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My Personal Finance-A Guide to Conscious Spending MY PERSONAL FINANCE A GUIDE TO CONSCIOUS SPENDING EDUCATION EMPOWERMENT SUCCESS Produced and created by EduCreations and available online at www.my1stchoice.org and at www.mybknow.com 1 My Personal Finance-A Guide to Conscious Spending My Personal Finance: A Guide to Conscious Spending Produced and created by eduCreations and available online at www.mybknow.com and at www.my1stchoice.org Introduction People often say they want to take control of their finances, save more money, or get out of debt. If you are one of those people but haven't yet made a plan or a commitment to change, now is the time. Money is a necessary part of life. Money problems don t have to be. Money can be a blessing or a curse. Sometimes money problems happen through absolutely no fault of our own. Accident, injury or illness can result in huge medical bills that become impossible to pay. Traumatic family situations ending in divorce often result in financial ruin. Even if nothing devastating happens, people can find themselves overwhelmed by debt. Most people are not taught about basic money matters and not learning those basics can have devastating results. This material will provide you with basic tools to become more successful with money. We hope the information here will interest you enough to pursue a lifetime of financial success and empowerment. Financial Awareness Nothing can change until there is awareness that a problem exists. If you are reading this, it s likely that you are already aware that you need more education about how to successfully manage your personal finances. First, be assured, you are not alone. Most Americans are either consciously lying about their finances or unconsciously in denial about their financial reality. Most people are not taught about money at home or in school. We are inundated by encouragements to buy, buy, spend, spend from TV ads and government officials proclaiming that shopping is a patriotic duty. Yet, a relationship with money is complex. Perspective can easily be distorted by neighbors and friends' financial situations. The natural tendency is to compare outside expressions of financial success or stability. Financial empowerment begins with a growing awareness of your relationship with money. YOUR MONEY MINDSET Your Money Mindset can simply be defined as what you believe about money and what it means to you. It is often unconscious so part of the action you will be taking is bringing to your consciousness what your beliefs are. This material aims to help you discover your relationship with money and what beliefs may have helped caused your money problems. Some of those things will have to change in order for you to reach your financial goals. Your relationship with money determines how you act with your money. Investigating this relationship can help you make valid, informed decisions about your personal finances. Professor Russell Belk, a professor at the University in Utah, asserts that studies have confirmed that people s relationship with money is not practical, but emotional. As you may have discovered in looking at your money mindset, emotions can play a big part in our money decisions. Often those emotions are fueled by values and standards that might not really even be our own - we pick them up through life from other people without even realizing it. This is a good time to take a look at them and decide if they really apply to you and if you really want to keep them. 2 My Personal Finance-A Guide to Conscious Spending Circle the words on the list below that apply to your thoughts and beliefs about money. There is no right or wrong answer. This is simply a self-awareness exercise. Hard work Family Smart Success Satisfaction Rich Happiness Good Expected Important Problems Worry Security Valuable Lacking Peace Poor Pressure Because our finances are so hooked into emotions they are not something we like to talk about. Harlan Friestad, Ph.D, a professor of marketing and past president of theSociety for Consumer Psychology says, "In the United States, talking about money is harder than talking about sex. He goes on to say it is often a love-hate relationship. And that "money is valued ..for it's own sake but it is also measured for its intrinsic value to us as people". Circle the feelings listed below that you have experienced either now or in the past in regards to money. Envy Gratitude Anger Rebelliousness Fear Desperation Happiness Relief Stress Overwhelmed Relieved Hopeful 3 My Personal Finance-A Guide to Conscious Spending FINANCIAL LITERACY You have probably heard the word literacy used in regard to reading and writing. But what about your financial literacy? Most of the nation is lacking in it. A 2004 bankrate.com survey reported only 26% of those surveyed passed a financial literacy test. A 2006 survey by C.A.R.E. found that over 60% of college students say they never had a meaningful conversation about personal finances with their parents. The average person is not taught in home or at school about basic money matters -- banking, savings, loans, credit, assets or liabilities, net worth, equity Take the quizzes below to see what you already know. Financial Literacy Quiz 1 TRUE FALSE 1.An automobile/truck can be both an asset and a liability 2.Gross income is equal to my take home pay 3.Savings is a budgeted item 4.You can put an explanation on your credit report 5.Budgets usually have 2 main headings 6.Budgets often have 4 types of expenses 7.A short term goal is less than a year 8.Credit cards should be used for groceries 9.Only corporations have net worth 10.Your children are assets 11.A 450 FICO score is considered good 12.Compounding interest is a good thing 13.Credit reports are free Answers: T,F,T,T,T,T,T,F,F,F,F,T,T 4 My Personal Finance-A Guide to