Avoiding D.E.B.T. Tip of the Day:
Don't lend money to people that are out of work; just give it to them. They don't need to owe anyone else and you don't need to hassle them about paying you back. If you don't have it; don't offer it.
Whenever I’m in a counseling session or leading a financial lecture, people always ask me about carrying debt. They want to know
how much debt is too much or where their limits should be. My response is typically the same; “I can’t tell you without understanding all of your financial matters.” Sure, I could offer the typical percentages quoted by most so called financial experts, 20%-35%. But do these numbers really answer the question? I don’t think so. There is no way to accurately answer these questions without getting the facts first. So, what am I to do? After several nights of prayer and contemplating, I came up with a solution to this problem. Create a short but effective guideline that will help people determine their debt limits without direct assistance. The aftermath was a six step guideline to determining the best personal debt-income ratio and here it is for anyone looking for answers.
Seven Step Guideline to Determining Your Best Debt to Income Ratio
1.Determine your values:
This step is more important than any other because it exposes the foundation of your spending habits. It requires you to be completely honest. Anything less will be a waste of your time. Look into the mirror and ask yourself, “What do I value?” If you find this question difficult to answer, begin your evaluation by tracing your money trail. Take a look at your bank account / credit card statements and determine where most of your money is spent. While your money trail can’t fully expose your values, it is a good place to start.
2.List your lifestyle goals:
Make a list of long term lifestyle goals. Once you’ve created this list, research the cost of your desired lifestyle. How much will a four bedroom single family home cost you in Maryland? Use search engines and different financial websites to assist with your research (http://www.bankrate.com/calculators/savings/moving-cost-of-living-calculator.aspx). You need to understand how much your desired lifestyle will cost before pursuing it. Make sure to separate potential monthly expenses from long term liabilities. These costs will be used later in this process, so put them to the side. (Note: If you are married make sure this is a combined list)
3.Determine your monthly household income and total assets:
Do this by totaling all net income that contributes to the household on a monthly basis. Net income is your take home pay. Also, summarize all household assets. Some common assets are savings, retirement funds, mortgage free properties, properties with a positive net worth, loan free automobiles and any other possessions that can be converted into cash. Bankrate.com and this site also has calculators for these estimates. Record these results separately.
4.Determine your monthly household expenses and total liabilities:
Do this by adding all expenses that your household pays per month. Next, summarize all household outstanding debts (liabilities). These are the debts that still need to be paid. This would include any all loans with balances, medical bills, collection bills and any other debt yet to be paid off. Record these results.
5.Compare your monthly household expenses and total liabilities with the cost of your desired lifestyle:
How? Subtract your total monthly household expenses from the estimated monthly expenses of your desired lifestyle. Next, subtract your total liabilities from the total cost of your desired lifestyle. Record these results.
6.Compare your total household monthly income and total assets with the monthly expenses and potential total liability cost of your desired lifestyle:
Subtract the estimated monthly expenses of your desired lifestyle from your total monthly household income. Next, subtract the total liability cost of your desired lifestyle from your total assets. Record these results.
7.Putting it all together:
Evaluate all of your results to determine if you can afford your current lifestyle and if you’re on track to reaching your desired lifestyle. If your current cost of living (monthly expense/ total liabilities) outweigh your current monthly income and total assets, then you can’t afford your current lifestyle. On the contrary; if you can afford your current lifestyle, compare your totals to the total expenses and liabilities of your desired lifestyle. This should allow you to understand how close you are to reaching your lifestyle goals.
AVOIDING D.E.B.T. TIP OF THE DAY
Never forget to your protect your net worth when taking on debt. Too much debt will leave you in the negative for a lifetime, but just the right amount will help you to reach all your lifestlyle dreams.
1. Pay off your auto insurance premium. Monthly payments will cost you more because most insurance companies offer you a discount for paying the full-term up front. (If your insurance company doesn’t do this and offer a significant discount; find another one.
2. Pay down your open credit card balances or any other loan to at least 25% of the available credit limit. This will help with boosting your credit score and cut down interest charges.
3. Pay off any closed/low balance loans.
4. Pay off your auto loan.
5. Settle any overdue accounts with collections agencies or law offices. Most of these debt holders are willing to settle the account for less than the balance.
6. Make an extra mortgage payment.
7. Prepay your monthly cable/satellite/internet/cellphone bill.
8. Prepay your weekly daycare expenses.
9. Make an extra student loan payment.
10. Pay for a few useful certification courses. This could come in handy if you are laid off or have a need for more household income.
11. Make an early rent payment.
12. Put most of the money in a savings account.
13. Purchase some bullion.
14. Purchase some food and put it in the deep freezer.
15. Prepay your monthly gym membership fees.
16. Get all your family medical, dental, and vision work done. Putting this off will usually cost you and your family more money.
