Archive for the ‘Financial Freedom’ Category

Five Simple Steps to Get Out of Debt

cash2Last week I shared how my wife and I will be debt free in a couple of weeks!  Earlier this week, I expanded that by saying that everyone should make getting out of debt a goal.  Not just a long term goal, but a goal they focus on now.  Today, I present five simple steps for getting out of debt.

1. Accept Where You Are Starting From

You need to start by accepting where you are at.  Too often people get into a state of denial around their debts.  They don’t see everything, or don’t admit to the seriousness of the problem.  For others, they like to imagine, or live like, their debts don’t exist.  No matter whether you are deep in debt, or just a small amount of debt, accept where you are.

Part of accepting where you are means you should not run around chasing magic solutions to your debt problem. Don’t chase fancy “debt consolidation” schemes or companies with all sorts of promises about paying only a small amount of their debt.  It also means that you don’t even contemplate bankruptcy. You need to start digging your way out on your own.  But here’s the good news:  you can do it!

2. Use a Simple Budget Systemmoney1

You may have heard that you need to have a budget, but most of the time budgets are too complicated or too rigid. You need a simple, but flexible budget system.  There are a lot of advantages to having a budget.  It allows you to track your spending so you know where money is actually going.  You might be very surprised when you see where you actually spend your money.  Further, having a budget allows you to plan where you will spend your money.  This plan allows you to make space for paying off your debts.  Finally, having a budget keeps you from spending more than you make.  If you spend more than you make you will only go further into debt. Using a budget to plan out month will help ensure that you don’t spend more than you make.

As you can see, having a budget can be very beneficial.  Of course, this is only true if you use it.  Unfortunately, most people that try budgeting don’t stick to it.  That is where the Simple Budget System comes in.  You can read about the Simple Budget System here.

3. Cut Your Costs

Once you have established your budget, and have an understanding about where you spend money, look for ways that you can cut your costs.  What are some things that you can give up? Certainly, this will mean sacrifice.  The deeper in debt you are, the deeper the sacrifices you will need to make.  Look through your expenses and determine what you can cut.  For some, it is their daily Starbucks coffee.  For others, it means cutting cable TV.  My wife and I went without cell phones for the last four years.  What can you cut?

Another way to cut your costs is to start using cash for your expenditures.  If you use cash instead of debit or credit cards you will spend less. It’s been said that people with cash spend 18% less than if they used a debit card, and 28% less than if they use a credit card.  Why?  Two reasons:  One, there is an emotional attachment to cash.  You actually have to hand it over, and there is an emotion to that.  It’s not as easy as handing over a piece of plastic.  Secondly, you always know you what you have left.  If you have $200 in your wallet and you are about to spend $50, you are very aware that this is 25% of what you have.  You are going to have a lot less.  It forces you to ask, “Do I really want to spend this?”   If you switch to using cash, you will spend less.

4. Increase Your Income

This step is one that people often overlook, but it can be extremely valuable.  If you increase your income, you can take 100% of the increase and apply it to your debts. That’s what my wife and I did.  Over the past few years we have made over $10,000 a year extra with our side business. We then applied that money to our debts!  Those extra payments dramatically propelled us towards being debt free.

There are many ways you can increase your income. You can work hard at your job and try to get a promotion.  This may work, but it is not guaranteed and it may take a lot of time.  For many, the better choice is to start a part-time business.  This might be a traditional business, such as doing book keeping or babysitting , or it might be an online business or other home business.  My wife and I have partnered with a direct marketing company.  It’s not multi-level marketing, or direct sales.  Instead it allows us to earn an income without having to stock products or sell things to others.  (Enough about that here, if you want to learn more, visit my site.)

5. Snowball Your Debts

The final step is to snowball your debts.  This means that you focus on one debt at a time, and when it is done you take that payment and snowball it into the next debt payment.  This is a technique recommended by several financial experts including Dave Ramsey.  There are a couple of ways you can do this.  One option is to start with the highest interest debt and pay it off first.  I prefer a second way, which is to pay off the smallest debt first because it helps create momentum.

When you are doing your debt snowball you make your minimum payments only on all of your debts except your focal debt. On your focal debt you make as large of an extra payment as your budget allows.  You do this until that debt is completely paid off.  Then you take the extra payment you were making, as well as the former minimum payment on the debt you paid off and start on the next debt. This way the extra amount you are paying on your debts each month snowballs as more and more of your debts are paid off.

There you have it: five simple steps for getting out of debt. You can do it.  Being debt free is within your grasp.  Just get started today!

