Creating a budget

How to create a budget

Since we use a 28-day budget, we made a budget every 4 weeks. Our next budget starts on March 19th and will run through April 15. If you have never done a budget, or a 28-day budget, start your budget when you get your next pay check.

To create the budget, you’ll need a piece of paper or a spreadsheet. Either works fine. I like a spreadsheet because you can copy the worksheet so you don’t need to start from scratch and you can keep a history. It will also automatically calculate how much money is left over as you create the budget. The goal is to spend every dollar on paper before the month begins.

The return of layaway

Layaway is a concept that a lot of younger people are not familiar with. When credit cards became popular, layaway programs started to disappear until they had become extinct. I am pleased to see these programs have returned.

Instead of using a credit card to pay for a purchase after making it, layaway allows you to select the items you wish to buy, pay for them over time and then take possession when you have finished paying for them. The first store I noticed that had brought back layaway was Bob’s Discount Furniture, which is a large chain in New England and surrounding states. Then I noticed larger stores like Wal-Mart and KMart reintroduced layaway programs. Tonight, I noticed that smaller chains, like GameStop, are giving people the option.

I commend these stores for allowing people this option. It’s a way for people who aren’t great at saving to purchase items without resorting to credit. While I would prefer to use a Christmas club account to pay for these purchases, layaway is something I am glad to see again.

When two become one

I went to a lovely wedding this weekend. During the ceremony, the priest discussed how in marriage two people come together to become one. This is a theme in most, if not all the weddings I have attended, including my own. It’s a beautiful thought really. The bride and groom, living separate lives, now join together and create one new life together.

In my years of counseling, I think a lot of people miss this message when it comes to finances. Most couples with financial problems (which quickly become marital problems) fall into one of two camps. Either they keep their financial lives completely separate or one person becomes the “financial guru” in the relationship. Generally, this person has the entire weight of both financial lives upon their shoulders but both partners still act as though they are living separate financial existences.

The hardest part of counseling people in either of these camps is convincing them that in order to end up at the same place at the end of their financial journey (usually retirement), they need to work together. There is no longer “her money” and “his debt” but “our money” and “our debt”. It’s impossible to have one spouse truly prosper financially when the other has debt of any kind. Whether or not you believe it, your financial lives will be forced to become one at some point. Hopefully that moment comes as prosperity at retirement, rather than bankruptcy later in life.

I’m a big believer in setting down goals. What kind of retirement do we want to have? How are we going to get there. When having children, will one of us stay home? Public school or private school? Do we see ourselves living here forever? Do either of us need more education to achieve our goals?

Jeff and I have these kinds of conversations all the time. It’s actually fun to sit down and ponder the future and try to figure out how we will get there together. We do our monthly budget together. We celebrate our financial successes together. We work out the setbacks together. We didn’t always do this. A few years ago, we were one of those couples where one person handled the finances. It was stressful. It caused disagreements. It caused strain between us. Once we got on the same plan and started working together, everything changed. The money stress is virtually gone. When there is money stress, we handle it together.

I’m not saying things are going to change overnight, but when you start to see your finances as one unit that you both must carry together, it will start to get better. Your marriage will become stronger and the stresses that come with money will be less.

For more information on this, I highly recommend The Total Money Makeover and Financial Peace Revisited. Both books cover how to talk to your spouse, how to have those budget meetings and how to put together a plan for the rest of your financial life.

Will you have enough for retirement?

Have you ever thought about this? Many of us are just blindly putting money into some type of retirement vehicle (401(k), SIMPLE, IRA, etc) but is this going to be enough?

There are a few things to consider when trying to figure out how much money you’ll need. First, try to figure out what percentage of your current income you think you’ll need for retirement. If you had no debt and no mortgage, now much of your income would you need to live off of? Don’t forget that you won’t be saving for retirement once you retire, so you can take that out as well. If we didn’t have any debt and weren’t saving for retirement, Jeff and I could live on about 50% of our current income.

