HouseholdBudget &ManagingDebt

SecondEdition PHILLIPE.DAY,AFC AccreditedFinancialCounselor WrittenforAcademyofFinancialLiteracy www.academyoffinancialliteracy.net 8778332867

Copyright2010AcademyofFinancialLiteracyallrightsreserved 1

 Thisbookiswrittenforallwhohavethedesireto learnandunderstandahouseholdbudget.Onlya smallpercentageofhouseholdsuseawritten budget.Forthosewhowouldliketolearnhowto implementabudget,wehopeyouenjoythisbook. Oureducationmission:Tomotivateand influenceallwhohavethedesiretolearn aboutpersonalfinances.

Introduction Thenexttimeyouwalkintoalocalbankor financialinstitution,lookforfreefinancial educationmaterials.Thesadtruthis,veryfew financialinstitutionsofferbasicfinancialeducation fortheirclientsorcustomers.Thisisnottosay, Thefinanceindustryisnoteducatingpeople. Manyofthemajorfinancialinstitutionsdooffer financialeducation,butisitaccessibleforevery one,orjustfortheirclients?

Wouldntitbenicetowalkintoabankandhavea freebookavailableonbudgeting,orhowto reduceandmanageyourpersonaldebt,and improveyourcreditscore?Othergreattopics oftenoverlooked,suchasmanagingyourcredit report,shouldbeofferedaswell.

Manyparentswouldlikehelpteachingtheir childrenaboutmoney,andhowtosavemoreand spendless.

ThisisoneofourpassionsatAcademyofFinancial Literacy.Wehaveadesiretomakepersonal financeeducationavailableforeveryonewhohas thedesiretolearn.

Introduction

ThestatisticsforpersonalbankruptciesinAmerica arealarming.Over1.5millionconsumersfiledin 2004.Thetrendofpersonalbankruptciesfollows oureconomiccycles.In2009wewilleclipse1.4 millionpersonalbankruptcies.

Ouryoungadultsincollegeusethecarpediem invocation:Liveforthemomentanddontworry aboutthefuture.Over100,000youngadultsunder theageof25fileforbankruptcyeachyear.Student loandebtfinanciallycripplesthousandsofcollege graduates;manydonothaveaplantopayfortheir unmanageabledebtload.

AhighpercentageofdivorcesinAmericacanbe directlylinkedtothemismanagementofhouse holdfinances.Manycoupleslackthedisciplineto savefortheirfuturebylivingwithintheir means.

Awrittenbudgetisthefinancialfoundationthat canhelpyousucceedwithyourpersonal,and familysgoals.Letusmotivateandinfluenceyou tostartahouseholdbudget.Wecanshowyou howtosaveandteachyoufinancialbalance.This bookhasmanykeysthatwillhelpyousucceed withyourfinancialfuture.

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Contents

PurposeandGoals...................
Understandwhyyoushouldstartawritten budget

Page 811

BudgetingBenefits................... 1213 Understandingthebenefitsiskey

StartingaBudget.................... 1417 Learnhowtoimplementabudget

Byusingyourbudget,youwillbeginachieving yourfinancialandpersonalgoals

UsingaBudget....................... 1821

BudgetReconciliation................

22

ChildrenandaBudget................ 2427 Yourfinanciallegacy

SampleBudgetSheet................. 2829 AnexampleofaonepageBudgetSheet

Savings.............................
Savingsaccountsthatmustbeinplacetohelp yousucceedwithyourhouseholdfinances

3035

BuildingWealth...................... 3638
Abudgetisyourplanforbuildingfuturewealth

Contents

Page ManagingDebt..................... 3967

Abudgetisyourplanforbuildingfuture wealth

DebtToIncomeRatios.............. 4244
Usefulformulastoevaluatefinancialstress

DebtSnowball.....................
Asimpledebtrepaymentplan

45

4950

DebtCollectors.....................
Learnyourlegalrights

5153

ManagingaCreditCard.............
Theproperuseofacreditcard

CreditCounseling.................. 5960 DebtSettlement....................

6162

ConsequencesofPayingLate........
Learnwhatmayhappenifyouignoreyour debts

6364

DebtManagementKeyPoints........ 6567 RecommendedReadinglist.......... 69

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PurposeandGoals Thisisyourstartingpoint.Youmustputyour purposeandgoalsinwriting.Whatisyour purposeforsavingmoney?Whatisyourpurpose fortrackingyourexpenses?Whycreateawritten budget?Whatdoyouwanttoaccomplish?

Doyouthinkaboutyourpurposeandgoals?If yousimplywanttomakeendsmeeteachmonth, thisisagoal.Everyoneshouldhaveapurpose, whichislinkedtotheirgoals.

Ashorttermfinancialgoalisoneyearorless.You canhavegoalswithshorterterms,butafterone yearthegoalbecomesamidtolongtermgoal.

Bepassionateaboutyourgoals!Besuretoput yourgoalsinwriting.Dontbeshyabouttelling othersaboutyourgoals.

Goalswillhelpyouwithmoneymanagement. Withoutpurposeandgoals,manyjustspend moneywithoutareason.Areyouspending withoutareason?

Goalsshouldbeapartofeverythingwedoinour life.Goalscanhelpyousucceedwithyourneeds, plusputyouclosertoyourwants.

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PurposeandGoals Inmanycases,theplantoachieveyourgoalsisas importantasthegoalitself.Example:ItsJanuary andmygoalistosave$10,000foradownpayment onahouse,byDecemberofthisyear.Iwillusea monthlywrittenbudgetsheettoseewhereIcan reducemymonthlyexpenses.Iwillputmy moneyinhighinterestsavingsorchecking accounts,andeachpaycheckIwillchartmy savingsgoals.(TherearebankspayinghigherAPY inhighyieldingcheckingaccounts.)Iwillreduce, oreliminatediningout.Iwillreducemyvacation spendingthisyearandfindwaystoearnextra money,suchasaweekend,oreveningjob.

Makingsacrifices,suchasforgoingshortterm pleasuresforayear,isacceptingresponsibilityto achievegoals.Beaggressive,passionateand drivenaboutyourgoals.Mapyourstepswitha writtenbudget,thenturnyourgoalsintoreality. Dontbecomediscouragedifyouhavesetbacks.So whatifittakesanextramonthortwotoachieve yourgoals!Takeprideineachaccomplishment, andshareyourgoalswithothers.Theywillbe inspiredbyyoursuccesses.Whenyoufindgoals yourepassionateabout,sacrificesbecomemuch easier.
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PurposeandGoals Itcantbestatedenoughtoputyourgoalsin writing.First,putthreegoalsinwriting,regard lessofthetimeframe.Theycanbeshortor longtermgoals. BasicExamples:

1.Iwillhave1.5milliondollarsincashwhenI plantoretireatage65,andownmyprimary residence.Iam27yearsfromthisgoal,andmy monthlybudget(SpendingPlan)ismymapfor planningandchartingthisgoalachievement.

2.Iwillpayformychildrenscollegeeducation. Thiswilltake$100,000andwillneedtobe availablein15years.Iplantouseseveralcollege savingsaccountstoachievethisgoal.

3.Iplantoincreasemyincomeby$50,000per yearduringthenext24months,bystartingmy ownbusinessinretailinternetsales.Myplanisto usemyskillsandtalentsIhaveacquired.Thiswill requireIputabusinessplaninwriting.

Beveryspecific!muchmorespecificthanthese examples.Eachoneofthesegoalsshouldtakea pageormoreindetails.Beveryspecificwith dollaramounts,dates,andtimeframe.

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PurposeandGoals Besuretoexamineandreexamineeachgoal. Yourgoalsmustprovokepositiveemotions.They mustgetyouexcitedandgiveyouaburning desiretoachieveyourgoals.

Foreachlongtermgoal,youwillneedtohave shorttermgoalsofoneyearorless.Thesewillbe linkedtoyourprimarygoal.Thiswillhelpyou achieveyourmaingoal.Forinstance,inthe retirementexample,youwouldneedtostartan investmentplan.Withinyourinvestmentplan, youwillhavespecificgoals.Yourbudgetwillhelp youimplementandachieveeachofthesegoals.

Eachgoalwilltakeonalifeofitsown.Dontlet anyonetellyouyourgoalsareunrealistic!There aretoomanyexamplesofpeopledreamingbig andsucceeding.Theirrealitybecameevenbigger thantheiroriginalgoallargerthantheyever imagined.

Donotlistentopeoplewhosayyourgoalsare unrealisticdreambigandsucceed.