Written by:

Danny Gamache

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Posted on June 11th, 2010 by The Success Professor  |  No Comments »

Why You Should Get Out of Debt

piggy bankIn an article last week I mentioned that everyone should set the goal of becoming debt free. This might seem strange to some, especially if you have read any recent books about how to get rich. Today many of these books teach the benefits of buying real estate with “other people’s money” and how you should leverage yourself by investing as little as you can and borrowing the rest.  Unfortunately this advice is only setting people up for disaster.  If the last three years have taught us nothing else, it should have shown us the folly of this sort of thinking.  The alternative is to become debt free!

So why get out of debt?

Peace of Mind

If you really want to experience peace of mind and freedom from financial worry, get out of debt.  Few things add more stress than debt. Being debt free means you don’t have to worry about the value of your home.

Don’t Pay Interest

Imagine interest is a big sucking machine that just sucks your money away into a black hole.  As much as renting is considered throwing away money, so is the interest you are paying on your mortgage or other debt.  If you finance a car, you’ll end up paying significantly more for that car.  If you pay for that new television on your credit card and pay it off monthly, you’ll be paying far more for the TV than you would have ever been willing to pay.  Interest is wasting your money.

Significantly Increased Cash Flow

Because you no longer have the money flowing to your debt payments you will have significantly more cash flow. This is something that is easy to imagine.  Take your current financial situation.  Consider your monthly cash flow – what you earn less what you pay out.  Now imagine that you did not have any debt payments.  Take your car payments, credit card payments, student loan payments, and even your mortgage away.  You no longer have to make those payments.  Think of how much you will have left over!  This is the increase to your cash flow.

True Financial Freedom

There is a saying in ancient Scriptures that says, “The borrower is slave to the lender” (Proverbs 22:7).  You never truly have financial freedom until you are debt free.  When you don’t own anyone anything, you can have the benefits of this freedom.  Think of how many people today who are “upside down” in their home.  In other words they owe more than the value of their home.  These people cannot afford to move and sell their home.  If they sell the won’t get enough money to pay off the mortgage, let alone have a down payment for a new home.  Instead they are locked into their current home and location.

As you can see there are many benefits in being debt free.  Being debt free should be one of your goals.  Not just a dream that you hope to do “someday”, but a goal that you set out and start pursuing today!  For a long time I held the idea of being debt free as a dream; something that would be nice, but not something that I was focused on.  I did not have a plan and strategy for achieving it.  It is only a goal if you do a few things:

1.    Write it down
2.    Share it with someone else
3.    Make a plan (strategy) for achieving it.

Later this week, I’ll write about the vital elements of a get out of debt plan.

Written by:

Danny Gamache
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Posted on June 8th, 2010 by The Success Professor  |  No Comments »

Joining the Conspiracy


This year for Christmas and in the lead up to the day my family will be joining in the conspiracy. This conspiracy is not really a secret, but it is not really that well known either.  It is a conspiracy to change Christmas; I think, to make Christmas more SUCCESSFUL.

The video below will invite you to join the conspiracy.

Note: The video is from a particular faith perspective, however the CONSPIRACY is something that can be participated in by people of any spiritual belief and is not tied directly to any particular organization.

Will you join the conspiracy? Share what you will do differently this Christmas below.

Danny Gamache – The Success Professor

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Posted on December 2nd, 2009 by The Success Professor  |  1 Comment »

8 Ways to Pay Off Your Mortgage Quickly

house

One of the achievements from last year that my wife and I are most proud of was the fact that we paid off an extra 15% of our total mortgage amount. We are about to make another extra payment as we continue towards our goal of being completely debt free.

This is certainly something you can achieve as well. Here are seven ways to pay off your mortgage more quickly.

1. Make a bigger down payment

Naturally, the larger your down payment the quicker you can pay off your home and the less interest you will pay. Take for example a $200,000 home with a mortgage at 5% interest over a 25 year period. There is a significant difference between making a 10% down payment and a 20% down payment. The 10% down payment results in $135,000 in interest. The 20% down payment will result in $120,000 in interest charges. That is a total of $15,000 extra you save pay making the larger down payment.

2. Get a shorter amortization period

The shorter the amortization period, the less you will pay in interest, and naturally the shorter amount of time you will have to pay off the debt. Take the example above, of the 25 year mortgage with a 10% deposit. As mentioned you would pay a total of $135,000 in interest. If instead, you reduced it to a 20 year mortgage you would only pay $105,000. If you went even further and had only a 15 year mortgage the interest charges would go all the way down to $76,000. That means nearly $60,000 is saved by having a 15 year mortgage instead of a 25 year mortgage. Certainly that means your monthly payments are higher – but not by as much as you might suspect. The difference is only about $400 each month.

