Financial Literacy

Budgeting - Part Four

Hello,

In this forth and final part of my short series on budgeting, we will look at how to budget once you have achieved debt freedom. When you have no debt payments to make each month, you can adopt a slightly different approach to budgeting your money. With the drain of debt on your income gone, you now have significant freedom on how you funnel the money that remains after paying normal living expenses.

The most important first task after all debts are paid is to build up a reserve fund. This fund should be sufficient to pay all your expenses for a period of between 6 and 9 months. This provides a great cushion for unexpected events and also allows for great flexibility when changing jobs; Imaging being able to have enough financial freedom to leave several months between leaving one position and starting another. A good size reserve fund also goes a long way to reducing the stress of unexpectedly losing a source of income.

To build your reserve fund, simply take the total amount you were paying towards your biggest debt at the end of the pay down process, and transfer it into a money market or other safe interest bearing account. The last thing you need to do with a reserve fund is to expose it to any risk. it also needs to be instantly available. Having your fund earning great interest but in a place where you cannot get your hands on it quickly in an emergency is not too bright!

If you continue to live well within your means, it should not take too long to build up the fund. I estimate if you are at the point where you have paid off most of your existing debt, and your finances are basically under control, it should take no more than a year to save enough to live on for 6 months.

Once you are well on the way to building your reserve fund, that is the time to start building your wealth. If you do not already have one, you should now select and engage a financial planner. Remember, when selecting this person, you are the customer and you should do enough research to ensure the person is reputable, reliable and has a first rate track record. Ask and get references. Ask if they are prepared for you to talk to their existing customers. Ask to see their certificates and qualifications. Goggle them. The better you do your due diligence, the more you will find out and the deeper you can trust them.

While in the wealth building stage, you still need to cover your routine expenses, some which are yearly, bi-yearly and quarterly. If needed, you can continue to use the HELOC account to fund these. However, having a seperate money market account that has sufficient in it to cover your largest normal bill is a great idea. This just gets topped up from your income stream. This also allows you to accumulate money for vacations, the holidays, special birthdays etc. In 2006 I did exactly that to fund a vacation. I still remember the feeling of freedom I experienced knowing the vacation was 100% paid for before I left. It was fantastic!!!

I trust you have enjoyed this short series on budgeting and have been able to put some of it into practice. I would love to hear of your successes and any comments you may have.

Have a great week!

Malcolm

Credit Counseling Services

The Consolidating of Credit Counseling Services is aimed at partners with families and individuals with one objective in mind, to help them to unravel their money management problems and break away from current financial calamity.

Specialized professional and caring credit analysts offer debt management solutions which are an ideal match for the clients personal and financial conditions. This will include making them aware of all available options, and providing educational support.

When a person takes the first step in contacting Consolidated Credit Counseling Services, they begin their journey toward easing the burden of excessive unsecured debt.

The certified financial counselor or coach may ask hundreds of questions to help build an economic profile and discover the major causes of personal financial problems./ The replies to these questions will provide the foundation of a comprehensive financial solution with programs precisely matched to the client's needs.

 

One Bubble After Another

Hello again,

The Internet bubble, the real estate bubble. What will be the next bubble?

Here is a great article with one answer: The Next Credit Crunch

Have a a great day!
Malcolm

Budgeting - Part Three

Hello,

Last time we looked at accelerating the payment of debt by concentrating all disposable income on one debt at a time, reducing the time to pay the debts off, and the total interest paid.

Now, having committed to use all disposable income to pay down debt, what happens if you have an emergency and need money quickly? This type of event is much easier to deal with if you plan for this eventuality.

One way you can get access to "emergency cash" is to set up a line of credit. A line of credit can either be secured on equity in your property, or unsecured. Secured lines of credit are usually less costly in terms of interest, but they all work in a similar way. They give you access to a maximum amount that you can draw on as you need it. Like a credit card, you have credit limit, you only pay interest on the actual amount outstanding. You can make capital re-payments at any time.

One way a line of credit can assist in paying down debt is to use it to even out larger expenses. such as property taxes over time. As you now have access to "emergency funds", it is possible to free up cash in savings accounts to pay off other debt, which can make sense if the interest being offered on deposit is much less that that being charged for debt.

Another way a line of credit can be used effectively to reduce interest is use all income to reduce the balance of the line of credit. All bill payments then come from the line of credit, leaving only a small balance in a checking account. A balance in a checking account is not working effectively for you if you have debts. This positive balance would be most effectively employed paying down any debt at high interest, not earning lower interest in a "normal" account. Debit cards benefit banks a great deal as they require an ongoing balance in a checking account.

So, a line of credit can be very useful in balancing expenditure over the long term and enabling the maximum amount of funds to be applied to clearing outstanding debt.

Have a great week!
Malcolm

The Nine Year Slippery Slide

Hello,

Here is a article from 1999 that you may find interesting.

Fannie Mae Eases Credit To Aid Mortgage Lending 

Enjoy!

The Day The Earth Stood Still

Hello,

I was sent a link to this article by Howard Ruff - The Day The Earth Stood Still

I believe it is a great summation of what led to the current financial crisis and some ideas of how to profit from the inevitable fallout from it.

Have a great week!

Malcolm

Budgeting - Part Two

Hello,

So, in part one we looked at the initial creation of a monthly budget. This involved adding up all income sources and then all essential expenditure.

If you have any essential quarterly, semi-annual or annual expenditure, these should be added to the essential expenditure by using the effective monthly figure. For example, if you have a property tax bill due on Jan 1st every year for $3000, then you should add $250 to your monthly expenditure figure. It is also good practice to slightly over estimate these types of payments to allow for tax increases each year.

The next step is to maximize the effective use of your money and free up more of your income over time to use for investments. Lets say you have calculated your income and essential expenditure.

So, now you have your income and expenditure figures. Suppose your monthly income is $4000 and your essential expenditure is $3000. The difference is $1000. Great, you have a budget surplus! Now you can really make some difference to your finances by applying this figure to reduce debt. To do this most effectively you take the debt that will be paid off soonest using the current minimum payments.

Let's say this is a auto loan with a minimum payment of $300, due to be paid off in 9 months. If you apply the $1000 budget surplus to that loan, not only will it be paid off sooner, you may in fact save a considerable amount of interest. 9 months at $300 = $2700. At the accelerated payment rate, the debt will be paid in just over 2 months. Once this debt is paid, the payment for the auto loan can be taken off your budget, so you now have $1300 to apply to the next debt. By repeating this process over all their debts, most families can clear their entire debt load in 7-10 years; sometimes far sooner.

For example, lets just say you have no other short term debts when the auto loan has been paid down, just your home mortgage. If your current payment is $900, now you have a total of $2200 to apply to the mortgage each month. By making additional capital payments at $1300 each month, not only will you pay the loan off much earlier, the amount of interest you will repay will be dramatically reduced. Once the mortgage is paid, you will have a budget surplus of $2200.

Of course, unforeseen expenses can and do occur. This is where a line of credit is useful to provide an effective reserve. We will look at using a line of credit for this purpose in Budgeting - Part Three.

Have a great week!

Malcolm

Money as Debt - An amazing insight

Hello,

This really powerful video gives an truly amazing insight into how money is actually created.

Money as Debt

I would love to hear your thoughts and opinions.

Malcolm