17. Get your birthday, anniversary, graduation, prom and other annual special occasions shopping done early.
18. Use the money to retain an attorney for filing bankruptcy. Hey, sometimes it’s really that bad.
19. Prepay your energy bill.
20. Make sure all your vehicles have good tires, brakes, and on time oil changes / tune ups.
What are some of your suggestions?
It's getting to be that time again; tax refund season. Post office employees nationwide are being stalked for 2012 W2's. But this year the anticipation seems to be turned up a little higher than previous years. Why, certainly high national unemployment rates and cost of living increases have contributed to this anticipation. But, it also seems that outstanding debts have reached all-time highs and must be paid sooner rather than later. This environment has led many people to forego planning for their tax return money in favor of focusing on the fastest retrieval methods. But, these actions often result in the loss of an opportunity to permanently suppress the real problem; too much debt. To avoid this from happening this year, it is important to create a plan before receiving. So, how do you determine what's the best way to use this money.
First and foremost, everyone should do a self or assisted financial evaluation to determine financial stability levels. This can be done by either reaching out to a financial advisor or by doing an online budgeting evaluation. Most online evaluations simply involve filling out a budgeting sheet, but some can be more complex. Once the evaluation has been completed, the hard part begins. Now, you must determine if it is necessary to use all of your tax return money for bill repayment or if some should be used for self or household pleasure desires. What makes this task difficult is finding a perfect balance between making responsible financial decisions and curbing depression. My advice is to make your decisions based on several factors; long term financial stability, short term financial stability, and the cost of wants/desires.
Your long term financial stability should always be at the front of your mind while making any financial decision. If using your tax return money does nothing to improve your long term financial ability; it is time to re-evaluate your plans. Why should you spend your tax return money on temporary or short term matters at the cost of long term stability? That trip to Las Vegas is not worth another year of financial struggles. Picking up a big screen television from Best Buy isn't worth having a sub 630 credit score for the next 2 years.
Your short term financial stability plans should coincide with your long term financial stability plans. Any short term financial problems that will hinder your long term financial stability should be addressed. An example of this could be making a choice to pay off your past due car loan instead of simply paying it up to date. While it might seem practical to simply pay your past due car loan up to date; it may be better when possible to pay off the loan early to free up money for savings. Why continue making monthly payments which results in the inability to pay off other debts or save money for emergencies? Make sure your short term concerns are always aligned with your long term plans.
The cost of obtaining your temporary wants and desires should not cause you to lose or extend your ability to achieve short term or long term financial stability. Remember, you want to establish a good level of financial security as soon as possible. Instead of purchasing a new high end hand bag or watch; maybe it would be better to go to a movie or have an inexpensive night out on the town. On the other hand; if the cost of a family vacation or expensive night out does not create any financial setbacks, go for it. It is always important to use some of your money for fun activities. Paying down a bill that won't be paid off for another 15 years could be set aside for the sake of a much needed family vacation.
Use these basic rules to help with create a plan for your tax return money and you should be just fine. For more specific answers to your planning questions email me or leave a comment for myself and other to respond to.
Every morning you leave home, kiss your love ones good bye, and begin your journey towards the workplace. Eating breakfast is also a part of your usual routine, but this morning you need to get some cash out of the atm. You usually have some cash on hand to pay for these meals, but you left most of your money in the back pocket of the pants you wore yesterday. After you enter your password in the ATM and check all balances, you realize there isn't enough money in the account you share with your spouse. You begin to think about why your balances are so low, but quickly pull another debit card to keep the people behind your from becoming irritated. This account always has enough money in it and you are certain your spouse didn't use it. You keep this account just for times like this and rejoice whenever you can depend on it. But, something else about this account makes you feel good. It's the security you feel in having an account that only you and the bank know about. That's right; this is the card that you keep all to yourself and nobody else can use it. While your spouse mismanages the joint account, this account is free from foolishness. The only person that could mess this account up is yourself and you will never let your significant other know about it unless it's absolutely necessary. Keeping this account a secret from your spouse can't be a bad thing, right? Isn't it the responsible thing to do when living with a sloppy money manager? If it's a secret the answer is plain and simple; no.
It doesn't matter if your intentions are good or malicious; keeping the knowledge of this money away from your spouse is wrong. It is financial adultery and will harm most relationships. It isn't wrong because you are the sole user of the account. The fact that you are putting money to the side to offset the financial mistakes your spouse will make is not the problem either. What makes doing this so wrong is the lack of honesty and openness. Why can't you keep this money away from your spouse while being open about its existence? Oh, I get it; your spouse will be upset with you. To avoid arguments about the use of these reserve funds, you will openly deceive and lie to the person you love more than anyone else in this world. That doesn't sound like love to me. It sounds more like fear of dealing with an unresolved issue. The truth is, you secret stash will eventually be revealed some day and your spouse will despise you because of your deception and lies. You have taken away something from your spouse that is far worse than the feeling of not controlling all the money. Trust has been lost and sometimes it will never return. You have committed financial adultery and your good intentions are meaningless. This would have never happened if you would have been honest about your secret account and unfortunately, it may cost you your marriage.