3. Pay every two weeks

By breaking up your payments and making a payment every two weeks you will in effect be making two extra payments each year. In order to do this you need to make the payments half of what you would have paid monthly. This means that your extra two payments go directly onto the principle lowering your total interest and speeding up your repayment process.

4. Increase the size of your payments

One of the most important ways of paying off your mortgage is by arranging to pay more than the minimum payment. Anything you pay extra will go instantly to the principle. For example, with the mortgage described above (a 25 year mortgage at 5% for a $200,000 home with 10% down) if you simply paid an extra $100 per month you would pay off your mortgage three and a half years early and save over $20,000 in interest. If you increased the extra payment to $250 per month you would pay off your mortgage more than seven years sooner and save nearly $50,000 in interest. If you went full out and paid an extra $500 per month you would pay off your mortgage eleven years sooner (in nearly half the original time), and save nearly $75,000 in interest.

5. Don’t refinance too often

The idea of refinancing for lower interest rates, or to free up some cash for other purposes, can be a serious temptation. Unfortunately, many people get in the trap of frequent refinances and end up getting stuck in a cycle of increasing mortgage debt. It is easy to think of using increased equity in your home to do renovations or repairs. In reality these sorts of things just add to your debt without creating any real personal wealth. Refinancing for lower interest rates may seem simple enough but there are often many fees involved. If interest rates have fallen significantly it might be worth refinancing once in a while, but don’t get in the habit. If you do refinance, make sure you understand all of the fees and make sure you are going to be living in the house long enough to truly take advantage of the lower interest rate.

6. Pay extra bulk payments

Extra bulk payments can be another powerful way of reducing the time remaining on your mortgage. In our example of a $200,000 home, an extra payment of $10,000 at the end of the first year shortens the length of the mortgage by about 2 ½ years and save you over $20,000 in interest.

7. Know your policy

The important thing to do when planning to pay off your mortgage quickly is to know your mortgage policy. Your policy may have certain provisions as to how you can pay off your mortgage and what sort of payments will have a penalty attached. In our case, our mortgage allows a maximum of 15% of the mortgage to be paid in a bulk amount each year. On top of that I can double any payment that I chose, and increase my payment amount by 10% once a year. These numbers serve as goals. By knowing that I can pay a maximum of 15% of the mortgage extra each year, I have a goal to pursue. I use their standards to drive me towards success and knowing the policy well protects me from paying any extra fees.

8. Set your debt free date

Like any goal, getting out of debt requires you to have a deadline. In paying off your mortgage your deadline is the date you set as your debt free date. This is the point in time when you plan on having your mortgage burning party and being able to say that you own your house outright. Do you have a debt free date? Take some time to set one and do what you need to do to make it happen.


Now don’t forget that you can combine all of these steps. Let’s look at one final example. We’ll stick to our $200,000 home and an interest rate of 5%. Remember that the original plan has you spending $135,000 in interest and paying off your home in 25 years. To start our plan you will make a bigger down payment. You’ll make a 25% down payment instead of 10%. You’ll take a 20 year amortization instead of 25 and you will increase the size of your payments by $200 a month. With this plan you will pay off our mortgage in 15 years and spend only $63,000 in interest; a savings of over $70,000. Do you think you might be able to put that $70,000 to good use? Of course you could. Not only that, but after 15 years you are done. You can take your monthly payments and redirect them to other things such as your retirement, travel etc. It is worth it. Make the small sacrifices now to live an unbelievable future.

Written by:
The Success Professor – Danny Gamache
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Posted on September 3rd, 2009 by The Success Professor  |  5 Comments »

Balanced Spending Within Your Balanced Budget

balance

photo by olaf

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You have heard it said many times that you need to have a balanced budget. The general understanding here is that you need to make sure spend less than you make. Unfortunately for many this gets complicated. People struggle to follow a budget. That is why I use a “Simple Budget Technique”.

Beyond having a balanced budget where incoming funds and outgoing funds are balanced, it is also important to balance where you spend your money; you should spend money on the things that are really important – both now and into the future. This involves creating an appropriate mix of how you spend your money and what you spend your money on. This is balanced spending. Here are four categories everyone should consider having a budget for:

1. Health

Increasingly, people are starting to pay attention to their health. There are a lot of ways to improve your health for free, but sometimes you should invest money in your health.

I’m not going to recommend a set amount to spend on your nutrition. But think about it – how much money do you spend on your car? I calculated out the other day that between insurance, oil changes, and basic maintenance (not even gas), I spend close to $4 a day on my car! How much then should I spend on my most valuable asset – my health?

