THE GOOD LIFE

In previous posts I have discussed the importance of budgeting and creating a spending plan (less threatening way of saying budget)! Hopefully everyone has taken those posts to heart and began working on a paper budget because it is the key to eliminating debt and creating financial success!

Today though, I want to give you some tools and resources to help in your budgeting efforts, and also provide tools to help you manage your money better. Are you excited! OK, well let’s go!

MONEYDANCE PERSONAL FINANCE MANAGER

I have listed this application in previous posts, but want to mention it again. This is the program that I actually use to help organize and manage my finances. It is essentially a program comparable to Microsoft Money or Quicken, but works on all platforms (MAC, PC and Linux). It is a software download with a one time fee (I think I paid $30) and updates the product with any new releases for free.

Moneydance is basically a fancy, easy to use check register. You can manage all of your accounts, including investments, assets and liabilities, credit cards and checking/savings accounts. By categorizing your spending with each transaction entry, Moneydance will generate a multitude of graphs, charts and reports including the all important Net Worth and Cash Flow reports. As you can see the the above screenshot, you can schedule events in the calendar, it automatically tracks your spending to give you a snapshot of spending and more, right from the homepage! To see more and download, you can go to www.moneydance.com and there is a link in my Blogrol to the right of this post!

MINT MONEY MANAGEMENT

What if you don’t want to spend money on a software package or tool, but still want to organize your money and even find ways to save…without saving! Mint is the product you are looking for then! This is a free web based product which allows you to create a free, anonymous profile and, within just a few minutes, see where you could be saving money, and how much you are spending.

When you set up your account, Mint will have you select your financial institutions and ask that you enter your username and password to your online banking. Mint will then access your account, import all of your transactions, classify your transactions, and provide you with graphs, charts and more. Once your account has been established and all of your financial institutions have been set up, Mint will provide you ways in which you can save money without setting aside money from your paycheck! For example, you may have a credit card account that you established on Mint will recommend a card for you which has a lower interest rate, or no annual fee, and provide you with the annual amount you would save with that card. Mint does this for a number of products and is based off of your current accounts.

Once your Mint account has been established, and all of your financial institutions entered, Mint will automatically update your accounts and categorize your spending daily without you requesting an update. This provides a hassle free budgeting and tracking system that other programs do not provide. The interface is easy on the eyes and fun to look at. The graphs and charts use colorful and easy to read formats, and provide useful information. One of the great features is a comparison of your spending to what other individuals on average are spending in that category. The system also allows you to set up account alerts which can be emailed or sent as a text message to your phone and can notify of you of upcoming bills and their due dates, when you are getting low on your account balance, and if there is any unusual spending on your accounts. This is a great tool for the person who wants an easy spending tracking system. You can access this website at www.mint.com or click on the link in my Blogrol at the top of the blog! NOTE: NOT ALL FINANCIAL INSTITUTIONS ARE SUPPORTED AT THIS TIME. CHECK WITH MINT TO SEE WHAT INSTITUTIONS ARE SUPPORTED.

ENVELOPE BUDGETING SYSTEM

The envelope budgeting system is an old, tried and true way of budgeting which our grandparents or great grandparents may have used. Essentially, you get paper envelopes, and use each envelope for a particular category (food, gas, housing, utilities etc.) and mark that category on the envelope. You then divide your cash out into the envelopes for each category, creating your budget. The amount you place into each envelope is the amount you can spend on that category. If you need more money for a particular category (food for example) you can pull money from another envelope (entertainment for example) for use, but whatever is left in your entertainment envelope has to now last until your next payday. When your envelope is empty, it is now empty until your next fill up! When it is gone, it is gone!