Thereasonyoumustbepassionateaboutyour goalsissimple:Yourdriveandpassionwillkeep yourbudgetalivefortherestofyourlife.

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BudgetingBenefits Abudgetisadocument,orsetofdocuments,used torecordbothactualandprojectedincomeand expendituresoveraperiodoftime.

Thedefinitionofabudgetgivesagood understandingofitspurpose.Wecandrawfrom thisdescriptionthatabudgetlooksintoour currentandfuturefinancialpicture.Notonlycan abudgetpredictourweekly,monthly,andannual expenses,butourincomeandsavingsaswell.

Abudgetisourfinancialroadmap.Wecanchart ourfinancialfuturewithasimplewrittenbudget sheet.Abudgetcanbecomeapersonalhabitsowe cancontroleverydollarweaccumulate.Wecan alsocreateaplantosaveforourfinancialand personalgoals.

Abudgetdoesonlywhatwetellittodo.Abudget canreducefinancialstress,bygivingyouaclear financialpicture,andmorecontroloveryour finances.

Abudgetshouldbeahouseholdhabitthat involvestheentirefamily.Manystudieshave shownthatmostpeoplelearnaboutbudgingat home.

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BudgetingBenefits Thebenefitsofabudgetareeasytolist,sotake noteandpreparetogetstarted.

Byusingahouseholdbudget,financialstress canbereducedbyprovidingafinancialplan. Budgetingpromotesfamilyvaluesthrough financialdecisionsthatrelatetoafamilysgoals andwhatisimportanttoeachofyou. Budgetingisyourmapandplantosavemoney, byshowingyouareasyoucanreducespending andincreasesavingstoachieveyourgoals. Budgetingcanhelpamiserfindfinancial balanceandaspendersave.Remember, financialbalanceishealthyandanimportant goal. BudgetingwillhelpyoubuildaRevolving SavingsandSafetySavingsaccountincase ofanemergency,suchasajobloss,divorce,ora medicalsetback. Budgetingisyourplantoavacation,newhome, orretirement.Also,itwillprovidemotivation toimproveyourincomethroughsavingsand goalsachievement.

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StartingABudget Thestartingpointistosimplygetstarted!You mustknowwhattoexpectfromyourbudgetand whyyouaregoingtobudget.

Youmustbewillingtomakechangesinyourlife whendealingwithyourfinances.Ifyoucontinue todothesamethingsandexpectdifferentresults, well,thisisinsanity.Bepreparedtomodifyyour harmfulandwastefullhabitsforusefulnewones.

Thingstoconsiderchanging: Youdontneedanewvehicleeverythreeyears. Buyusedandsavethousands. Reducespendingonfoodandeatingat restaurantslattesandentertainmentmustbe budgeted. BrownBaglunchesandtakeyourlunchto work. Spendlessongiftsforyourfriendstheywill likeyoujustthesame.
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StartingABudget

Youwillbegintoseemanyareaswhereyoucan reducespendingandchangeyourfinancial situation.

UnderstandingthedifferencebetweenNeeds andWants.

Example:Aneedissomethingthatisnecessary tokeepthefamilyandhouseholdworkingprop erly,suchasnewtiresforthecar,orautilitybill. Examplesofawantwouldbeanewbigscreen television,ornew,brandnamegolfclubs.

Weneedtoidentifysomewants,asthisisanarea wheremanypeoplestruggle.Wewouldliketo thinkthisiscommonsense,butitisnot;people provethiseachdaybyspendingmorethanthey earn,manytimesonunnecessarywants.

Examplesofunnecessarywants thatcanbreakahouseholdbudget:

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Unplannedvacationwithfriends Anythingcustomizedonyourvehicle Televisioncablebeyondthebasic TelephonecallerID,callwaiting,cameraphone iPod,Bluetooth,computergames,poolservice, lawnservice,overgifting Latestelectronicdevicetoshowoff

StartingABudget

Letsstartbyfirstlookingatwhatyouhavedone withyourpastfinances.Thiswillgiveyoua startingpointtobuildyourfuturebudget.

1.Gatheryourprevious bankstatementsand checkbookrecordsfrom thepreviousthree months.

2.Youwillneedallyour sourcesofincome.Gatherdocumentssuchas paycheckstubs,SSIchecks,childsupportreceived, dividendchecks,etc.

3.Ifyourincomevariesfromweektoweekand monthtomonth,averageyourincomebytotaling yourmonthlyincomeforthepastthreemonths,. thendividebythree.Thisisagoodnumberto startwith.

4.Weuseasimpleonepagebudgetsheetthat emphasizesgoals.Formostofus,keepingour budgetingprocesssimpleisarecipeforsuccess.

5.Startbyfillingintheincomecolumnsandenter thetotal.UseyourNetIncome.(Thisisyour actualtakehomepayaftertaxesandother deductionshavebeentakenoutofyourpaycheck.)

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StartingABudget 6.NextisyourFixedExpenses.Theseare expensesthatdonotchangefrommonthto month,butarestableforatleastsixmonths.The budgetsheetwillcategorizetheseitems.

7.FlexibleExpensesareitemsthatyouspenda differentamountoneachmonth.Formosthouse holds,yourlargestFlexibleExpenseisgroceries. Mostpeoplearesurprisedathowmuchthey reallyspendongrocerieseachmonth.

8.Besuretoassignyourmoneytoacategoryand putallyourmoneytowork.Ifyoufindyouhave discretionarymoney(thisisthemoneyleftafter yousubtractallexpensesfromyourincome)put thistowardsincreasingyoursavings,then reducingdebts.

9.Ifyourbudgetisnotinbalanceduetoashortage ofmoney,thenyouwillneedtomakeadjustments; theeasiesttargetsareFlexibleExpensestoreduce yourmonthlyexpenses.

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UsingAHouseholdBudget 10.Usingthegoalsideofyourbudgetsheet,seta targetgoaltoreduceyourFlexibleExpenses.

Example:Youractual(current)monthlygrocery expenseis$400.Onthegoalsideofyourbudget sheet,setamonthlytargetgoalof$370,thenapply the$30costreductiontoyourcreditcarddebt.

Makingsacrificestoachieveyourgoals takesmaturityanddiscipline.

Usingthisprocesswillreduceexpenseswithin yourmonthlybudget.Ifyouaretrulypassionate aboutgoals,youwillfindareasinyourmonthly budgettoreduceexpenses.Makingsacrificesto achieveyourgoalswilltakematurityand discipline.

Besuretocustomizeyourbudgetsheetforyou andyourhousehold.Additemstoyourbudget sheetthatpertaintoyouruniquemonthly expenses. Examples: Specialfoodforyourpetsnake Specialloansowedtofamilymembers Specialworksupplies

Letslookatmonthlyprioritiesthatmustbepaid withoutfail. 17

UsingAHouseholdBudget

ExamplesofMonthlyPriorities: Rent,mortgage,allnecessaryutilities,groceries, transportation,Insurance,andsecureddebt. Theseitemsmustbekeptcurrentandpaidbefore otherexpensessuchasunsecureddebt(Credit Cards)arepaid.

Ifyouarestrugglingtomakeendsmeetwithyour budgeteachmonth,usetheseGeneralGuidelines forreference:

Housingcosts.... 2535% Groceries........ 1013% Transportation... 215% Utilities......... 510% Recreation....... 510% Savings.......... 1020% Debts............ 510% Charities......... 10% Medical......... 510%

Useyourgrossincometodetermineifyouare withinthemonthlygeneralguidelines. Example:Monthlygrossincomeaverages$3000, andyourrentis$900.So$3000X30%=$900,and youarewithintheguidelinesformonthlyrent. Areastochecktoseeifyoumaybeoverspending include:Transportation,Groceries,andHousing.

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UsingAHouseholdBudget

Becreativeandmakethebudgetingprocessfun.

Asimpletrackingsystemfordailyandweekly spendingexpensesistousea3x5(orlarger) spiralnotebook.Writedownhowmuchyou budgetedfortheweek,andsticktoyourbudget plan.

Example:Labelapageforgroceries.Your monthlygrocerybudgetis$400.Yougogrocery shoppingweekoneandspend$75,sodeduct$75 fromyour$400onthegrocerypage.Nowyou have$325remainingtospendongroceriesthis month.Youcandothisformostofyourflexible expenses,suchas: WeeklyExpenses Groceries Gasoline Clothing Entertainment Spendingmoney Gifts Thisisaneasywaytokeeptrackofyourexpenses eachweek.Remembertoplanforfutureexpenses, suchasannualmemberships,autolicensetabs, andbiannualautoinsurance.
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UsingAHouseholdBudget Keepingyourbudgetprocesssimple.