Your health budget might include money for:

cherriesBetter food – Good food costs money. Unless you have your own garden or live on a farm, it will cost you more to eat natural organic foods and to eat more fruits and vegetables. All of these can be valuable investments.

Fitness – While many people will choose to exercise for free, there are a number of things that you may want to spend money on. If you run or walk a lot you should invest in a pair of good running shoes. Some will want to invest in a gym membership, or purchase a quality piece of exercise equipment. Where I live in Canada, there are several months of the year where outdoor activities are limited due to the cold and snow. This is why my wife and I purchased an elliptical trainer. It gets lots of use, even in the summer. You might choose to get a membership at a golf club or tennis club. Choose something that you will enjoy and will keep you fit.

Vitamin/Minerals and Supplements – More and more today people are realizing that good nutrition is needed to live a life that is full and vibrant. It is almost impossible to get the nutrition you need from the food you eat. It is just no longer there. Soil quality has decreased substantially over the last century. Further, much of the food we eat is shipped long distances and loses its nutritional value over time. In fact even the American Medical Association now recommends that everyone take a multivitamin and mineral supplement. Beware in your shopping because most minerals have a difficult time absorbing in the body – in fact the average absorption of store brand products as been shown to be only 3-6%. You should be able to notice a difference after a couple of months taking the supplements.

2. Self-Improvement

If you are not growing and developing you are falling behind. We live in an information world and technology in almost all fields is expanding exponentially. In fact it is said that you need to double your knowledge every 7 years. Thankfully, there are more and more free sources of training and information such as blogs and podcasts. Beyond that there are some great ways to spend a little and invest in your self:

booksBooks - Reading is a great way to gain knowledge and to keep motivated. I make it a practice to always be reading something motivating, inspiring and educational. If there is a subject you want to learn about, read a few books on it and you will far ahead of most people. And with reading you don’t have to stop learning about something. If you are passionate about a subject, just keep reading. Here are my top book choices to get you started.

Audio CDs - Many top speakers sell their material on CD or DVD. I also purchase blank CDs and burn my favorite podcasts on to them for listening in the car. One popular choice is to learn a language. Many programs combine audio recordings with online or computer-based learning to help you learn a new language more quickly.

Conferences - Make sure that at least once each year you attend a conference related to your personal growth. This might be a conference specific to your field, or a general personal development conference. I find it best to plan to attend a conference that is some distance from your home. Use it as a personal retreat weekend to refresh and connect with your goals.

Seminars or Classes - Look for other opportunities to learn. These might be seminars put on by the local Chamber of Commerce or you may take a class at a local college or university. These can be fantastic ways of learning a new skill or staying up on your industry.

Coaching - Everyone needs a coach. A coach is someone you can bounce ideas off of, share your goals with, and go to for advice. A good coach will keep you accountable to your goals, help you recognize your strengths and weaknesses and inspire you to achieve your best. I speak with a coach every two weeks, and I serve as a coach to many others.

3. Giving

Look to give money away. There is a clear connection that occurs between giving in receiving. The people that give money away tend to receive more back. I don’t think there is some magic reason for this happening, but I do think it works in our psychology. If you give away money, you naturally carry with you an abundance mentality. You are able to understand that more money will come and you will be alright even though you give it away. No matter whether you earn a lot of money, or very little, you should start giving now. A good place to start is by giving 10% of your income. For some, this may seem like a lot, and yet if you set it up as an automatic gift each month you will hardly notice it. And yet, it will be able to make a significant difference in the lives of others. Some ways to give are:

Support a meaningful cause - If there is a cause that is particularly meaningful for you, look to support that cause. For example, you may be passionate about cancer research. If so, look for ways to give to that cause.

Support your local church, synagogue, or worship community - If you attend a church or similar community you should be involved in supporting it. Not only does it support the ongoing functions of the church itself, but churches often provide an opportunity to pool funds and use them to accomplish things that individual donors would not have been able to do.

Support a microenterprise - I’ve previously written about how entrepreneurship can play an important role in poverty alleviation through microcredit. You can contribute as well. Kiva.org partners individual lenders with entrepreneurs in less developed countries. You loan a small amount to them, and it is repaid back over the next year. You are then able to take the same money and loan it to another person.

povertySponsor a child - One very rewarding form of giving is to sponsor a child. There are many organizations that allow you to sponsor a child in a less developed country. Your funds go to help pay for food, clothing and education for that child. You are often able to send and receive letters from your sponsor child providing for a hands-on connection to your giving.