Obviously, this method sounds good, but we not long live in a paper age. Many of us don’t ever carry cash in our wallets or purses. To fix that, companies have come out with software and systems to help re-introduce envelope budgeting into our lives in an electronic form so that you don’t have to withdraw your cash; you can keep it safely in the bank or Credit Union. Here are some options for electronic envelope budgeting systems:

• Crown Mvelopes: Crown Financial Ministries offers an online, web based product called Mvelopes Personal. This is a subscription service which provides you anytime access to your accounts via internet and mobile devices. The concept is the same as the traditional envelope budgeting system, but provides automatic retrieval of transactions, automatic categorization, spending plan creation and charts, graphs and statements which can be printed. I have used this product, and really enjoyed it. Because it is a different type of budgeting, it does take some getting used to, but can ultimately save you money (the product’s website claims you can recover 10% of your income) and helps you to spend better. Your first 30 days are free, and if you wish to continue, for as little as $7.08 per month with a 2 year subscription (the subscriptions are paid up front). You can access the website and begin your free trial at www.mvelopes.com or click on the link in the Blogrol.
• Snowmint Envelope Software: Snowmint Creative Solutions (http://www.snowmintcs.com/index.php) offers several personal finance products for download including an envelope budgeting system. The system has a simple user interface with large icons and simple functionality. About.com conducted a review of this software product, and rated it a 4.5 of 5 stars. See below for a screenshot of the Windows version. There is a free trial with this program as well and then a one time fee of $29.95 for the download; more if you order a CD copy. You can check out the article online at http://financialsoft.about.com/od/reviewsfinancesoftware/fr/BudgetSnowmt.htm

• Paper Method: Of course, there is always the fancy paper method of envelope budgeting whereby you print out a tracking sheet, which you can find at Crown Financial Ministries (see Blogrol for link) and use each tracking sheet as an envelope. It acts like more of a check register, but each “register” will be dedicated to an envelope category. This way, you can spend with your debit card and still track your envelope spending on paper. The downside to this method is that it does not provide a good visual which tends to be a motivator and it can be harder to track the spending since you have multiple sheets of paper floating around. I prefer software or web based products which prevent this problem and provides the visual motivation necessary for success.

I have had several great comments regarding the personal finance posts over the last few days! Thank you for reading and interacting. It is much appreciated!

I wanted to reply to a comment by my friend Laura who was looking for clarification on one item, and had an excellent question regarding the effect of carrying a balance on a credit card or paying the card off every month on the credit score. Here is what I was able to find:

In Step 1, during the savings process, I mentioned that you should pay the minimum on all of your bills in order to save the $1000. Laura pointed out that for some individuals, debts such as credit cards are paid off every month. If this represents you personally, focus on spending less on your credit cards during your savings period so that your total expenditures are less, making it easier and faster to save. Otherwise, pay off the cards every month without worry, especially if you are making good progress in saving.

The second point was regarding the effect of paying off a credit card every month vs carrying a balance on the card. The answer to this is: pay off your card every month. I don’t know the exact effect to the credit score compared to carrying a balance, but there is an effect, and it is better overall. Now, if you were to carry a balance, the credit bureaus recommend that you carry a balance no more than 35% of your available credit limits. “For instance, if you have a credit card with a $1000 limit, you should try to keep the balance owed below $350″ (TransUnion, 2008). This rule applies to each account individually (35% on the Chase card, 35% on the Bank of America card etc.). I also heard though on a radio show that you also want to keep your totall revolving debt (credit cards typically) at or below 35% as well. This will help to prevent “over extension” as the credit bureaus call it which can effect your scoring and risk factors.

So, to recap:

• Pay the minimum on your accounts while you save. If you pay off your card every month, you are a lucky person, but if you are trying to work on Step 1, charge very little to your credit cards until you have the emergency savings built up so that you dedicate your funds to savings.
• While paying off your cards every month is better than carrying balances, keeping your balances at or below 35% of your available credit limit, both per account and collectively, will have a positive effect on your credit score.

I want to mention here that I am not a credit counselor, and I recommend that you contact the credit bureaus directly if you have questions about specifics on your credit report. TransUnion is the only bureau that I know has a customer service line where you can speak to someone directly. You can call them at 1-800-916-8800 and press menu option 3.

I hope that is helpful to everyone and answers your question Laura!

