reduce your expenses below the statistics on this chart, increase your income, and start saving and investing.
Adjusting your budget
After you have figured your personal percentages for the major categories by reviewing the average family spending trends, you need to be flexible and adjust your budget where necessary. Don’t feel badly when some of the percentages are above the norm. Adjust your budget to match what you can handle at the time. If you stick to your budgeting plan, you will soon see positive changes and a reduction of your debt stress level.
Bank Reconciliations
When you budget and use bank accounts, you must reconcile the accounts on a monthly basis or your budget and bank account will suffer.
Many of you who use checking and savings accounts fail to exercise control over them. I was surprised to learn that thousands of people don’t even reconcile their check registers with the monthly statements.
You can’t keep a budget in order without reconciling your bank accounts.
Errors are made regularly by you and by the bank, and if you don’t reconcile the accounts, you could lose money.
For example, were you aware that if the bank makes an error in your account that causes a decrease in your funds, you have to bring that error to their attention within 60 days or the bank is not obligated to replace those funds? However, if the bank makes an error that increases your funds, they can take back those funds at any time—even a year later! This fact can wreak havoc on your finances if you are not careful.
Banks are in business to make money. They charge all kinds of fees that can add up to hundreds and even thousands of dollars per year, especially if you are not managing the accounts by reconciling them monthly.
Here is how to properly reconcile your bank accounts:
You must write down every transaction in your check register, including all ATM and debit card transactions.
Please try to limit the number of ATM withdrawals that you make, to avoid spending cash and not keeping up with it, and not making sure it is used for budgeted items. I have heard of people who use the ATM on a daily basis; these folks are usually the ones who spend all they have before the month is over.
Also, please try to limit the amount of debit card purchases as these also tend to ruin a budget; because of so much identity theft and financial fraud, debit cards have become a favorite for crooks. If someone gets access to your debit card information and drains all the funds from your checking or savings account, you may be in a world of trouble, as your mortgage, car note, and insurance payments start to bounce. Correcting debit card fraud will take much more time than you can imagine, and can ruin your financial situation faster than credit cards ever could.
In a household where two people use the same account, one person needs to keep the check register and be responsible for registering every transaction that applies to the account. The other person needs to be responsible for telling the register keeper of every check written, every debit card purchase, and every ATM withdrawal.
Many times we forget to record ATM withdrawals, and that will catch up with us as checks start to bounce and fees start to accumulate.
Reconciling a bank account is very simple. First, draw a line down the middle of a sheet of paper.
Next, put the balance from the bank statement at the top left of the page and the balance from your check register at the top right of the page.
Figure out the check numbers that you have written since the last day of the previous month, or, if you have been reconciling, the last check posted on the last reconciliation. Place the very next check number (which should be the first check of the month being reconciled) and the last check of the month being reconciled at the bottom of the page. This is done so that you will be aware of all checks that need to be accounted for.
Next, log all outstanding checks that have not cleared the bank yet in the left column and all of the bank charges in the right column.
Place all deposits that have not cleared the bank yet in the left
column. Add any interest earned to the right column.
Next, correct any errors in your check register by placing the change in the appropriate column.
For example, if check #3600 cleared for $20.41 but you have it in the check register for $20.14; you need to subtract 27 cents from the right column to correct your check register.
Another example is if the bank charged your insurance draft of $50 per month twice, you need to add that amount back in the right column and contact the bank immediately to reverse the additional charge. If you wait three months to contact them, they are not obligated to reverse the charge and you will have to go directly to the insurance company to handle this error.
Once you add and subtract all of the numbers in the columns, you should see the same balance in each column. Work with your reconciliation until all errors and items are detected, and the reconciliation should be balanced.
After reconciling, make sure that you log all necessary corrections in your check register or those same errors will show up the next month.
It is good to do your reconciliations and keep your check register with a pencil. Otherwise, you will need to purchase plenty of whiteout!
For savings accounts, you need to do the same thing. However, make sure to post all deposits and withdrawals. Savings accounts should be much easier to reconcile. It is usually a matter of adding interest income to the reconciliation and to your savings account register.
Now you need to implement bank reconciliations on a monthly basis. Have fun!
Knowing How Much You Owe
When I counsel people in severe debt, one of the first things that I ask is, “How much do you owe?” Believe it or not, that question often stumps them. They know they owe a lot, but they have no idea how much. This is a big reason why they are continuously in debt.
When people come to me for help with their finances, I first ask them to collect all of their bills and list them on a spreadsheet. They are often surprised at the debt amount because it is usually much more than they have mentally calculated. For instance, one couple told me that they thought their debt was $11,000, but when they completed the spreadsheet, it was actually $27,000!
In keeping track of what you owe, you should make a spreadsheet and list mortgage, credit cards and other consumer debt purchases, cars, and other items you are purchasing or have purchased. You should not include rent, utilities, telephone, day care, and expenses that are not purchases. Although these are monthly expenses, they are not permanent, and you can stop them without much trouble.
For example, if you purchased furniture that costs $5,000, you are obligated to pay that amount until it is paid off. On the other hand, if your child’s day care costs $300 per week, you can stay at home, change day care centers, or have grandma keep the baby; you won’t have to go through a credit report debacle like you would if you stopped paying for that furniture.
The bottom line is that the totals that should be placed on this list are for purchases that you can’t change and that must eventually be paid off or sold.