4. Investing for the Future

Investing is a vital step. Some people have been scared by the recent economic downturn and have retreated away from investing. You shouldn’t let fears about the economy stop you. Yes, you may want to learn a little bit about risk and stay away from over optimistic views of investments in areas such as real estate, but it is still important that you save for the future. There are several things you should be saving for:

Retirement/Long Run - Investing for your retirement and later life is vital. No matter how much or how little you are making now, invest 10% in your long-run plan. Be diligent and don’t cheat on this plan. Stick to it, and you will have a nice nest egg ready for your retirement. It is never too early or too late to start investing – you’re never too young or too old. With tax deductions given for starting retirement savings programs, saving for your future can even be more valuable. Make sure you’re making your money work for you. Investments can serve to leverage your money, allowing you to earn even while you sleep. Do it now!

dave ramseyEmergency Fund - We all know now that job stability is a thing of the past. Beyond that, life is full of surprises, and some of them are very costly! Having an emergency fund in place provides peace of mind, and stability when those surprises occur. Author and radio host Dave Ramsey suggests having an emergency fund that will cover 3 to 6 months of living expenses. This is a great guideline that everyone should follow.

Education Fund - If you have children, it is wise to put money away into an education fund, to help them pay for college education. Even if you are hoping your child will pay for their own education, having a small fund in place can make a big difference for them. Ideally, put some money away when your child is born and allow it to grow all the way until they are ready to go to college. If you missed that time, start now anyways!

Asset Replacement - you should also have money to replace your personal assets. You can use this to save for and buy a car with cash, be prepared when something breaks, or as part of a planned replacement strategy.
Having a balanced budget means more than keeping income higher than expenses. You need to have a balanced budget to ensure your spending habits match your long-term priorities. Invest money in your health, your personal development, your future, and in others through giving. Only when these spending choices match your values and goals will you have a real balanced budget.

Written by  -
Danny Gamache – The Success Professor
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Posted on August 6th, 2009 by The Success Professor  |  1 Comment »

How we paid off an Extra 15% of our Mortgage Last Year

One of the accomplishments of 2008 that I’m most proud of is that my wife and I paid off and extra 15% of our TOTAL mortgage last year. One of our big goals is not to spend our life paying off debt.  For most people the debt they are left with for the longest is their mortgage.

Because of the size of a mortgage, early on in the life of your mortgage regular payments pay very little beyond the interest.  That, plus the fact that the average person moves to a new house (and usually a bigger mortgage) every seven years, means that most people have a mortgage for most of their lives.  As such mortgage fits the words origin: mortgage comes from the French word “mort” which means death, and “gage” which is pledge. As such a mortgage is debt until death.  Unfortunately for many people this rings true today.

Thankfully, it doesn’t have to be that way. The more you pay extra on your mortgage the quicker it will go away.  Extra payments can significantly accelerate your mortgage.  Putting extra on your mortgage early lowers your principle, meaning that you will always being paying less interest because of that extra payment.

Here are the six things we did in 2008 to pay an extra 15% of our mortgage:

1. Set a goal

The starting point for achievement is setting a worthwhile goal that you are truly motivated to accomplish. Our broad goal of paying off our mortgage quickly is a result of our desire to be debt free.  From our broader goal, it was important to set a goal for the year.  In our case the goal was set for us.  Part of our mortgage agreement allowed us to pay up to 15% of our mortgage extra each year as prepayment without penalty.  With 15% being the maximum allowed, it naturally pushed us towards reaching that limit.  Thankfully the 15% was both challenging and yet realistic.  We had to work hard to reach that as a goal, but we were able to do it.

2. Be Frugal

A second tip that helped us pay off our goal was to be frugal. While compared to some we never went to extremes in frugality (we still traveled significantly and enjoyed great vacations), we did make some important steps.  One example is that we did not eat out a lot.  In particular we took our own lunches to work, rather than having to purchase lunch.  We also made very few purchases of “extras” thus saving significant money on the little things.  Further, we never purchased wants impulsively; rather, we let some time go by to see if we still want the purchase.  We also saved a lot of money by buying things used.  We purchase things from garage sales, online classified ads and friends are all great sources for discount purchases.

3. Sell Things

A third thing we did is to sell things.  There are many ways to sell things.  You can clean out your garage or storage room and sell things you aren’t using. You can have a garage sale or sell through Ebay or Craig’s list.  You can also get rid of assets such as a second car that you don’t use very often.  This year, we paid off a mobile home that we had been renting out intermittently.  We were able to use some of the proceeds from that sale towards of our mortgage.