Manyfinancialcounselorswillhaveyoucomplete acomplexfourpagebudget(spendingplan).This isnotasimpleprocess.Formostofus,thiscan takethefun,andsimplicity,outofbudgeting.

Thesebudgetswillaskforgrossincome(before taxesandotherdeductions),thenaskforallof yourtaxinformationandotherdeductions.To thesecounselorsIask,Whatisthepurposeofthis exercise?WearenotlookingforaNetWorth analysisbutasimplespendingplan.Whenwe doaNetWorthanalysis,weneedmoredetailsand morefinancialformsforacompletefinancial picture.

BankswillnotcashyourGrossincome. OnlyNetIncomeisusableforpayingbills, Savings,andgoalattainment.

Succeedingwithyourmonthlybudgettakes consistencyanddiscipline.Useyourbudgetona regularbasis.Reviewittwiceperweek,andmake sureyoureontrackbylookingatyourfinancial accountsdaily.Aonepagebudgetsheet,asshown inthisbook,willhelpyousucceedwithyour monthlyspendingplanandfinancialgoals.

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OnlineBillPay

Mostbanksofferfree onlinebillpayment service.Thisisamuch saferandlesscostly methodofbillpayment andaveryeasywayto paybills.

Advantages:

Nopostageorenvelopestopurchase Safety:Noworrythatyourmailwillbetaken orlostfromamaildropbox Convenienceofpayingbillsanytime,dayor nightfromanywhere Easytosetupautomaticrepeatbillpayment Agoodmethodtotrackyourexpenses Reviewaccountbalancedailyifdesired

Usingonlinebankingisagreatwaytotrackyour monthlyexpenses.Whenreconcilingyour monthlybudget,simplyreviewyouronlinecheck ingstatement.Averyeasysystemtotrackall monthlyexpenses.

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BudgetReconciliation Whenreconcilingyourbudget,yourecheckingto seeifyoustayedontrackwithyourfinancial spendingplan.

Whenyoustartamonthlybudget,youarelooking intoyourfinancialfuture.Attheendofthemonth youwanttodoublechecktoseeifyourbudget balanced,andyouusedgoodnumbers.Youdo thisbylookingatyourcheckbookregister,or onlinebankingstatement.Takeeachexpense category,andtotalhowmuchyouspentforeach budgetingcategoryforthemonth.Ifyouwere trackingyourexpenseseachweek,youshouldbe inbalance.

Example:IntheGroceriescategory,youbudgeted $400forthemonthandtrackedyourspending eachweek.Attheendofthemonth,youaddall yourgroceryexpensesandseeyouactuallyspent $420.Notbad,butyoumissedyourgoal.Youwill wanttofindwhereyouspenttheextra$20.Wasit planned?Didyousubtract$20fromanother category,suchasclothingexpenses?Ifyoudid, thenyourbudgetbalanced.Youdothisforeach categorytoseeifyourbudgetbalancedforthe month.Movingmoneyfromoneflexibleexpense categorytoanothercanhelpbalanceyourmonthly budget.Thisisbeingfinanciallysavvy.
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ChildrenandaBudget

Teachingyourchildrenthefamilysvaluesabout moneyisafamilylegacy

Ahouseholdbudgetshouldbesharedwiththe family.Someparentsmayfeeluncomfortable showingtheirchildrenthehouseholdincome. Therearewaysaroundthis.Youcanexplainabout expensesbygoingthroughthebudgetsheetand budgetprocesswiththefamily.Youcanexclude theincome,andexplainthisisprivateinformation.

Otherswillhavenoproblemwiththisprocess,so showingincomewillnotbeanissue.Involvingthe entirefamilywillincreasetheexcitementand interestaboutsavingandachievingthefamilys goals.Discussfinancialissueswithyourchildren, andallowthemtolistentothedecisionmaking process.

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ChildrenandaBudget

Example:Yourfamilyisplanningandsavingfora triptoAustraliaintwoyears,asaLongtermgoal. (Ashorttermgoalisoneyearorless.)Byusinga householdbudget,youinvolveeachmemberofthe family.Eachcancontributesavingstowardsthis plannedvacation.Youcanalsogiveincentivesfor moneysavingideas.

Example:Yourteenagerdecidestohelpby watchingtheyoungerchildren,allowingyouto savemoneyonasitterandapplythissavingsto yourvacationgoal.

Teenagersinvolvedinthebudgetingprocesswill learntosuccessfullymanagetheirownmoneyand setsavingsgoals.

Thepayoffcanbebig.Childrenwithmoney managementskillsarelesslikelytohavefinancial problemsasyoungadults.

Parentsneedtotakeresponsibilityfortheir childrensfinancialeducation,byteachingsound moneyhabits.Eightyfivepercentofchildren learnaboutmoneyfromtheirparents.The teachingprocesscanbeeasy.Takeadvantageof this,andbeagoodexample.Remembertouse leveragewithallowance,andgettheirattention.

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ChildrenandaBudget

Allowyourteenagerstheresponsibilityofthe householdbudgetforamonth.Letthemmakethe purchasingdecisions,andhelpthemastheylearn theprocess.Orhaveyourteenagersplantheir ownfinancialspendinggoalsbyusingabudget.

Sinceeachsituationisdifferent,yourchallenge maybeingettingyourteenagersmoreinvolved withthebudgetingprocess.Makeaneffort, becauseyourfamilysfinanciallegacymaydepend onit.

Makesureyoushowyourteenagerthemonthly bills.Showthecostofhouseholdamenities,such asthetelevisioncable,internet,andelectricitybill, comparedtoanhourofworkortheirallowance.

Whenfinancialtimesaretight,andthehousehold budgetischallengingtobalance,involvetheentire family.Askforideasthatcanreducemonthly expenses.Reviewhouseholdluxuriesthatcanbe reducedoreliminated.

Today,manyhouseholdsareoverspendingmoney onitemsthatarenotpriorities.

Example:Computergames,iPoddownloads,or othermonthlyexpensesassociatedwiththe internet.Thesearenonessentialitems.

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ChildrenandaBudget

Cameraphones:Isitaphoneoracamera?These arejustafewexamplesofmoneypits,thatcan upsetatighthouseholdbudget.

Teachingyourchildrentosaveandplan(waitfor anitem,insteadofimpulsebuying)canbe priceless.Itemsmaygoonsaleatalaterdate,ora wanteditemmayfalloutoffavorwithyourchild.

Givinganallowancetochildrenisagreatteaching tool.Therearemanyparentingadvantagesto givingyourchildrenanallowance.Leverageisa bigreason,andofcoursegivingthemthechanceto managetheirownfinancesiskey.

Usetheallowanceleveragetoyouradvantage. Thisisanaddedincentiveforyourchildrento followthehouserulesandsavemoney,by followingtheirownbudget.Thisshouldbethe houserulesofreceivinganallowance.

Example:Anallowanceforyourfiveyearoldmay be$3perweek.Youcanlinkchorestothemoney, sothechildhasthethrillofearning,saving,and spendingmoney.Oneideaistoseparatethe moneyintofivecategories.

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ChildrenandaBudget Exampleforafiveyearold: 1. Spendingmoney 2. Shorttermgoals.(ItsImportanttostartgoal achievementearly.) 3. Longtermgoals,suchascollegeorabike 4. Givingtocharityorchurch 5. Holidaygiftgiving

Thisexampleisverygeneral.Bespecificwithyour children.

Makesuretheyareinvolved ineachstepofthebudget andsavingprocess.Keep themexcitedabouttheir goals.

Forchildren,ashortterm goalwouldbe26 months.Therearevarying pointsofviewonlinking moneytochores.Thereare choreseachfamilymember mustdo,andotherchorescanbelinkedto payment.Adultsworkformoney,sothereshould beaconnectionbetweenworkandmoney.