If you're in this situation and your spouse has not found out about your little friend; today is the day to reveal this secret. Dealing with this issue today will help to eliminate bigger problems in the future. It's time to be honest about your money, even if it means arguing for a little while. It is better for them to know about your disapproval of their financial habits than to continue to lie. Relationships are built on trust; despite your disagreements.
Avoiding D.E.B.T. Tip of the Day
Avoid the victim mentality. Far too often, many people blame their financial problems on their parent's, spouse, child's father or mother, friends, boss, and even the government. This way of thinking hinders progression and will often hold people back from achieving their goals. It's far more productive to practice self-accountability. Accept your mistakes and contributions to your circumstances and move forward. We all make bad financial decisions, but the individuals that learn from them and move forward will often solve their financial problems.
Avoiding D.E.B.T. Tip of the Day:
Invest in everything that leads your marriage away from divorce. Trust me, even if things don't go as planned; it's worth it.
How much of your income are you willing to give away to obtain your lifestyle desires? Most people will respond by saying "as little as possible", but we all know that can't be true. Why would we agree to give up more than 50 percent of our lifetime earnings before we earn it if most of us really believed in giving away as little as possible? We consistently agree to pay principle plus interest charges on mortgage loans, student loans, credit card loans and other personal loans, and end of giving away a lot of our time and money. These agreements are made in spite of us knowing we are required to give away 20-30 percent of our lifetime earnings to local and federal government agencies. Here is a quick example of just how much money we spend by the age of 55, before incorporating food, clothes, insurance, medical coverage, and child care expenses.
Student loans / 10 years $20,000 (total paid $27,619.31)
Mortgage loan / 30 years $250,000 (total paid $429,674)
One Auto loan / 5 year $27,000 (total paid $30,571.20)
Credit cards / 10 years $15,000 (total paid $19,000)
Grand Total = $506,864.51
Once we account for taxes and the previously mentioned expenses, the total would minimally increase to $1,500,000.00 by the age of 55. The median U.S. household income for 2013 was approximately $51,017; and it doesn't seem to be be getting much higher anytime soon. This means it would take the average U.S. household almost 30 years to pay off these loans without considering all the other normal expenses like entertainment, vacations, auto repairs, etc. The calculations used for our loan totals were also estimated with 4.00% interest rates. Imagine what they would be if we just raised them by 1 or 2 percent. What room would there be to save or retain any earned income?
This doesn't sound like the actions of people that have a high regard for retaining lifetime earnings. In fact, it represents just the opposite, but we don't do this with bad intentions. The majority of us do this because we believe it is necessary. How else can a person that isn't born into wealth achieve the "American Dream"? While I won't dispute the necessity of using bank loans to reach our dreams; I do believe we can limit its impact on our lifetime earnings.
When we are searching for a job, most of us predetermine our minimal salary requirements before filling out an application. Before going into business negotiations, we typically create a game plan which includes minimal acceptable terms better known as "the bottom line". Why don't we put a "bottom line" on the amount of lifetime earnings we are willing to give up to pursue lifestyle aspirations? I think it has more to do with our customs than a blatant disregard for retaining hard earned money. America is all about the big gamble. Our great nation thrives on its citizens gambling on their future. Why else would we be encouraged to agree to debt that most likely won't be paid off until we've reached retirement ages? The practice of giving up a few hundreds of thousands of dollars for the purpose of earning millions of dollars in the future has been preached to us more than the parables of Jesus Christ. Does the idea of purchasing a house today and selling it for more in the future sound familiar to you? How about going in debt to obtain a degree for the purpose of finding a high paying job. These themes should be very familiar, unless you've managed to live under a rock for the last 50 plus years or you're under the age of 18. We live in a society that constantly sells the idea of using debt to obtain lifestyle dreams, and protecting yourself against this level of debt dependency requires the creation of a bottom line.
Do yourself a favor and set your bottom line price today, if you haven't already. Don't depend on any standard percentages set by so-called expert financial advisers, create your own number. This is a limit that you will have to live with. While I do agree with standard percentages between 50 and 70 percent (this includes tax requirements), your number must be self initiated. If you set the limit, you will be less likely to surpass it. Once you set your limit, hold on to it like your life depends on it. If you're only willing to give up $700,000 of your first $1,000,000; don't agree to loans that surpass $700,000. This is the one figure you should never compromise. Otherwise, the many hands that are reaching for your riches will grab them and never let go. Remember, living in American requires you to step up to the negotiation table and your personal wealth will always be on the line. Know your bottom line and run away from the negotiating table if the price gets too steep.
Don't isolate yourself just to prove a point. Sure, you may be able to take care of your bills without any assistance, but that doesn't mean you shouldn't accept gifts from others. If a trustworthy friend or family member offers you money with no strings attached; take it. Don't be so proud that you miss out on a blessing.