4. Pay off other debts

Another thing that helped us to pay off more on the mortgage was to pay off other debts. Over the past couple of years we have focused on paying off other debts as well as the mortgage.  In 2008 we also paid off my student loan, leaving us with only or mortgage remaining.  Each time we paid off a debt, we would add the previous payment to our extra mortgage payments, thus creating a debt snowball. Dave Ramsey, in his book “Total Money Makeover” (one of my top 10 books), recommends paying off your debts smallest to largest to create momentum for your debt snowball.

5. Find Secondary Sources of Income

A final big factor in paying 15% extra on our mortgage is the flexibility that comes from adding an extra source of income. Our home business affiliate program makes a significant difference.  We build our home business on a very part-time basis around our full-time work schedules.  That of course, means that the money we earn is extra, and is something we are able to use for achieving our goals such as paying off our mortgage!  There are many secondary sources of income that you can find, whether it is by taking an extra job, or starting a home business.

6. Have a Simple Budget

Finally, it is important that in order to achieve a financial goal such as paying off a debt, that you have a budget.  Unfortunately, most budgets don’t work, which is where my simple budget technique comes in.  By having a simple budget you are able to make wise decisions with your money because you always know where you stand.  You are able to make decisions based on what you have and the goals you want to achieve.
What are your goals?  Do you want to pay off extra on your mortgage, or pay off other debts?  What are you doing to make that happen? Share your goals and thoughts below to keep yourself accountable, and for the encouragement of all readers.

Written by:
The Success Professor – Danny Gamache
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Posted on January 8th, 2009 by The Success Professor  |  6 Comments »

Money 911: Dealing With A Financial Emergency (and Developing Financial Peace)



How is your Financial Health?

Are you in a financial emergency? Do you need to dial money 911?  Certainly, our economy is, and so even if you are not in an emergency state, a full financial check up might be in order.  In times of financial uncertainty people are more aware of their money.

The issues of what to spend money on are elevated in the importance of decision making.  Because of this increased focus, it can be a great time to make life changes when it comes to how you deal with money.  Unfortunately most people make only minor surface changes and, after the storm is over, quickly change back to their previous poor money habits.  However, if you change your understanding about money, and develop new habits, the changes can result in lifelong financial peace.

Dealing With The Emergency and Developing Financial Peace

1. Assess the Situation: Be Honest With Yourself

Most people struggle with being honest with themselves about their financial condition.  It is very easy to be in denial about the need to make changes and the need for help.  Here are a few questions to ask yourself:
* Do you have credit card debt?
* Has your overall level of debt increased during the past year?
* Do you have a car payment?
* Does it ever feel like the month lasts longer than the money?
* Do you find yourself struggling to make it until the next payday?
* Are you finding it hard to save for the future?
* Do you and your spouse often fight about money?

If you answered YES to any of these questions, then you need a financial surgery.  If you answered YES to more than one of these questions (or maybe all of them!) then you are in desperate need of changes in you life.  Admit that you have financial struggles and begin to change.

2. Stop the Bleeding

The first step is to stop the bleeding.  You do this by changing your spending habits. This will mean changing your lifestyle.  Let’s face it, if you answered YES to questions above then you are living a lifestyle that you cannot afford.  You need to scale back to a lifestyle you can afford.  The longer that you’ve been living a life you can’t afford, the further you will need to cut back your current spending.

There are many common changes that need to take place in this step.  You may need to:
* Stop eating at restaurants
* Put a hold on any purchases other than food, shelter, and utilities
* Cut out a monthly expense (like your cell phone or cable tv)
* Sell you car to eliminate car payments – by purchasing a small car with cash
* Commit to not buying anything on credit again

The more difficult your financial situation (ie. the more often you answered YES in part one) the more of these steps you will need to take. You may even need more drastic measures.  Part of cutting your spending is to develop a clear, written budget.  Most budget systems are complex and set people up for failure. Here is how to set up a simple budget system.

3. Give Yourself Oxygen: Increase Your Income

Your financial equation has two sides, your expenses and you revenues:  what you spend and what you make.  Once you have stopped the bleeding in your spending you need to look for ways to increase your income.

There are endless ways to increase your income.  You can:
* ask for (and do what it takes to earn) a raise
* have a second spouse enter the workforce
* get a second job
* start a home business
* sell some of your ‘things’ on Ebay or by having a garage sale

Again, the more difficult your financial situation the more ways you will need to find to increase your income level.

4. Consider Alternative Treatments: Have a Plan B in Place

In order to find true financial peace, you will need to develop a “plan B”.  “Plan B” is the preparations you will take in case something unexpected happens to your income source.  This could mean that you lose your job, you get a pay cut, or you get hurt or disabled and are not able to work.