Next, you’ll need to consider how long you might live. Go whip out your crystal ball… wait, you don’t have one of those? Aww, come on. No crystal ball? Really? Ok, ok. How about the next best thing? The Living to 100 Life Expectancy Calculator is not exactly a crystal ball, but I know a lot of financial planners and other professionals that use it as a gauge. The other nifty thing about this calculator is that it gives you suggestions how to improve your life expectancy. You’ll probably be amazed how long you’re going to live. According to the CDC, if you were born in 1980, your life expectancy is 74 years. If you make it to age 65, your life expectancy jumps to about 85. That’s a lot of retirement money.

I found a great retirement calculator at MassMutual’s website. It’s the first one on the list, “retirement planner”. This allows you to put in your current age, retirement age, how much you currently have saved and a bunch of other variables to see how the numbers work out. It will also give you suggestions to reach your goals. It’s a very nice tool. I would suggest that if you are under the age of 50, do not check off the “include social security” box. At some point the government is going to need to make changes to the social security system and I would rather you plan as if it does not exist. If you plan that there won’t be social security and it’s there when you retire, you’ll have much more money. If you plan for it to be there and the benefits are reduced or aren’t there at all, you won’t have enough money.

When I did our calculations, I also did not take into account my husband’s pensions. Unless it’s money in my retirement account, I’m not counting it yet. If the pensions are there when we retire, we’ll have a hell of a retirement, but I think at this point we are just too far from retirement to feel secure that they will be there. If you are closer to retirement and vested in your plan, you can reduce the percentage of your income that you’ll need from your retirement account. For example, if you think you’ll need 80% of your current income in retirement, but you have a pension that will provide you with 60% of your current income, then you only need 20% from your retirement account.

How are you progressing toward your retirement goals?

Self finance your next car purchase

I hate car loans. I’ve only had one in my life. My first two cars were purchased with cash. They were crappy, cheap cars, both of which I loved. My third car was a new 2002 Kia Spectra. I still own this car and I plan to drive it until it dies. I don’t think I’ll ever buy another new car because I hate having a car loan. I’m currently saving for my next “new-to-me” car.

Most people think I’m crazy when I talk about saving for a car. Car loans and leases are part of everyday life. Well, they don’t have to be. Being an accountant, I decided to run the numbers. It’s pretty amazing.

When you get a car loan, two things happen: you are paying interest to the loan holder and you are losing the interest income you could have gotten by putting the money into your bank account each month instead of forking it over to your loan company. These two forces are costing you a lot of money if you have a car loan.

I went to BankRate yesterday to check out loan rates. The average rate for a 5-year new car loan is 7.49%. Therefore, if you take out a $10,000 car loan, the monthly payment would be $200.33 a month and you would pay $2,019.92 in interest. Now, let’s take this one step further. What if you took the $200.33 a month a put it into a savings account at 1.5% (which is what my ING account is paying right now) for five years to save up the $10,000? Well, it wouldn’t take you five years. It would take you a little over four years to save up the money. If you put the money in for a full five years, you’d have $2,473.24 left over in your savings account. Not bad, right? Wait, it gets better.

What would happen if you kept putting $200.33 in savings each month, say for the next 40 years? Well, if you withdraw $10,000 every 5 years to purchase another car (hopefully you last a bit longer than that), in 40 years you would have purchased 8 cars for the same monthly payment you would have sent to the loan company. How much do you think would be left in the savings account at 1.5% interest?

$26,109.26. That’s right. Over $25,000. Remember, also, that we have the lowest savings interest rates this country has ever seen. What happens when interest rates go back to 4%? In 40 years, after purchasing 8 cars, you would still have $58,504.86!