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Monthly Take Home Pay

(Net Income) Take Home Pay Child Support / Alimony Received Other Income, Bonuses

Total Net Income

$4,500.00
Constant for Six Months

FIXED EXPENSES
Mortgage / Rent Insurance: Auto, Home, Life Long Term Savings, IRA, 401(k) Emergency Savings Church Donations Legal / Child Support / Alimony Car Payment

$1,300.00 $140.00 $300/Goal $15,000 $300.00 $2,040.00 Change Month To Month $470.00 $150.00 $150.00 $75.00 $120.00 Included $150.00 $60.00 $400.00 $25 Copay $10.00 $40.00

Total Fixed Expenses

FLEXIBLE EXPENSES
Groceries: Household Items, Pet Food Cell Phone / Telephone Electricity Water/ Gas / Heat / Utility Bundle Package / Cable TV Internet Service Transportation: Gas, Oil Changes, Car Maintenance Credit Card Payment Other Unsecured Debt Payment Student loan, Bank loan Childcare / Daycare Prescriptions, Medical / Dental Pet Care, Postage, Office Supplies Clothing / Dry Cleaning Memberships / Contributions Home Maintenance Entertainment, Dinning Out Hobbies, Latte's, Movies Revolving Savings Savings - College Spending Money: Hair, Smokes Gifts / Holidays / Other Total Fixed Expenses Total Flexible Expenses TOTAL EXPENSES Subtract Expenses from Income 28

$300.00 $1000 Goal $50.00 $2,040.00 $2,000.00 $4,040.00

$460.00

Budget Goals
(Net Income) Take Home Pay Child Support / Alimony Other Income, Bonuses Total Income

Budget Goals

FIXED EXPENSES
Mortgage / Rent Insurance: Auto, Home, Life Long Term Savings, IRA, 401(k) Emergency Savings Church Donations Child Support / Alimony Car Payment

Constant for Six Months

Monthly Savings

Total Fixed Expenses

FLEXIBLE EXPENSES
Groceries: Household Items, Pet Cell Phone / Telephone Electricity Gas / Heat / Utility Bundle Package / Cable TV Internet Service Transportation: Gas, Oil Changes, Car Maintenance Credit Card Payment Other Unsecured Debt Payment Student loan, Bank loan Childcare / Daycare Medical / Dental Pet, Postage, Office Supplies Clothing / Dry Cleaning Memberships / Contributions Home Maintenance Entertainment, Dinning Out Latte's, Hobbies, Movies Revolving Savings Savings - College Spending Money: Hair, Smokes Gifts / Holidays / Other Total Fixed Expenses Total Flexible Expenses TOTAL EXPENSES Subtract Expenses from Income

Reduce Flexible Expenses

$420

$50

$250

$50

Monthly Savings

$100
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MoneySavingIdeas

Manyfinancialinstitutionsofferhighinterest savingsaccounts.Manyhavezerofees,withno minimumbalancerequirements.Somepay1% 5%AnnualPercentYield(APY)duringgood economictimes.Thiscanbeagreataccountfor SafetySavingsmoney. Clippingcouponsandbuyingstorebrands. Whendoneproperly,ahouseholdcansaveover $1,000peryear. Carryingunmanageabledebtisveryexpensive. UseaDebtSnowballtoreduceyourdebtand savethousandseachyear. Raisethedeductiblelimitsonyourhomeand autoinsurance.Makesureyouhavethismoney inyoursafetysavingsaccount.Thiscansave you$50to$100eachmonthoninsurance premiums. Staywithinyourwrittenbudgetforallbudget expensecategories.Lookforwaystoreduce spendinginyourflexibleexpensecategories. W4taxform:Adjustyourexemptionsto improveyourinterestearningsavingsaccounts.

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MoneySavingIdeas
Lotter yWin ner

Dontcountonwinningthelottery.Evenifyou didhitthebigoneawrittenbudgetisamust.

Investyourlotteryticketmoneyintoahighyield savingsaccount.Themoneysavedwillbeanice accountafterafewyears.

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MoneySavingIdeas Taketimetobeorganized,andestablishagood recordkeepingsystem;thiswillsaveyoutimeand helpwithyourmoneymanagement.Makesureto keeptaxrecordsandimportantdocumentsina safeplace;considerafireproofsafeforthese documents.

Brownbaglunchcansave$50to$60permonth. Bringyourcoffeefromhome.Notbuying takeoutcansave$20to$30permonth,ormore. Neverpayfullpriceforanyproductwhere thereisacommissionedsalesperson.Always negotiateabetterprice. Whenpurchasingacommutercarforwork, buyausedvehicle,withafourorsixcylinder engine,tosaveongasolineandinsurancecosts. Ahomepurchaseishuge.Makesureyou maintainyourFICOcreditscoreabove750.You willsavehundredseachmonth.Ahighercredit scoremeanslowermonthlyhousepayments. Savebigonautoinsurancewithahighcredit score,cleandrivingrecord,andlifeinsurance foramultilinediscount.

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SavingsRatio Usingamonthlyspendingplanandimplementing aconsistentsavingsplanisagreatwaytoimprove yournetworth.Ofcoursethiscanonlybe accomplishedifyoureduceyourdebtloadalso. $550 MonthlySavings (1)$_________

$4500 MonthlyNetIncome(AfterTaxes)(2)$_________

Dividemonthlysavingsbynetincometofindyour monthlySavingsRatio.

Example:

(1)____Divide(2)_____X100=SavingsRatio____% $550 $4500 12.2

12.2%SavingsRatioisacceptable.Yoursavings ratioisageneralguideline.Therewillbeyears thispercentagewillincreaseordecrease, dependingonyourhouseholdeconomy.AHouse holdeconomywillcycle,thesameastheAmerican economy.Inyearswhereyour householdincomeisupand debtislow,besuretosaveand planforyearswhenthehouse holdincomeisdown.Yourgoal istofindfinancialbalance.
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SavingsAccounts

Letslookatyoursavingsaccounts.Savingsareabig partofachievingyourpersonalandfamilysfinancial goals.

Emergency(safety)savingscanbeafinanciallife saverincasessuchas,jobloss,medicalsetback,etc. Formanyhouseholds,thegeneralruleofhavinga Safetysavingsaccountoffourtosixmonths grossincomewillapply.Grossincomeisyour incomebeforetaxesandotherdeductionsaretaken fromyourpay.

Thereareexceptionstothefourtosixmonthrule. Forinstance,thosewhoareselfemployed,andthose whohaveincomebasedonspecial,orspecific talents,willwanttobuildalargerSafetysavings account.Uptooneyearofincomeforlossofjobor medicalemergenciesisrecommended.

Thisemergencysavingsaccountshouldbeinaliquid (easyaccess)account.Thisaccountshouldearn higherinterestthanapassbooksavingsaccount. Therearemanyhighinterestsavingsaccountspaying 14%,and,dependingontheeconomy,youmaydo better.Itusuallytakesseveralyearstobuildan emergencysavingsaccount,butitisimportantto haveone.

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SavingsAccounts

ARevolvingSavingsAccount(TopPriority)

Arevolvingsavingsaccountis,formany,an unfamiliarterm.Simplyput.arevolvingsavings accounthelpsbalanceahouseholdbudgetwhen monthlyunexpectedfinancialsurprisesarise.This savingsaccountwillbeapassbooksavings account;usuallyatthesamebankorcreditunion linkedtoyourcheckingaccount.

Example:Youdidthehouseholdbudgetforthe upcomingmonth.Yourbudgetisinbalance,and yourteenagerjustrememberedtotellyou,he needssuppliesforanupcomingsciencefair project,costingabout$200.Ifthecosthadbeen $50,youcouldhavemovedmoneyfromthe entertainmentorclothingbudgetcategories. Instead,useyourRevolvingSavingsAccount. Movethe$200tothecheckingaccounttocoverthe addedexpense.Yourbudgetwillstayinbalance withouttakingonadditionaldebt.

Keep20%ofyourmonthlygrossincomeinyour revolvingsavingsaccount.Income$3,200X.20= $640.Thisisyourfirstlineofdefensefromusinga creditcardforunexpectedexpenses.Builda RevolvingSavingsaccountbeforeyoubuildan Emergencyaccount.

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BuildingWealthUsingaBudget

Abudgetisagreatopportunitytostartbuilding wealth.Thereareseveralstepsyoumustcomplete beforeyoucanstartbuildingwealth.

Buildarevolvingsavingsaccountof20%of yourmonthlygrossincome. Haveadebtreductionplan,suchasadebt snowball,topayoffdebt. Changethewayyouthinkaboutyourfinancial situationandfinancialgoals.Maturityand disciplinearerequiredtobuildwealth.Ifyou continuetoaccumulateunmanageabledebt,by spendingbeyondyourmeans,truefinancial wealthwilleludeyouuntilyoumakechanges. Createasavingsplanusingabudgetto accumulateanemergencysavingsincaseof joblossormedicalsetback.Thisaccount needstobelargeenoughtolastyourfamily fromfourmonths,toayear.Eachfamilyis different.Asingleparentwithchildrenwould needamuchlargersafetysavings. Buildingwealthbysaving,investingand leveragingyourmoneyisalifelongprocess.