Brent

On “Personal Finance Part 1″ we talked about starting a budget, how to do it, and why it is important. Today, I want to use some resources from Crown Financial Ministries to explain the importance of personal financial management and help everyone get started on the road to financial freedom.

Let me share some personal information with you first. Thankfully I have been blessed to have been raised in a household where my parents were knowledgeable about finances and financial management. I have been able to live at home rent free through college. I am one of the thousands of college students though who has credit card and student loan debt. I guess another plus is that I really enjoy personal finances and how the financial system works so I know some of the financial system’s and operations which helps in my decision making. Several years ago, I discovered Crown Financial Ministries. They are a Christian ministry organization that helps individuals realize that they are not the owners of their possessions or money, but the stewards of “stuff” and money, give to them by God.

This understanding of money and possessions helped me to understand that I need to take good care of what God has entrusted me which caused some additional motivation. Of course, there is also the feeling you have when you are debt free, have money and savings and don’t have to worry about the finances, and that is all good and fine. The thing that I learned, and that others need to understand, is that God is trusting you with resources that should be properly managed.

I began listening to Howard Dayton’s radio show through Crown, and learned a lot about how to handle money, what is acceptable and what is not from a Christian perspective when dealing with topics such as cosigning (never do it), buying a home (have 20% down to reduce your payment and eliminate the need for PMI insurance) and much more. I also discovered a wealth of books, resources and aids in planning out my success in financial freedom. Perhaps the most helpful resource by far, which I still use today and even have it posted in my room, is the Crown Financial Ministries “Money Map”. This is a visual guide which walks you through the 7 main steps to “True Financial Freedom”. This freedom is where you are 100% debt free (including the house), have several months worth of savings, college funds (if you are planning on having kids) and retirement is fully funded.

The budget, as discussed in the previous post (Personal Finance Part 1) is a key to every step of the “Money Map”. Without it, you will have a hard time making good on your goals in your personal finance life. If you have not read that post, please do so! So, with that background information, let’s get into the first 2 steps of the “Money Map”.

STEP 1: SAVE $1,000

This is your emergency fund that I was discussing in the previous post and the first destination on the Map. Believe it or not, saving this money will actually help you get out of debt. Let’s say you are prone to spending on your credit card when times are tough or an emergency arises. Having this money available to you for emergency use will help to pay for that emergency in cash instead of on your credit card. The hope is that you will begin to limit your credit spending. Cash is a good thing and hardly anyone has any on hand. According to US News, the average American has a savings rate of -2% to 0%! We are spending more than we are making and that is not a good thing!

I mentioned in the previous post that you should begin to a lot yourself money every payday to put towards savings. This should be an ongoing, continual process. In this step, pay only the minimum balance on your accounts every month in order to get your savings up to the $1000 mark. Once you have reached this amount, you will continue to save every month, but you will reallocate funds in order to begin paying off your debt. Remember, your budget, or spending plan, is dynamic, not static. Keep making adjustments and fine tuning the document in order to get the most out of your debt repayment and savings.

STEP 2: PAY OFF CREDIT CARDS

Credit cards are not evil. I just want to state that up front. It is the way in which we use them that is evil. It is a dangerous thing to have so much money just lying around, readily accessible. This is especially true if you are an emotional spender. In step 2 of the “Money Map”, once we have saved the $1000 for emergencies, we need to begin paying off the credit cards. I have actually just finished this step this weekend! Let me tell you how to do it.

Have you ever heard of the “Snowball Effect”? This is a payback method you can use to pay back your debt and it works really simply. You can do this one of 2 ways: based on interest rates, or based on balances. I prefer to work with the balances so that is what I will use in my example.