Write the following captions across the top of your spreadsheet:
1. Name of the creditor
2. Total balance
3. Monthly payment Amount
4. Number of payments left
5. Interest rate
6. Payment due date
7. What I purchased
Placing items on this list will surely let you know what you have done concerning your finances!
Once you list these items, your goal is to get them paid off as soon as possible. I advise people to pay the smallest balance off first. This gives you a sense of accomplishment and motivates you to pay off the next item. One thing people can do is to take any extra funds, like refunds or company bonuses, and use all or part of the money to pay off some of the debt.
When I utilized this method early in my own life, I started with the smallest of my multiple credit cards and had it paid off in two months. I then ceremoniously took the card into the garage, cut it into four pieces, placed it on the ground, and did a dance on top of it. I did this with every subsequent credit card until they were all paid off. I then obtained one credit card for all of my needs and I was done with playing the multiple credit card game.
Understand that you do not need a card from every department store, every gas station, every airline, and every professional organization with which you hold a membership. One card, whether it is a Visa or MasterCard, will suffice for all of your travel and other needs. You can use Visa or MasterCard at department stores, to book airline tickets, or to buy gas or any other product or service. You can even use them internationally. Get rid of all those other cards and keep one card.
You will be careful about running up the balance, and you will cut down on spending, knowing that you have limited access to credit.
The ideal situation is to have one credit card whose balance you pay off every month, and have no other consumer debt. Sometimes we have to have a car note and a house note, but make sure you keep these debts to a minimum.
For example, don’t buy a $400,000 home if you can’t truly afford it, just because a lender says you qualify for it! That is a trap and if something happens to your job, you are really in trouble. Get a house that you can comfortably afford without working overtime or being in a crisis situation if you or your spouse loses a job.
It is very hard to do today, but we all need to purchase homes that we can pay for on one income. Many times a wife will work for one or two years after marriage and all is well, until the couple gets pregnant and the wife takes time off from her job. Many companies are insensitive and do not welcome the woman back after her child is born, or they may cut her hours, thinking that she will have another child soon. Couples really need to plan in advance for such occurrences so that when the new baby comes, the financial strain won’t come with him.
Don’t buy a brand new car when you can get a used one of the same year, make, and model with about 10,000—20,000 miles on it for up to $10,000 less. There is no need to ever purchase a new car today. The only thing a new car can get you that a good used car can’t is more unnecessary debt!
I have purchased only used cars since 1987, and statistics tell us that if we only buy used cars and run them until they won’t run anymore, then for each of those automobiles we buy and keep, we have shaved five years off of our retirement date—if you utilize the other financial principles noted in this book. That means that you are saving around $10,000 a year by buying a good used car and those funds can instead go toward retirement.
Make sure that you are always able to show what you owe. Make sure that you routinely pay off the debt and don’t create more. Also, try to resist the temptation to keep up with the Joneses by buying big houses and new cars. By the way, who are the Joneses, and why are we trying to keep up with them? For all we know, the Joneses are trying to keep up with us! That’s another story for another day.
What’s Good and Bad About Interest
You will be learning a lot more about interest as you implement your plan to get out of debt; however, right now I will give you the basics. Personally, I think that paying interest is evil. Our society has gotten so tangled up in borrowing that most people think interest is a part of everyday life.
You need to stop paying interest on credit cards and other consumer debt; you will learn how in this book.
Banks and other financial companies calculate interest in different ways. They use simple interest, compound interest, and add-on interest. Today, banks even tack on late payment fees of up to $39.99 per month! You must understand that no matter what type interest you pay, you are slaves to this financial system.
It is rumored that Albert Einstein was once asked, “What is the most important mathematical formula?” His response was, “The formula for compound interest. Those who understand compound interest collect it, and those who don’t, pay it!” You collect compound interest by becoming business owners and investors, and it starts with ge
tting out of debt and ceasing to pay compound interest to the bankers.
Let’s discuss the Rule of 72, which can be extremely useful and valuable to you. It’s a handy mathematical rule that helps to estimate approximately how many years it will take for an investment to double in value at a specified rate of return. To estimate the number of periods required to double an original investment, divide the most convenient “rule-quantity” by the expected growth rate, expressed as a percentage.
For instance, if you were to invest $2,000 with compounding interest at a rate of 9% per year, the “Rule of 72” gives 72/9 = 8 years required for the investment to be worth $4,000.
Using realistic interest rates:
The Rule of 72 tells us that if you obtain 2% interest on your investment, it will take 36 years for $1,000 to become $2,000. Isn’t this the interest rate that you get at the bank on your savings account and on your CDs? Do you have 36 years for that investment to double? NO! Are there better ways? YES! Later in this book we will discuss ways to increase your investment income and retire financially fit.
On the negative side of interest, the Rule of 72 tells you that if you obtain a car loan for $20,000 at 18% interest, you will have paid a total of $40,000 for that car after four years! You will have actually paid for that car twice after four years.
You may not be aware of it, but people in this country pay 18% on debt like cars and credit cards due to their poor credit rating. Credit card debt in the United States is an epidemic!
A $5,000 CREDIT CARD BALANCE @ 21% BASED ON A MINIMUM MONTHLY PAYMENT OF $150 (3% OF THE UNPAID BALANCE) WOULD TAKE YOU 22 YEARS TO PAY OFF!
This is how most Americans are kept in financial bondage all of their lives.
I am sure that you now see how interest is shackling you with your mortgage and other long-term debt.
Let’s talk about mortgage interest. By the way, the Latin for mortgage is debt until death.
How to Escape the Rat Race Page 4