36

BuildingWealthUsingaBudget Yourhouseholdbudgetcanbeusedtoaccomplish manyfinancialgoals.Accumulatingwealthtakes knowledgeandpatience.Thebestmethodisto putyourmoneyintoseveralfinancialinvestment vehicles,notjustone.Thiscanensureyouwill neverloseallyourfinancesinoneinvestment setback.

Takethetimetolearnabouteconomiccyclesand investmentcycles.Understandingthesetwo,may helpyoubuildfinancialwealth.

Thosesellingamagicinvestmentsystemare onlyproductsalespeople,nottruefinancial educators.Iftheirmagicsystemreallyworked, wouldtheysellittous?They wouldbetoobusyusingtheir systemtomakemillions.

Slowlyandsteadily,saveand investforthelongrun. Budgetandsave1520%of takehomepay,dividingthis intoseveralsavingsand investmentportfolios.Be consistentandpersistentto achieveyourfinancialgoals.

37

BuildingWealthUsingaBudget Plan foryourfuture,andsetfinancialgoalsthat willallowyoutoretirefromworkincomfortand safety.Ahouseholdbudgetcanbeusedtoplan andsavemillionsofdollarsforyourfuture.

Asstatedinthegoalssection,dreambigsave big.Dontallowdebttodetouryoufromreaching yourfinancialgoals.Retirementshouldbeoneof yourlongtermsavingsgoals.Learnthepowerof compoundinginterest,dividends,andleverage. Setagoalofsavingatleast10%eachpaycheck. Onceyouseeyoursavingsgrow,yourgoals becomereality.Youwillgetmoreexcitedand wanttosave20%eachpayday.Howdoyousavea milliondollars?Onepaycheckatatime.Start todayanddontlookback,onlyforward.

Howdoyoueatanelephant?Onebiteatatime.
38

ManagingDebt

Wehaveallheardtheagelessclich:Therearetwo thingsinlifethatarecertaindeathandtaxes.For manyAmericans,wecouldaddunmanageabledebt. Thisdebtlegacyformanyfamiliescontinuesfor generations,duetolackofbasicfinancialhabits.

Wecanteachyouhowtodealwithunmanageable debtandtoreducefinancialstress.Learningto saveforyourfutureandachievingfinancialgoalsisa signoffinancialdisciplineandmaturity.

Manymarriedcouplesstarttheirmarriagewith thoughtsofsavingmoremoneyandreducingtheir debt.Theybelieve,withasecondincometheycan eliminatetheirdebtandsavemoremoney.Theysoon realizeeachpersonisspendingmoremoneythan beforetheyweremarried.Therealityis,itsnothow muchmoneyismade,buttheirspendinghabitsthat count.Ahighpercentageofbrokenmarriagesis directlylinkedtomoney.

Theoldclich,Itsnothowmuchyouearn,buthow muchyouspend,istrueformost.

Gettingmotivatedtomakebasicfinancialchangesis easy,butmaintainingasuccessfulfinancialstrategy overtimeisthetruetestoffinancialsuccess.

39

ManagingDebt

Managingdebtisachoice,apositivehabitthat youcanstartatanytimeinyourlife.Obviously, theyoungeryoustart,thebetterofffinancially youwillbe.

Ifyoubelievethatdebtisgooddebtorbaddebt becausethisiswhatyouhavebeentold,lets changeyourthinking.Debtisnotouttogetyou; debthasnoconscience.Startthinkingofdebtas manageableorunmanageable.

Hereisanexampleofonewaymanypeopleget intotroublewiththegooddebt,baddebtbelief: Ahomepurchasehasalwaysbeenclassifiedasaso calledgooddebt.Ahousewillneverlosevalue, right?Whatdoyoutellpeoplewhohavelosttheir homeinforeclosureandcantsellorrefinance, becausetheirhomelostvalue?

Inatypicalyear,thereareover1million homeforeclosuresintheU.S.

Thesepeoplelosttheirhomesforvariousreasons, suchasajobloss,divorce,illness,orevenatragic accident.Thebottomline:Theycouldnotafford themonthlymortgagepayment.Thehomeisstill ahome,neithergoodnorbad.

40

ManagingDebt

Toomanypeoplebuymorehousethantheycan afford,whichcanleadtoforeclosure.Itisupto youtodecidehowmuchhouseyoucanafford,not themortgagebroker.Inthegreatsubprimehome lendingdebacleof20032007,manymortgage brokersputpeopleintoriskyloansthatweremore thanpeoplecouldafford.Theydidthisbyusing nomoneydown,adjustablerateinterestonly mortgages.Onceinterestratesstartedtoclimb, manyfamilieswereforcedfromtheirhomes, becausetheycouldnotaffordthehighermonthly payment.

Letslookatsomewaysyoucanprotectyourself andyourfamilyfromadebtdisaster.When decidingtomakeamajorpurchase,takeinto considerationhowthispurchasewillaffectyour monthlycashflow.Again,thegeneralguidelines:

Transportation1015% Remember,ifyou Food1013% Debt510% choosetoexceedthese Savings1050% basicfinancialrules Childcare510% youwilladdfinancial Entertainment5% stresstoyourlife. Clothing5% Utilities1015%
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HomeMortgage2535%

DebtToIncomeRatio(BackEnd) Hereisausefultoolindeterminingyourfinancial stresslevel.Dothemath,andconsiderwhereyou arebeforetakingonfurtherdebt.

1. GrossMonthlyIncome(Totalincome,before FederalTaxes,Statetaxes,SocialSecurity $3800 entitlements) 1.____________ 2. DebtPayments(Includechargecards,carpay ments,advancepay,loans,rent,mortgagePITI)

MonthlyExpenses: MonthlyPayments $1200 Mortgage/Rent $_____________ $350 AutoLoan $_____________ $250 CreditCards $_____________ PersonalLoans $_____________ StudentLoans $_____________ $150 Insurance $_____________ Other $_____________

$1950 Total 2._____________ 3.Divideline2byline1,andmultiplyby100 $3800 $1950 (2)______Divide(1)______X100=BackRatio____% 51.3

28%30%Someadditionalcreditmaybeused. 31%43%Fullyextended,FHA/VAtypicallimits. Above43%seriouslyoverextendedseekhelp!

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DebttoDisposableIncomeRatio(FrontEnd) Thegeneralguidelinesarehelpful.Ifyoufind youareoverbudgetandshortoncasheachmonth, startbylookingatthesepercentagestoseewhere youmaybespendingtoomuch.

Whenmakingahomepurchase,haveyour mortgagebrokershowyousomeworstcase scenarios.Planyourhomepurchasebasedon whathappensifinterestratesclimbforthenext decade.Dontloseyourhomebecauseyoudidnot planforthefuture.

Example:$3,000monthlygrosspayX.30=$900 rent.Forsafety,keepyourhousepaymentsbelow the30%limit.

Anothersimple,butuseful,formulatouseisa DebttoDisposableIncomeRatio,alsoknownas theFrontEndformula.Thiscanbeagoodway todetermineifyouarecarryinganunmanageable debtload. DebttoIncomeRatioFormula:Forthisformula, yourmonthlydebtpaymentsincludeeverything exceptthemortgage,rent,utilities,andtaxes. Includedarethingssuchascreditcardpayments, studentloans,auto,medicalbills,andloanson itemssuchasfurnitureandelectronicspurchased.
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DebttoDisposableIncomeRatio(FrontEnd) Includetotalmonthlydebtpayments,anddivideit byyourtotaltakehome(Net)incomeyourpay checkaftertaxesandotherdeductionshavebeen takenout.Thiswillgiveyouyourdebtto disposableincomeratio.Whatdoesthismean, andwhyshouldyoucare?

Ingeneral,creditorslookatyourdebttoincome ratiotoseetherelationshipoftheamountofdebt youhave,comparedtoyourincome.Manyuse thistodetermineiftheyshouldgrantyoualoanor giveyoucredit.Ifyourdebttoincomeratiois below16%,youareconsideredtobeingood financialshape.

Example: 1. Monthlytakehomeincomeis$3,000 2. Monthlydebtpaymentsare$450 3. Take$450(monthlydebtpayments)dividedby$3000 (takehomepay)=.15,so15%isyourDebttoIncome Ratio.

WhenyourDebttoDisposableIncomeRatiogets above17%,alenderwillviewyouasahigherrisk. Usethisformula,alongwithyourpercentage generalguidelines,tokeepyourbudgetinbalance andyourdebtmanageable.