The first part of having your plan B is to develop an emergency fund. Author Dave Ramsey of the Total Money Makeover (one of my top 10 book choices), suggests having an emergency fund of $1000 set aside immediately, even before you begin to pay off debts.  Later you should increase this fund to covering six months of expenses.  If you are concerned about the possibility of job loss in the near future, then get the emergency fund up to six months of expenses right away.

The second part of plan B is to create alternate sources of income. This is where having a home business that allows you to create residual income (also known as passive income) comes in.  Other plan B options include developing new skills and more education or getting your foot in the door at a new company by starting a part time job.

5. Make Long Term Life Changes: Get Out of Debt

After you have a plan B established, have done what you can to increase your income, and have made any necessary changes to your spending it is time to do everything you can to get out of debt.  Again I would suggest following Dave Ramsey’s teaching here.  Dave teaches that you begin a debt snowball by paying off the debt with the lowest balance.  This allows you to gain some quick success.  The snowball effect occurs because once you pay off the first debt you add the original payment of that first debt to your extra debt payments and start attacking the second debt.  Your goal is to pay off everything other than your mortgage right away, and then over time attack your mortgage.

6. Continue to Focus on Long-term Financial Health: Save for Your Future

The next step is saving your future.  This is long-term savings for your retirement.  You need to start to do this only after you have paid off all your debt other than your mortgage.  Your goal is to fully fund your retirement account, to create extra sources of residual income, and to continue to live frugally while you save, save, and save.  Included in this step will be saving for specific purposes such as your next car, vacations etc.  You never want to use debt again.  You will also likely want to contribute to your child’s education fund.  Always buy things with cash by saving for them first.  This gets money working for you instead of against you.

Written by:
The Success Professor – Danny Gamache

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Posted on November 6th, 2008 by The Success Professor  |  2 Comments »

Simplify Your Budget

Photo by Emdot

Photo by Emdot

Do you have a budget?  Perhaps you’ve tried setting a budget only to find that you are not really following it.  Having a budget is the first step towards improving your financial situation and moving towards financial freedom.  By establishing a budget, you are able to have a clear understanding of how much money you have coming in, how much you have going out, and where that money is going.  A budget allows you to follow the primary rule of a debt free life – spend less than you make.

Unfortunately most budget systems are very complex. They require you to itemize every category of spending and keep track of where every item you spend goes.  While this system make work for people with strong organizational skills or those who have the time to track every cent, most people just end up frustrated.

Traditional budget systems are also very restrictive. Having every category scheduled to the precise amount you will spend doesn’t allow for the fluctuations that naturally occur in life.  Life doesn’t always flow on an exact monthly basis.  Perhaps during one month you purchase more groceries; the next month you may need less.  One month you may not have time or desire to spend much on entertainment, but the next month your favorite band may be in concert in your area.  When this sort of situations come up you may feel handcuffed by your budget.  It is often when this happens that people will start making exceptions and eventually abandon their budget.

Another reason that many budget systems do not work is because they are not prepared for the unexpected.    Let’s face it, life brings many unexpected events our way, and they often cost money.  An emergency fund is the ideal way to protect you from most of these; however what do you do while you are working to establish your emergency fund?  Also, many unexpected expenditures are small and hardly worth breaking into an emergency fund.  It may be an unexpected $30 because your good pair of pants developed a rip in them, or an unexpected tank of gas you need because you had to pick up your son or daughter from a friend across town.  These expenses may not be planned and in fact they may occur after you’ve already spent your budget for these areas.  It is hardly worth breaking into the emergency fund, but you also don’t have any budgeted space for them.

The end result of traditional budget systems is that most people don’t follow them for long.  Because the budget is so complex, feels restrictive, and does not allow for the unexpected, it is very easy for people to get off budget.  Once someone is off budget it is often easier for them to stay off than to start over.  And so people quit.  People start with good intentions but then end up leaving their budget behind and get back into the same financial traps they were in before.

That is why people need a simple budget system.  You need a system that will be easy to use, give you some freedom in your monthly spending, and has an allowance for the unexpected.

Steps in Developing a Simple Budget

1. Start a spreadsheet – at the top, write down your forms of income.

Write down all of your family’s forms of income (net take home pay).  For example, on our budget we have my paycheck, my wife’s paycheck, and our expected business income.  If you get paid monthly you will have one column in your spreadsheet.  If you get paid twice monthly you will have two columns.

