Budgeting & Debt Basics
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1 Budgeting & Debt Basics
2 Why Have a Budget? Gain control over your finances Get the most out of your money Achieve your financial goals
3 What is a Budget? A plan for saving and spending Allows you to choose between: Today s wants/needs Planning for the future
4 Purpose of a Budget Track spending Free up money Manage debt Increase savings
5 Cash Flow Your personal cash flow statement can say a lot about you, your income nature, your spending habits and lifestyle Income Expenses = Surplus or Deficit
6 Examples of Income & Expenses Income Salary Rental Income Dividends, Interest, Capital Gains Pension & Social Security Expenses Housing Debt Living Expenses Taxes Insurance Savings & Investments
7 Suggested Budget Percentage Guidelines 25-35% 10-20% 10-15% 5-10% 0-15% 2-7% 2-5% Housing & Transportation Food Savings Debts, Recreation, Medical/Health & Utilities Charitable Gifts Clothing Personal
8 Money Saving Tips Request an interest rate reduction on your credit cards Watch ATM fees Get books from the library Eliminate some cable services Consider increasing insurance deductibles Use flex spending accounts
9 Money Saving Tips Pay yourself first Dining out Transportation Managing cash Telephone Clothes Vacation
10 Money Saving Tips Curb impulse buying Put the item on a list for 30 days before you purchase Put an item on hold and wait an hour Stop junk mail to limit temptation Pay with cash only Shop at the grocery store with a list Avoid snack food at the gas station
11 Money Savings Example Save $1 per day x 20 working days per month with 8% return $11,780 $249
12 Budget Systems Envelope method Budget worksheet Excel template Budgeting software Internet resources
13 Budgeting Pre & Post Retirement A budget should be established before retirement At retirement, track expenses for the first 6 to 12 months Adjust your retirement plan and budget to actual expenses
14 Budget Review Establish expense priorities Be realistic Include savings Monitor expenses and maintain discipline Correct bad habits Reward yourself Periodically review & adjust
15 Summary Keep your monthly net income positive. Don t let your expenses exceed your income Establish a regular program of savings and investing for your future Be disciplined but flexible with your budget, circumstances can change unexpectedly
16 Cash Refund Option Our Appetite for Debt
17 Importance of Good Credit The higher your credit score, the less interest you may be charged for a loan Many employers conduct credit checks as a part of the hiring process Insurance companies can use a person s credit report to determine rates Good credit has a lasting effect on family finances and relationships
18 The Debt Trap Many Americans drowning in debt may face a lifetime of repayment Approximately 43% of households spend more than their take home pay Consumers owe nearly $2.5 trillion in debt, which doesn t include mortgages Household savings rates have dropped to 0.4%
19 Consumer Credit Massive consumer debt has crippled the personal balance sheets of individuals nationwide Revolving Credit Credit that is repeatedly available as payments are made Installment Loans A line of credit that cannot be used again after payments are made
20 Our Credit Card Debt From 2000 through 2008, banks mailed 42 billion solicitations for credit cards Credit card debt in 1968 was $8 billion, by March 2010 it soared to an all time high of $975 billion According to the credit reporting company Experian, approximately half of all credit card users don t pay the full amount of credit card charges each month In 2007, credit card companies collected an estimated $18 billion in penalty fees
21 3 Types of Plastic Credit Card A card that may be used to repeatedly borrow money or buy products or services on credit. Issued by banks, savings & loans, retail stores, and other businesses. Charge Card Similar to a credit card except the balance must be paid off at the end of every month (American Express Gold Card). Debit Card A plastic check. Money is withdrawn directly from your checking account.