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DebtSnowball

ADebtReductionPlan

Thefollowingchartshowsanexampleofalldebts, listedfromthesmallesttobiggest.Firstreviewyour monthlybudgetsheettomakesureyourneedsand prioritieshavebeenpaid,includingyoursecureddebt, suchasforacarloan.Next,listyourunsecureddebt andstudentloansasintheexample.Attackthisdebt usingaDebtSnowball.

PayoffDebt#1first,usingyourdiscretionarymoney. Once#1ispaidinfull,applythediscretionarymoney todebt#2(alongwithdebt#1spreviousminimum payment).Continuetheprocess(includingeachpaid debtsminimum)untilalldebtsarepaidinfull.This ishowadebtsnowballworks.Thisplanworkswell formanyandisnotimpactedbyinterestratechanges.

DebtSnowballExample

BalanceMin.payment 1. Providiancreditcard$400$25 Startwiththe 2. Targetcard $450$25 smallestdebt andapplythe 3. Searscard $500$30 min.payment 4. MasterCard $1,200$50 tothenextdebt. 5. Studentloan $6,000$150 ________________________________________________ Total $8,550$530
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WarningSignsofTooMuchDebt

Livingpaychecktopaycheck withoutaplan

Spendingmorethanyouearn

Signs of Too Much Debt

Livingonborrowedmoney

Receiving30daylatenoticesforlatepayments

Makingminimumcreditcardpaymentseach month

Receivingcallsfromyourcreditorsaskingfor payment

Choosingwhichbillstopayfirst,realizingthat otherswillbepaidlate

Transferringcreditcardbalancesregularlyto zerointerestratecards Nosavingsaccountnorcontributionstoalong termsavingsplan

Regularlyrefinancingtotakeequityfromyour hometopayoffunsecureddebt(creditcards)

Thesearewarningsignsthatcanleadtobigger problems.Thefirststepisrecognizingthatyouhavea financialproblemandthatyoumayneedhelp.

46

ManagingDebt

Debtsthatcanbecomeapriorityareunpaidtax debts,childsupport,alimony,andsecureddebts, suchanautoloan.Thesearedebtsyoudefinitely donotwanttoavoidpaying,asthesedebtscanbe collectedusingmoreaggressivemeans.Makesure youlearnthelawsinyourstatewithregardto thesedebts.Besuretokeeppaymentscurrent.If youcantmakeapaymentontime(beforethedue date)youmustcommunicatewithyourcreditors.

Stayingindenial,continuingtoprocrastinate,will onlycompoundyourdebtsituation.

Areyouafraidtogetacopyofyourcreditreports, becauseyoudontwanttoseeyourtruefinancial situation?Youmustfaceyourpast.

Itscommonforparentstoassisttheiradult childrenduringfinancialhardshipsthenendup bankruptthemselves.Thisisnotagoodplan.

Unlessyoumakechanges,youwillgetmoreofthe same.DontplaytheBlameGame.Youshouldface uptoyourfinancialsituationandtakecharge.The buckstopshere.Iamresponsibleformyactions,is theattitudeyoumusttaketohelpyourdebt situation.Maturitywithdisciplinewillhelpyou gaincontrolofyourdebtandfinances.

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TheCostofOverSpending

Whatkeepsyoufrompayingyourdebts?Ifyou havegoodhouseholdincomeandstillspendmore thanyouearn,whatisyourreason?

Arebadhabitskeepingyouindebt,suchasbuying cigarettes,alcohol,drugs,gambling,carpartsfor yourhotrod,toomanyshoes,oranewcar?How muchdoyouspendeatingatrestaurantseach month?LookattheFlexibleExpensescategoryon yourmonthlyspendingplan(Budget).

Apersonwhosmokesapackofcigaretteseachday isneedlesslyspendingabouttwothousanddollars everyyear.Overathirtyyearspan(sayfromage 2050),thatisnearly$50,000.Thatsagooddown paymentonahouseor$150amonthtowards payingoffyourdebt.Theseareareasinyourlife thatneedtobeaddressed.

Denyingthatyouhaveaproblem,orjokingabout yourspendinghabits,isawayofprocrastinating andavoidingyourproblem.Ittakesmaturityand selfdisciplinetoseekprofessionalhelp.

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ManagingDebt

DebtCollectors Debtpriorities,andhowtodealwithdebt collectors,needtobeunderstood.Harassmentis thenameofthegamefordebtcollectors,including dailyphonecallstellingyouthatifyoudontpay theywilltakeyourpossessions,takelegalaction, orruinyourcredit.

TheFairDebtCollectionPracticesActprovides consumersrightsandprotectionfrommanyofthe debtcollectorstactics.Withinfivedaysaftera debtcollectorfirstcontactsyou, thecollectormustsendyoua noticethattellsyouthenameof thecreditor,howmuchyouowe andwhatactiontotakeifyou believeyoudontowethemoney. DebtCollectorsmustnot:

Contactyouatunreasonable times(before8a.m.andafter9pm), unlessyouagree. Contactyouatworkifyoutell thedebtcollectorthatyouremployer disapproves.

49

ManagingDebt

Contactyouafteryouwritealettertellingthemto stop,excepttonotifyyouthatthecollectorplansto takeaspecificaction. Contactyourfriends,relatives,employerorothers, excepttofindoutwhereyouliveandwork. Harassyouthroughthreatstoharmyou,theuse ofprofanelanguage,orrepeatedtelephonecalls. Makeanyfalsestatementorclaimthatyouwillbe arrested.

Ifdebtcollectorsviolateanyoftheselaws,makesure youinformthemoftheirfederallawviolationsand thatyouwillreportthemtotheFederalTrade Commission:www.ftc.gov.Alsoreportthecollector toyourandtheirStateAttorneyGeneral. Legalactionstaketime,andtheycannottakeyour personalpossessionsforcreditcarddebtormedical bills.Thesedebtsareunsecureddebts,meaningthe debtorshavenoclaimtoyourpossessions.Iflegal actionistaken,andajudgmentisplaced,youcould haveawagegarnishment.Thiscanhappen,so ignoringthedebtisnotagoodidea.Itisadvisableto speakwithyourdebtors.Explainyoursituation,and besuretoputitinwriting.
Donotpayforanunsecureddebtbeforeyouressentials andbasicneedshavebeenmet,suchas housing,utilities,andfood.
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ManagingACreditCard

Threeusesforacreditcard

1. Travel:Acreditcardissafertocarryfortravelthana debitcard,cash,orpersonalchecks.Budgetahead foryourtravel,sowhenyoureturnfromyourtrip, youpayyourbalanceinfull.Also,youcanmake paymentswhiletravelingviatheInternet.Useyour banksonlinebillpaysystemwhiletraveling,tomake sureyoudontaccrueinterestonyourcreditcardfor travelexpenses.Forshortvacationsandonline purchases,werecommendyouprepayforthe purchase.Sendthemoneyinviaonlinebanking beforeyoucharge.Whataconceptprepayment.

2.Business:Creditcardsareusedbymanycompanies forbusinesstravelexpenses.Creditcardsareaneasy waytotrackpurchases,withtheaddedprotectionof stoppaymentonpurchasesifneeded.

3.CreditReportandCreditScore:Usingyourcredit cardinconcertwithawrittenbudgetwill,liketheabove examples,helpbuilda goodcredithistory. Thiswillhelpmaintain agoodcreditscoreand improveapoorcredit score,whenused properly.

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ManagingACreditCard Theproperwaytouseacreditcardisseldom taught.Wehaveallseenwhatunmanageable creditcarddebtcandotoahouseholdsbudget. Letslookattheproperwaytomanageacredit card.

Creditcardsareafinancialtoolthat,whenused properly,canbeanassetandbenefitforyou.A creditcardshouldonlybeusedinconcertwitha writtenbudget.

Example:Youhavebudgeted$100forclothing thismonth.Themoneyisinyourchecking account,whichyouplannedtousetopurchasea pairofshoes.Instead,useyourcreditcard,then payyourcreditcardbillwithin15days,orthe sameweek.Usingyourcreditcardwillshowyou canusecreditresponsiblyandisoneofthebest waystomaintainandimproveyourcreditscore.

Useyourcreditcardforsafetyandconvenience. Ifathiefweretogetaholdofyourdebitcardand cleanoutyourcheckingandoverdraftprotection savingsaccount,whosemoneydidthethiefsteal? YoursIfthesamethinghappenedwithyour creditcard,whosemoneywastaken?Acreditcard isabankloan,sothebanksmoneywastaken,not yourmoney.

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ManagingACreditCard

Federallawsforconsumerprotectionregardinga creditcardtheft,sayyourmaximumliabilityis $50.Inthedebitcardexample,youcouldhave hadoverdraftchargesalso.Banksinmostcases protecttheconsumer,butifyourPINwasusedin thecrime,yourbankmaytakeasecondlookatthe crimebeforeputtingtemporarymoneyintoyour account.