Billy, our example, has 3 credit cards, each with a balance. They are as follows:

• Bank of America: $2000 @ 4.5% w/ min. payment @ $15/mo
• Chase: $5000 @ 10% w/ min. payment @ $20/mo
• Washington Mutual: $12000 @ 12.25% w/ min. payment at $100/mo

To properly use the snowball effect on balances, Billy is going to begin paying off the card with the lowest balance first which is his Bank of America card. Notice that this card has the lowest interest of the three. You could argue that Billy should pay off the card with the highest interest first, and that would be a valid argument (and actually the way in which you would use the snowball effect based on interest rates). The reason I would recommend to pay off the card with the lowest balance is it creates a sense of achievement and excitement when you pay off your debt. Paying off Bank of America would give encouragement, and create a noticeable change in the Net Worth and total debt. If Billy chose to pay off the Washington Mutual account first, he may be saving money on interest charges, but it will take him longer to pay off the account, and that would leave relatively smaller balances on the other cards creating a distraction and frustration.

So, Billy will pay off the Bank of America card first. In order to do this, his spending plan (budget) has changed to accommodate the allocation of funds. No longer will he be putting as much money in savings as he was before. Instead, he will continue to put money away every month, and pay the minimum balances on his Chase and WaMu cards, and begin adding some additional funds over and above his minimum payment at Bank of America to begin paying down principle. If Billy removed $50/month from his savings allocation, he would be paying a total of $65/month to his Bank of America card. When you pay more on principle, you reduce the amount that is applied to the finance charge each month, saving charges on that card.

Once the Bank of America card has been paid, Billy will move to the Chase card. Now here is where the snowball effect really takes its shape. Billy will pay the minimum amount due on the chase card every month like normal, but will place the money he was paying off his Bank of America card with onto his Chase card. To put this into a mathematical equation, it would look like this:

Chase = Min. Chase Payment + Min. BofA Payment + Principle Payment OR Chase = 20 + 15 + 50 

The same approach would then be applied to the WaMu account once the Chase card has been paid off, and that is the snowball effect! Keep in mind, you can allocate your budget however you want, add more to the card when you have some extra to spare and so on. It is entirely up to you!

TIPS TO STAYING THE COURSE

Depending on how much debt you have, it may take a while to complete these first two steps. I have personally been working on the “Money Map” for about 2 years and just finished step two this weekend. I am now moving to step 3 which we will cover in the coming days.

To stay motivated, set a goal, or way to celebrate when you complete each step. For example, after completing step 1, buy yourself a new pair of shoes, or a CD or something special. Just be sure that you budget for that expense and it is not going to undo what you just completed. That is important. 

Another tip is to get an accountability partner, someone who can help you adjust your spending habits, save your money, and keep you accountable in paying off your debt. Having someone to talk to can help alleviate stress and financial worries as well.

Well, that is it for this post. I know it was a little lengthy, but I though that I had to cover the first two steps for you to get an idea of why saving first is so important for the rest of your getting out of debt. 

I highly recommend that everyone purchase the Crown Money Map from Crown Financial Ministries. It will help to serve as a reminder and help to keep you on track. I would also recommend the book by Howard Dayton called “Your Money Map” which is a guide through each and every step of the “Money Map” and even includes a small, fold out map in the back. Great resources. The picture of the book is below.

Good luck on your journey to financial freedom. As always, feel free to email me with your questions or comments! brent.a.downey@gmail.com

Brent

WELCOME to my first personal finance post! I hope you enjoy it!

Many of you know I enjoy personal finance. I listen to radio shows, read Money magazine on occasion, and enjoy learning about getting out of debt, successfully managing finances and investments and more. I want to share this knowledge with you all because I know it is a big help and a lot of people struggle with debt and financial difficulties.

Please feel free to let me know of any financial topics you would like me to discuss as well and I will cover them in future posts.

Today, I want to talk about budgeting and beginning the process of becoming debt free.

GETTING STARTED

I prefer to call budgets another word as budget sounds too restrictive. A spending plan is better terminology. Don’t be afraid of spending plans. This is simply a document that will help you determine where you want your money to go. This document also acts as an accountability partner to some extent because you will know how much you can spend on any given item. This will also help in keeping your bills from being paid late because you will have already planned their payment in advance. The spending plan can be as simple or as complex as you want them to be. We will talk more about the budget itself though in a second.