22 New Credit Card Statements New Balance Minimum Payment Due Payment Due Date $3,000 $90 4/20/2012 Late Payment Warning: If we do not receive your minimum payment by the date listed above, you may have to pay a $35 late fee and your APRs may be increased up to the Penalty APR of 28.99%. Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance. For example: If you make no additional charges using this card and each month you pay... Only the minimum payment $103 You will pay off the balance shown on this statement in about 11 years 3 years And you will end up paying an estimated total of $4,745 $3,712 (savings = $1,033)
23 Credit Card Do s DO Pay more than the minimum per month or, if you can, pay the entire balance Reduce your interest rate by calling the credit card company Pay for daily items with cash, debit card, or check Destroy (shred) credit card applications received in the mail to prevent identity theft Apply for credit sparingly Sign your card immediately
24 Credit Card Don ts DON T Get in the habit of making just the minimum payments Buy things you cannot afford to pay off at the end of the month Close out a credit card with a balance on it Close out your oldest credit card
25 Our Installment Loans By the end of 2008, residential mortgage debt rose to approximately $14.6 trillion Outstanding auto loans are approximately $318 billion, the average amount financed per loan was $26,268 There is an estimated $830 billion of outstanding student loan debt
26 How Much is Your Debt Costing You? Total cost of a $10,000 loan over 5 years based on interest rates of 5%, 10%, 15% and 20%* $27,175 $12,840 $16,486 $21,167 *Estimates are based on a daily interest rate using a 360 day year
27 401(k) Plan Loan PROS There is no credit check There is a competitive interest rate You are paying yourself back Automatic repayments through payroll deduction Loans can be taken for any reason
28 401(k) Plan Loan CONS When 401(k) funds are out on a loan, they are no longer invested Repayment of the loan is made with after tax dollars If you stop making pre-tax contributions, you may lose your employer match If you leave your job you must pay off the loan or it will be considered a taxable distribution Interest on 401(k) loans isn t tax deductible
29 7 Warning Signs of Too Much Debt 1 You only make the minimum payment on your credit cards each month 2 You continue to make more purchases with credit while trying to pay it off 3 You have at least one credit card that is near, at, or over the credit limit 4 You are late in making payments on credit cards and household bills 5 You don t know how much total debt you actually have 6 You use your credit cards to pay other bills 7 You don t have savings to fall back on in case something unexpected happens like medical needs or car repairs
30 Your Financial Fitness Program
31 Debt Management Companies Buyer Beware Promises are made to reduce your debt Companies may charge large fees for their services Companies will tell you not to pay your creditors, which may result in your account going unpaid for months Promises that may be to good to be true
32 Debt Management Companies Research and Education Real debt management can only be found by changing your approach and financial behavior Contact your creditors Review Better Business Bureau information Review state licensing and regulation information
33 FICO Scores FICO measures an individual s creditworthiness with scores ranging from 300 to 850 Below 600 Bad Scores Above 725 Good Scores Median Score
34 FICO Factors Current Applications 10% Installment vs. Revolving 10% History Length 15% Punctuality 35% Outstanding vs. Available 30%
35 FICO Score Do s Keep your older accounts open the longer your credit history, the better Check your credit report regularly and immediately fix any errors Shop for credit over a short period of time
36 FICO Score Don ts DON T EVER be late with a payment payments later than 30 days will stay on your credit report for 7 years DON T co-sign a loan or become an authorized user on someone else s credit card
37 Information sources Federal Trade Commission Free annual credit report from TransUnion, Equifax and Experian Toll-free Additional fee is required to receive credit score
38 Summary Set goals Develop a budget Find ways to reduce expenses Pay yourself first Monitor credit
39 Your Financial Fitness Educate Yourself There are many low cost or no cost ways to receive financial education Work with a financial professional to develop and monitor your budget Develop a Plan Your strategy should include family members Write down your plan Monitor your Plan Continuously review your strategy Make adjustments to increase the value of your plan
40 We Are Here to Help You Provides group education and one-on-one guidance Experienced noncommissioned planners Specialize in the needs of electric cooperative employees (option 6)
41 NRECA & PIRC are Here to Help You Dupree W. Godwin, CFP (703) I welcome your feedback. Please fill out an evaluation of today s program. Thank you! 41
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