Are you convinced that car loans just make you poor and self financing your car purchases can make you rich? Let’s look at one more scenario. What if you usually purchase $20,000 cars? Your monthly payment would be approximately $400.66, costing you $4,039.84 in interest. If you saved the money instead and purchased the car after you had saved for it, you would have $52,218.53 at the end of 40 years, even after you purchased 8 cars (one every 5 years), assuming 1.5% interest rate on the savings account. Raise that interest rate to 4%, and you’ll have saved $117,009.71. That’s a nice chunk of retirement savings right? I’d rather have the $117 grand than have a car loan. I can be patient. I can wait a bit longer to get another car. What do you think?


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Financial Peace University: Week 1 reaction

Jeff and I started Dave Ramsey’s  FPU yesterday at our church. Financial Peace University is a 91-day (13 week) program to help get you back on track financially. I have already read Financial Peace Revisited and The Total Money Makeover. We’ve been using Dave’s strategies for over a year and paid off about $13,000 in debt last year. In the last 30 days we’ve paid off one credit card and one student loan. We decided to do the program to help jump start our budget and really get things moving. Our goal is to get everything, except the house paid off in the next two years before we start a family.

The sessions work like this: each Sunday, we meet for two hours. For the first hour, we all meet together and watch the video for that lesson. Then we meet in small groups to discuss the lesson and our own personal situation. Everyone agrees that whatever is said in the small groups is confidential. Doing that really helps people to open up and share. We have a large number of people taking it at our church. Over 60 people signed up. There are people in all age groups. There are people in all different situations. For me, I think it’s great to have the small group discussions so you can get feedback and support from other people. It keeps me motivated to keep going.

The first week is about saving and the introduction of the baby steps. The first baby step is to save $1,000 in an emergency savings account. We have already done this, since we’ve been following the plan. He wants you to do this in the first month of the program. If you household income is less than $20,000, he suggests you put $500 away. He then jumps to step 3 to discuss having three to six months of expenses in savings. While we are on savings, we should discuss savings, right? The part that bothered me was that there was no discussion of how to get there. I thought maybe it would come in the discussions. It didn’t. I thought maybe it would come in the reading from the book (as part of the homework, you were supposed to read a couple of chapters from Financial Peace Revisited), which I reread last night. It wasn’t in those chapters either.  I went through the CD’s and the online resources. Still no suggestions. I haven’t checked out the message boards yet. I’m sure there are probably suggestions and discussions there.

The one message I did really like from this week: Look at your emergency savings as insurance, not an investment. This is your insurance plan in case your furnace stops working or your car breaks down. The one change we are going to make is to open an Electric Orange Checking account so that if we do have an emergency, I can write  a check from that account to pay the bill. That way, I don’t have to put the emergency on a credit card while waiting for the Orange savings account to transfer the funds to my regular checking account. It would be too easy to carry a balance and use that transferred money for something else.

My fear is that some people will look at the first baby step and think that this just can’t be done. If you had to save $1,000 in 30 days, how would you do it? Where would you cut back or how would you increase your income?

Interest rates down again

I got an email from ING DIRECT stating that my March statement was ready. My interest rate dropped twice last month. I’m not earning 1.50% on my savings account with them. I decided to run over to Webster Bank’s site to see what they are paying for a savings account. With a normal, run-of-the-mill savings account the rates are .30%. So my ING account is earning five times that. That made me feel better.
Then I looked at the interest rates for their premier savings accounts. The interest rate for the premier savings is 2.00% if you meet all the qualifications. There are many. First you must have over $25,000 in the account to get that rate. You must also have a premier checking account. To qualify for that, you must have at least $10,000 in cash or $50,000 in loans, cash and CD’s with the bank. Well, if you’ve got the $25,000 in the savings account to get the higher rate, you qualify. There are all sorts of free services that come with the premier account, but none of them are appealing to me.

My point here is to make sure you have the best banking products for your situation. I don’t have tons of cash on hand because I’m paying down debt. If you have a large emergency savings account (good for you!), maybe one of these options is better for you. Check out all your options and then decide.

How much are you earning on your savings? Do you find yourself trying to put more aside due to the bad economy?