Photo by Thebrasspotato

Photo by Thebrasspotato

2. Record all of your bills payments and anything you need to pay on a monthly basis.

In this step you should simply list everything that is a MUST pay each month.  These would primarily be your bills and debt payments, not variable expenses like groceries.  Call these your fixed expenditures. On this list you should include:

  • mortgage or rent
  • all utility bills
  • phone bill and cell phone bill
  • cable or satellite bill
  • car payments
  • student loan payments
  • minimum credit card payments
  • house and car insurance
  • monthly giving
  • any other debt payments

This list should include everything you are committed to.  If there is something on this list that you don’t want to be committed to cancel that service, or pay off that debt.  If you have two columns after step 1 because you get paid twice monthly, you should place these bills and payments in the proper column based on when they become due.  Assuming you are paid an equal during each part of the month you should try to balance out the payments.

You should also look to automate as many of these payments as possible.  Use your bank account to set up automatic bill payments so that the fixed expenses are paid without any conscious effort on your part.

3.  Total your fixed expenditures and calculate your income minus your fixed expenditures so you have your amount remaining.

After step 3, your budget should look something like this:

Simple Budget 1st of month 15th of month
Your paycheck 1200 1200
Spouse’s paycheck 800 800
Business income 600
MONTHLY INCOME 2600 2000
Fixed Expenditures
Mortgage 600 600
Car Payment 350
Student Loan 300
Car Insurance 70
House Insurance 60
Phone Bill 60
Internet Access 50
Cell Phone 50
Electricity 90
Cable Bill 50
Credit Card Minimum 110
Donations 320 260
Total Expenditures 1510 1460
Income less fixed expenditures 1090 540

4.  Set a budget for your variable expenses.

Your variable expenses will be all of the other types of expenditures that you may make in a budget period (ie. a month if you are paid monthly, or ½ month if you are paid twice monthly).  This will include your groceries, clothing, gas, entertainment and any unexpected surprises that may come up.  Your goal is to estimate a reasonable amount for these variable expenses, but to keep it as low as possible.

The process of finalizing your variable expense section of the budget will take time.  You will have to play with it over the first few months of using the simple budget system.  But once it’s complete it will give you flexibility and freedom in your spending.

5. Withdraw cash each budget period equal to your variable expenses.

Studies have shown that people who spend cash instead of debit or credit cards on average spend 18-28% less.  That is true of every category of spending, even clothes and groceries.  By spending cash you have to think about making each purchase, and have the emotional response of giving up cash.
Because of this fact, you should withdraw your variable expense budget at the start of each period.  This is what you will use for every variable expense.  The important thing to remember is that once the cash is gone – it’s gone.  You need to make it last for the entire budget period.

Because the variable budget is grouped together, you have a new found sense of flexibility.  You can spend more on groceries if there is a fantastic sale.  You can spend less on entertainment if there is nothing of interest to you this month.  You can easily flex between one type of variable expense and another.  It also gives you some leeway for unexpected events.  Certainly you have to keep within your overall variable budget but you can easily flex from one area of spending to another.

6. Use the remainder to accelerate debt payments and/or to save for the future.

The money you have left by this point in your process should be used to payoff debts or save for the future.  For most people, the best first step is to pay off debts as quickly as possible.

To do this, pick one of your debts and put all of the remaining money directly on to that debt.  This is known as a debt snowball and is recommended by financial experts such as Dave Ramsey.  Some experts suggest that you start with the debt with the lowest balance (in order to create some quick success), while others argue to attack the debt with the highest interest rate (in order to save more money in the long-term).  Either option can be successful, just make sure you start paying down debts right away.

The snowball effect occurs because once you pay off the first debt you add the original payment of that first debt to your extra debt payments and start attacking the second debt.

Now your completed simple budget should look something like this:

Simple Budget 1st of month 15th of month
Your paycheck 1200 1200
Spouse’s paycheck 800 800
Business income 600
MONTHLY INCOME 2600 2000
Fixed Expenditures
Mortgage 600 600
Car Payment 350
Student Loan 300
Car Insurance 70
House Insurance 60
Phone Bill 60
Internet Access 50
Cell Phone 50
Electricity 90
Cable Bill 50
Credit Card Minimum 110
Donations 320 260
Total Expenditures 1510 1460
Income less fixed expenditures 1090 540
Variable Expenses 450 450
Remaining Budget: APPLY TO DEBT 640 90

This budget system will simplify your financial life.  It sets all of your fixed payments on some form of automatic payment schedule so that you don’t worry about them.  It groups your variable expenses together to give you flexibility in how you spend them.  It can lower the stress that comes from trying to fit make every budget category equal and trying to keep track of every purchase.  By using cash you will spend less, and by following the debt snowball you will pay off your debt more quickly.

The Success Professor – Danny Gamache

Posted on September 24th, 2008 by The Success Professor  |  11 Comments »