Federallimitsofliabilityforadebitcard:

Notifyyourbankwithintwodays,$50maximum liability.Twodaystosixtydays,$500maximum liability.Sixtydaysorlonger,theliabilityis unlimited.

Useacardwithnoannualnormonthlyfee.Donot revolveabalance(carryabalancefrommonthto month).Trynottouseyourcreditcardforemergencies. Asafetysavingsaccountisforemergencies.

Acreditcardgraceperiodisthetimeperiodbetweenthe postingdateofatransactionandtheduedate,within whichanynewcreditcardpurchasesmadeduringthe billingcyclewillavoidfinancecharges.Ifyourgrace periodis22daysthenyouhave22daysafterpurchase beforeintereststartsaccruing.Interestisthepenaltyfor borrowingmoney.

53

ManagingACreditCard

Example:Youbuyawasheranddryerwithyour creditcard.Themoneyisinyourchecking account,butyouuseyourcreditcard.Thesetis delivered,theyarrivedamaged,andtheretail merchantisnothelping.Sinceyouusedyour creditcard,youcandisputepayment.Yourcredit cardcompanywillcontactthemerchanttoverify andgenerallywillworkontheconsumersbehalf tocorrecttheproblem.Manycreditcard companiescanhelpyou,evenmonthsaftera purchase.Theonlyrealstipulationisthatthe goodspurchasedaremorethan$50andpurchased within100milesofyourmailingaddress.You mustfirsttrytoresolvethedisputewiththeretail merchantbeforecontactingyourcreditcard companytodisputepayment. Hadyouusedyourdebitcard,theseoptions wouldnothavebeenavailable.
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UnderstandingDebt

Payingoffa$5,000balanceatdifferentinterest rates:

10% Percentage_>> Mo.Payment:

15% 6years, 7months 2years, 7months 1year, 7months

20% 9years, 1month 2years, 9months 1year, 8months

$100

5years, 5months 2years, 5months 1year, 7months

$200

$300

Interestisthepenaltyformakingjustthe minimumpaymentsonyourcreditcardandother loans.

Example:ForacreditcardwithanAPRof18% anda$1,200balance,makinga4%fixedpayment willtakeovertwoyears,andthepenaltyisan additional$315ininterest.Interestisthepenalty forborrowingmoney.

ForacreditcardwithanAPRof20%anda$10,000 balance,makingjustthe4%minimumpayment willtake15years8months,andtheinterest penaltyis$7,050.Heresanidea:Howaboutpre payingbeforeyouchargetoyourcreditcard?A greatideaforonlinepurchasesorshortvacations.

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UnderstandingDebt

BorrowingtoPayforDebt

Itisnotrecommended,ever,thatyouborrowfrom theequityinyourhometopayoffunsecuredcredit carddebt.Usingtheequityinyourhometopayoff creditcarddebtistakingadebtthathasnosecurity tiedtoit,andturningitintoasecureddebt.The realityis,whenthisisdone,yourhomeisnowthe securityforyourpriorcreditcarddebt.

Itwascommonformanyhouseholdstousethe equityfromtheirhometopayofftheirunsecured debt.Therearemanyfinancialadvisorswhohave recommendedthisfinancialtactic.Themortgage industrysurvivesonthistactic.Thesadtruthis, over80%ofhouseholdsthatusetheirhomeequity topayforcreditcarddebtarebackintoworse creditcarddebtwithintwoyears.

The15%ofpeoplewhodothissuccessfullyarethe oneswhohadafinancialplan.Idontwantto throwthebabyoutwiththebathwaterwhenIsay, Itisnotagoodideatorefinanceforthepurpose ofpayingoffdebt.Thestatisticsshowoddsof successareagainstmostpeople.Dontbecomea statistic.

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UnderstandingDebt

Beforeyoudothis,askyourself,AmIinthe80% orthe20%?Onewaytotellistolookatyourpast performanceindealingwithdebt.Haveyoudone anythingtochangeyourfinancialhabits?Have youtakenfinancialeducationclasses?Areyou matureenoughtolivewithinyourmeanswitha budget?Areyounowdisciplinedenoughto implementandmaintainafinancialplan?

Theseareseriousfinancialquestionsthatonlyyou cananswer.Donotlistentomortgagebrokers whentheytellyou,Youcanaffordthis.They mayputyouintoaninterestonlyARM(adjustable ratemortgage)afteryouinformedthemyouplan tostayinthishomeforthenexttwentyyears. Run,runfast,fromthesepeople.Seekfinancial advicefrompeoplewithexperienceandfinancial certification.Behonestwithyourself;ifyouare notgoingtosticktoa soundfinancialplan, donotrefinanceyour housetopayoffcredit cards.Youonlymake themortgagebroker happy.

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UnderstandingDebt

Example:TheBrownfamilyhas$30,000incredit carddebtandotherunsecuredloans.Theywould liketoeliminatetheirmonthlydebtobligations.They decidetorefinancetheirhomeandusetheequity fromtheirhometopayoffthisdebt.

Sixmonthslater,Mr.Brown,theonlysourceof incomeforthefamily,loseshisjob.Thefamilyhasno safetysavingsaccount,sotheyusetheircredit cardsforlivingexpensesuntiltheyaremaxedout again.

Duringtheirfinancialdifficulty, theyfellbehindontheirmortgage paymentsandwereforcedtoshort selltheirhomebeforeforeclo sure.But,whentheysoldtheir home,theyactuallyowedmore thanthesaleofthehomecould provideandstillowedthesecond lienholder,whowantedtheir money.Withnoincomeandfal lingfurtherbehindonthemonthly bills,Mr.Browndecidedhisonly optionwastofileforbankruptcy.

MUST SELL

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CreditCounseling

ACreditCounselingAgencyisagoodoptionto consider.Thousandsofpeoplehaveusedthemto payoffcreditcardsandotherunsecureddebt.

ReasonstouseaCreditCounselingAgency:

Maybeabletoreagethedebtsandeliminate financechargesandlatefees Freepersonalfinanceeducationforthewhole family Freeeducationalmaterials Answerstomanyofyourpersonalfinance questions Mostarenonprofitandadheretostrictstate andfederal(IRS)guidelinesandacodeof ethics Manyofthenonprofit,501(c)3s,offeradebt managementplan(DMP)thatmayreduce interestrates,collectonemonthlypayment amounttodisbursetocreditors,andpossiblyhelp payoffyourdebtsooner.Debtsmustbepaidin fiveyearsorless. Federallawsrequiretheconsultingorsetupfee waivedwhenyouask
59

CreditCounseling Thecreditcounselingindustryoffersfree consumereducation.Inmanycases,knowingyour financialoptionsmayhelpyoufindasolutionto yoursituation.Manypeoplehavehadavery positiveexperienceworkingwithaCredit CounselingAgency.

Formoreinformation,hereareseveralwebsites: www.aiccca.com www.aadmo.org www.nfcc.org

Manyofthenonprofitcreditcounseling companiesareapprovedasHousingandUrban Development(HUD)housingcounselors.They helpmillionsofhomeownersworkwiththeir mortgageserviceronloanmodificationsand foreclosureissues.

CreditCounselingusuallywillonlydealwith unsecureddebt.Mostwillnotdealwithdebt collectors,becausemanydebtcollectorsdonotlike todealwiththeCreditCounselingAgencies.

TheFederalTradeCommissionhasinformationon whattolookforinaCreditCounselingAgency. Theirwebsiteiswww.ftc.gov.

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DebtSettlement

ADebtSettlementCompanyisnot recommended.Theywillnegotiateareduced settlementpayoffwithyourcreditor.Theonly wayadebtsettlementcompanycandothisisif youstoppayingyourdebts(bills).Thenthe creditor(creditcardcompany)realizestheymay notgetanymoney,sotheysettleforlessthanthe fullamount.But,whenyoustoppayingyourdebt, yourcreditisruined.Youhavenowbecomeahigh riskwhenviewedbylenders.Yourcreditscore fallsdramatically,becauseyouhavefailedtopay asagreed,perthetermsofyourcontract.

Youalsoneedtoknowthatifyoupaylessthanthe fulldebtamount,anythingabove$600savedmay betaxableincome.

Example:Youowe$8,000oncreditcards.You signacontractwithaDebtSettlementCompany, andtheytellyounottopayyourcreditcardbill. Thesettlementcompanynegotiatesasettlementof $5,000withyourcreditcardcompany,tobepaidin threeyearsorso.Hereiswhathappenstoyou:

YourFICOscore(creditscore)takesa significantdrop,possibly50100points.