Coupons, coupons everywhere!

I want to welcome new readers from The Non-Consumer Advocate. If you haven’t checked out Katy’s blog, take a few minutes to go over there (after you finish reading my post, of course).

Last time, I discussed grocery stores. Now, we move on to coupons. There are a lot of mixed feelings on coupons. Some people don’t think they are worth the time. Others spend lots of time cutting, trading and using coupons. I am a huge fan of coupons. I generally save $10 to $20 each week with my coupons, and I’m just getting back on the bandwagon after lapsing for a while. Every once in a while I do that. I get so caught up in other things that I don’t have time to cut coupons. My savings start to suffer and I get my butt back in gear. I am currently in the butt in gear phase.

I have a wide variety of sources for grocery coupons. The best source is the Sunday newspaper. I get the paper delivered everyday, which costs me $2 per week. Most newspapers will allow you to get just the Sunday paper or the Thursday/Sunday subscription for less than buying the paper at a store. The Thursday paper in Connecticut has most of the grocery store flyers for the week. If you consider subscribing to the paper, get the largest paper in your area. At one time we got the smaller daily paper, but it had a lot fewer coupons than the large paper. My mother-in-law gives me her coupons,  so I get double flyers. Yay Mom! I have to say I got really lucky in the in-law department.

You can talk to your delivery person to see if they have extra flyers you could have. Bribing your newspaper person with brownies helps.  You can also talk to your neighbors and co-workers if you are really outgoing. Get coupons from whoever you can! A lot of people just throw those coupons away. Perish the thought.

In addition to your paper, there are tons of sites on the internet where you can print coupons: coupons.com, couponmom.com, couponsuzy.com. You can print coupons through mypoints.com as well. If you Google “grocery coupons”, you’ll get tons of results. Just make sure you check with your grocery store, since not all stores take printed coupons. You should also check on your grocery store’s website. Many now have printable coupons.

I’ve had a lot of people tell me they can never find coupons for the brands they use. I’m generally not very brand loyal but there are a few things I love. In those cases, I call the customer service number on the package and ask for coupons. Every company has a customer service number. If you can’t find one on their packaging, check their website. If they don’t offer coupons in the Sunday papers or online, encourage them to do so when you call. Most companies have coupons they can mail to you. If you enjoy the product, call every few months to tell the company how much you enjoy their product. They will offer you coupons 90% of the time. I once called Sara Lee, which owns Jimmy Dean sausage, to see if the sausage was gluten free (I won’t tell you why). I was assured that it was gluten free and was offered tons of coupons. They arrived a few days later and the savings were AWESOME! For a two minute phone call, I got about $10 worth of coupons. Not a bad deal.

If you get really adventurous, you can start trading coupons. There are groups on the internet where you can trade coupons with others. I did this for a while. My savings were great, but it was really time consuming. If you have the time and really need the savings, these coupon trading groups are really worth it. Try yahoo groups for coupon trading groups.

Clip, clip, clip away. Next time, we’ll talk about organization and maximization!

Are you a coupon user? Tell me about your successes and failures with coupons.

Are you giving the IRS an interest free loan?

How is it already February 8? I feel like I just wrote an entry two days ago. Well, I want to thank everyone who sent suggestions for blog topics. I got lots of suggestions from clients, friends and through my email. The winner of the Kill-a-Watt energy monitor is Amy from CT. Congrats Amy. I’ll get it out to you ASAP.

On to more important matters. Now, I try not to get huffy on the blog but I think tonight I have to rant a bit. It’s tax time so not only am I preparing tax returns for my clients but a lot of people talk taxes with me. Friends, family, acquaintances, you name it. People talk money with me in general. It’s the nature of the profession. I know there are a lot of people out there who are struggling to pay their bills each month and are racking up credit card debt. Then there same people are getting THOUSANDS of dollars back in tax refunds. Are you kidding? Seriously? Why are you giving the IRS an interest free loan?