The first step in creating a budget is to track your spending for 30 days if you don’t already. Get a check register, computer program or access Crown Financial Ministries (the link is in my Blogroll) to access a PDF document of a check register. Tracking your spending will help in determining two things: how much you spend in a particular category, and how much to a lot in your budget for that category. My guess is that you will find you are spending too much money on eating out during the month and you will want to reduce that expenditure. You can now take your spending data and create a budgeted amount for eating out every week.

It is important to maintain a check register of some sort even after your first month. Many times the amount in your bank account and the amount you actually have will not match due to outstanding checks and pending transactions. I use a computer program called Moneydance which is a one time purchase fee and is always available to you with unlimited updates of the program; no monthly charge. This program allows me to balance my account every month with my statement, track accurate available balances by noting outstanding checks and pending transactions, and also generates a number of reports including net worth, assets, liabilities, cash flow and expenditure totals by category.

THE SPENDING PLAN

Now it is time to begin the process of using your data to create a budget. Excel tends to work nice for this document because you can create simple formulas which will automatically calculate totals and it produces a clean looking document when printed with no formatting issues. As a bonus, you can also color code columns and rows! How exciting is that! First, go through your check register and color code your spending for easy reference, or just add how much you spent in each category. Keep in mind that eating out and groceries are two different categories and should be listed separately on the budget and calculated separately when totaling your months expenditures. Same goes for similar categories.

For a basic budget, list all of your spending categories in column A, along the left side of the page. Across the top, list your paycheck dates and your expected amount for every paycheck. In the body of the document then goes your budget amounts for each category. Keep in mind, you are allocating the amounts that you want to spend on each paycheck. IMPORTANT: WHEN ENTERING YOUR BILL AMOUNTS, BE SURE THAT YOU PLACE THEM ON THE BUDGET AHEAD OF YOUR PAYMENT DUE DATE! This will prevent late or missed payments.

Once your document is completed and is formatted and colored to your liking, print it out and post it in the area that you pay your bills. For most of us this will be near the computer as we all, for the most part, use on line banking and on line bill payment and we use our computers a lot. The budget will always be accessible and in view.

Here are some tips when creating your allocations on the spending plan:

• Round your paycheck amounts down and your expenditures up to the nearest whole dollar. Rounding in this way will create a pillow in case you underestimate an expenditure of have something arise out of the blue. It will also not draw your checking account to a scary balance, risking overdraft fees.
• Set money aside each paycheck for yourself. Give yourself some spending money each paycheck so that you don’t go crazy! This would be in addition to eating out money. Take this money out in cash from your ATM each payday so that once it is gone, you cannot spend anymore of your already allocated funds in the budget.

I also want to mention that a budget is dynamic, never static. You will always want to be changing your amounts, fine tuning your allocations so that you are always making progress.

IMPORTANCE OF SAVINGS: BUILDING WEALTH

Be sure to include savings as a category. Paying yourself first is the only way to become rich and according to a lot of people, is the “secret” to gaining wealth. If you don’t have a savings account, open one. Every paycheck, be sure to allocate something to savings. You also want to be sure not to spend your savings except for emergencies. Let your money sit in your account and earn interest for you. It is free money!Emergencies do not include a new pair of shoes, a new video game or something similar. This emergency savings is set aside for emergency car repairs, unexpected doctor’s bills etc. DO NOT SPEND IT ON ANYTHING OTHER THAN THAT!

FINAL THOUGHTS

I hope that this information was useful and you can begin to start your financial success with a spending plan. This is the most important tool in personal finance and when used correctly, along with a check register or computer program, you will see a reduction in debt and a more stable financial history.

Check out Crown Financial Ministries website for helpful tools, and documents, calculators and more. They even have an excellent daily radio show that you can listen to on line or Podcast it and listen to it when ever you have a chance. Also, I included a link in the Blogroll to an excellent tool providing financial information, news and calculators. You can also search for products such as loans, credit cards, mortgages, auto loans and more and arrange by rates, fees etc. It is called Bankrate.

Let me know if there is a particular topic you would like me to discuss! You can contact me at brent.a.downey@gmail.com! Have a great day everyone!

Brent