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DebtSettlement

YourcreditreportnowshowsaSettlementfor thisdebt. The$3,000dollarsyoudidnotpaymaybe taxableincomeasforgivendebt,soyoumust paytaxesonit. Youpaidaveryhighfeeforthisservicethat ruinedyourcredit. Inmostcases,usingaDebtSettlementcompany canbeasbadasfilingforbankruptcy.

TheDebtSettlementindustryhasbeenun regulatedforyears.Thefailurerateofpeople droppingoutofaDebtSettlementplanisvery high.

Whendoingbusinesswithanycompanythathas accesstoyourmoney,besuretoaskforreferences, andcheckwiththeBetterBusinessBureaufor complaints.IfyouhaveaccesstotheInternet, alwaysdoawebsearchusingthenameofthe company,toseewhatinformationisreveled. Adebtsettlementcompanyisnotrecommended.

62

DebtConsolidation Apopularloanofchoiceformanywithunsecured creditcarddebt.Therearethousandsof companiesmakingpromisestohelpeliminateyour debt.Theirlendingstandardsareverylow,which allowsmanyhouseholdswithalreadydamaged creditscorestoparticipateintheirprogram.

Mostpeoplebelieveiftheyjusthadmoneytopay offtheircreditcarddebteverythingwouldbefine again.ThisflawedlogiciswhattheDebt Consolidationindustrywantsyoutobelieve. Borrowingmoneytopayforyourdebtsisalwaysa badidea.Manybanks,creditunionsand independentfinancialcompanieswillprovidea debtconsolidationloan.Whathappensin90%of thecasesis:householdswillborrowthemoney andpayofftheircreditcards.Theircreditcard accountsarestillopen.guesswhathappens,yes, yourecorrect,withintwoyearsthecreditcardsare maxedagain.Theconsolidationloanpaymentis stilldueeachmonth,andsoarethecreditcard payments.Inmanycases,thesehouseholdsfind themselveswithsuchunmanageabledebt,they finallythrowinthetowelandfileforbankruptcy. Weneverrecommendaloan,ordebtconsolida tionloantopayoffcreditcarddebt,oranydebt.
63

ConsequencesofPayingLate

Knowwhatcanhappenifyoudecidetopaylateor notatall:

Mortgagepaymentsfrom90120dayslatecan resultinforeclosureandthelossofyourhome.

Autoloan,1daylate(althoughlendersmaywait 60days):Repossession,lossofcar,potentialfor collectionofunpaiddebt.Ifyourcaris repossessed,thebankorthelenderwillsellit.If themoneyfromthesaleisnotenoughtocoverthe amountyouoweonthevehicle,youwillowethe balance.Thisdebtmaygotocollectionsifyoudo notpayinatimelymanner.

Studentloans,270dayslate:WageandSocial Securitygarnishment,taxrefundseizure.

Creditcards,180dayslate:Accountchargeoff, senttocollections.

Collectionaccounts(dependsontheamountand theaggressivenessofthecollector):Wagegarnish ment,propertyorbankaccountseizure.

Taxdebt(dependsontheamountandthe aggressivenessofthecollector):Wagegarnish ment,propertyorbankaccountseizure.

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ConsequencesofPayingLate

Childsupport(dependsontheamountandthe aggressivenessofthecollector):Lawsuit,wage garnishment,jail.

Eachofthesewillhaveanegativeimpactonyour creditreportandscore.Alwayscommunicatewith yourcreditors.

ManyStatelawsdiffer,sobeawareofyour particularstatelaws.

CreditCardBillingDisputes UndertheFairCreditBillingAct

Sendaletter(certifiedmail)tothecreditor within60daysofthepostmarkofthebillwith thedisputedcharge. Thecreditormustacknowledgeyourletterin writingwithin30daysofreceivingitand conductaninvestigationwithin90days.You donothavetopaytheamountindispute duringtheinvestigation. Ifthereisanerror,thecreditormustcredityour accountandremoveanyfees. Ifthebilliscorrect,youmustbetoldinwriting whatyouoweandwhy.Youmustpayitalong withanyrelatedfinancecharges.
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DebtManagementKeyPoints

KeepitSimple ARecipeforSuccess

1. Youmustputyourdebtreductionplanin actionnow,today. 2.Takesimplestepstostart.Writeasimple budget.(Reviewoursamplebudgetinthis book).

3. Writeyourdebtsonapieceofpaperinorder ofsmallesttolargest.

4.Makeaplantostartyourdebtsnowballtoday bypayingoffyoursmallestdebtfirst.

5. Ifyouareoverwhelmed,considercallinga nonprofitcredit counselingagencyfor help.

6. Youmuststartyour safetysavingsand revolvingsavings accountsASAP.This canhelpprotectyou andyourfamilyincase ofanemergency.

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DebtManagementKeyPoints

Debthasbeenawayoflifeformany.Sometimes parentspassthislegacyofdebttotheirchildren,dueto theirownlackof financialeducation.

Manystateshave strengthened personalfinance educationin schools.However, ourhighschoolseniorsarestillfailingyearlypersonal financeliteracytests.(Jump$tartCoalitionforPersonal FinanceLiteracy)

Itisimportantforparentstounderstandtheimpactof personalfinanceeducationinthehomeandnotrelyon theschoolsystemtoteachthebasicsofmoney management.Parentsmustsetagoodexample.

Usingasimplewrittenbudgetandlearningtopay yourselffirst(save1020%ofyourincome)arebasics thataresoeasytoteach.Continuetobeapositive exampleforyourchildren.

Ahighpercentageofyoungadultsleavecollegewith unmanageableamountsofdebt.Creditcards,auto loans,andstudentloanshaveputafinancialburdenon oursociety.

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DebtManagementKeyPoints

Thiscanbeaheavyfinancialburdenwhenstartinga newcareerorfamily.Personalfinancesarenotdifficult. Itdoeshowevertakematurityanddisciplinetoachieve yourpurposeandgoalsinlife.Setgoalsandmaintain soundfinancialhabits.KeepitSimple,Silly. Throughoutthisbook,nowheredidwesayyoumustlive totallydebtfree.Debtisunavoidableandshouldbe thoughtofasafinancialtool.Amortgageisdebt,an insurancecontractcanbedebt,andacarloanisdebt. Thesecontractsareawayoflifeandshouldbe managed.Yourdebtshouldtobemanagedinaway itdoesnotaffectyourhealthnorthewellbeingof yourfamily.

Whenusedproperly,debtcancreatewealth,suchas whenyouleveragerealestateforfinancialgain.A wellplannedstudentloanisdebtthatcanhelpcreate futurewealththroughimprovedknowledgeandskill enhancement.

Ifyouchoosetoprocrastinate,youmaybeoneof thethousandsofAmericanslivingindebtand withlimitedincomeatretirement.Theaverage socialsecuritycheckis$1,000permonth,andfor many,thisisnotenoughtopaythebillseach month.Setaplanintoactionassoonaspossible.

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ClosingStatement

Financialliteracyhasbeenaroundforhundredsof years.Formany,thisinformationissomething new.Manyhouseholdshaveneverimplementeda writtenbudget.Manyhaveneverconsideredthe impactfinancialeducationcouldhaveintheir household.

Whicheverfinancialplanyoudecidetoimplement, keepitsimple;thiswillmakeitmucheasierto repeatandmaintain.Asuccessfulfinancialplanis asimple,repeatableplanthatcanbetaughtto others.

Ifyouneedprofessionalhelp,therearefinancial counselorsyoucanspeakwith.Lookforfinancial counselorswhoaretrainedtodealwithdebt,credit, creditscore,andknowhowtobuildasimple spendingplan(budget)youcanunderstandand follow.Agoodprofessionaldesignationtolookforis anAccreditedFinancialCounselor(AFC),asthese aresomeofthebestconsumerfinancialcounselors available.Agoodprofessionalfinancialcounselor willmakeyourfinanceseasytounderstand.

Youcanfindoneinyourareabygoingtothe www.AFCPE.orgwebsite.Thekeyis,starttoday.

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RecommendedReading

ThinkLikeAWinner Dr.WalterDoyleStaples TheRichestManInBabylon GeorgeS.Clason LivingonaBudget PeterJ.Sander DealwithYourDebt LizPulliamWeston TheMillionaireNextDoor ThomasJ.Stanley WilliamDanko ReadySetRetire & BucketsofMoney RaymondLucia

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Notes

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