Conscious Spending Financial Literacy Quiz 2 1.A bank account can help me track expenses 2.Savings accounts pay more interest than CDs (Certificates of Deposit) 3.Credit reporting agencies qualify you for loans 4.Budgets are divided into income & expenses headings 5.Periodic expenses occur monthly 6.Goals should never be reached within 1 year 7.Bankruptcy is the only way out of excessive debt 8.Only credit counselors can negotiate with creditors 9.A credit score of 500 is considered good 10.There is always risk involved with investing Answers: T, F, F, T, F, F, F, F, F, T Financial Literacy Quiz 3 Mark the letter by each action that best describes your current or past behavior A=Always I balance my bank statements I check my credit report regularly I pay my bills on time I track my expenses I write down goals I talk with family about finances I save regularly 5 S=Sometimes N=Never My Personal Finance-A Guide to Conscious Spending VALUES AND STANDARDS Money's purpose and value is different for different people. Money cannot buy happiness. It may make life easier for some and more difficult for others. Of course, everyone wants to have enough money to keep themselves and their loved ones safe and secure, fed and clothed with a roof over their heads. However, what s important to remember is this - Jim Tehan, spokesman for Myvesta (nonprofit financial health center) states that "We've found that money problems aren't about money but other life issues People often disconnect from how they spend their money". Ask yourself the following questions to determine what your values and standards about money might be: What do I believe the purpose of money is? What value do I place on love or peace of mind or family? These are simply additional ways to raise your awareness of what is important to you and how money fits into that. Each of the self awareness exercises that you have now completed can help you decide what money related habits, behaviors and attitudes you want to keep and what you would like to be rid of. With that awareness and the decisions you make as a result of it, you can develop and implement a plan to be rid of beliefs or feelings you no longer want. By doing that, you will have new behaviors and attitudes to practice. And practice creates new habits. These new habits will be the ones you have decided you want for yourself. They will be of your choosing. No more living by default - making a decision by making no decision. No more making decisions based on what someone else says or does; or on lack of knowledge; or emotions; or immediate gratification seeking. You are ready to take control of your finances. MONEY AND THE FAMILY If you are part of a family that is affected by your finances, be sure that there is communication between all family members about your financial situation. If children are in the home, they are definitely affected and probably know more than you think they do about the money problems you and your spouse are having. Keeping your children "protected" from money matters is not helping them. You will help them by including them in family finances so that as they grow up, they have confidence in handling their personal finances. Money is often a source of family stress and arguments. Those arguments and the related problems can be greatly reduced by sitting together and having open honest discussions about where you're at, where you want to be and how to get there. It's very important to choose a calm and quiet time with perhaps some guidelines (no yelling or accusing) during a family money meeting. Try the following exercise during one of these meetings. You might find that everyone is more flexible and creative than you expected. Each person writes down what they believe is a strength and weakness of their own AND a strength and weakness of the person sitting to their left. The only guideline is that it be done as gently as possible, no shaming. Then each paper is read aloud by whoever desires. There should be no blame or shame or ridicule about what is written. Remind everyone that difficult things can be talked through in a calm manner, even if you aren't used to that; remember you are practicing new behaviors and attitudes. If it doesn't seem to be working, take a break and try again at another time. 6 My Personal Finance-A Guide to Conscious Spending Another family exercise is to give each person a turn to say one thing they think or feel causes the biggest money problem. Then, choose one of those and have a group discussion about possible solutions to that one problem. YOUR FINANCIAL VOCABULARY Annual Percentage Rate. This is the most important term you should know when it comes to credit cards and other revolving debt. An annual percentage rate (or APR) is the percentage of what you owe that is charged to you as a finance fee. A rarely understood fact is that your credit card's APR doesn't accurately represent how much you actually pay if you don't pay it off right away. For example, let's say you have an APR of 18 percent on a balance of $1,000. It might seem to mean that you are charged $180 (or 18 percent of your debt) per year. In reality, that 18 percent is divided into 12 monthly interest rates, which comes to 1.5 percent, and applied monthly. This interest then compounds each month, which means you are charged interest on the earlier interest fee. So the actual finance charge on the original amount comes to about 19.6 percent after 12 months. Compound Interest. Compound interest can also work in your favor. For example, suppose you have $1,000 in a savings account paying 5 percent annual interest, compounded quarterly. After one quarter, a fourth of the annual interest, or 1.25 percent, would be applied to your balance, giving you $1,012.50. Another quarter goes by, and this time, that 1.25 percent is applied to the new balance, leaving you with $1,025.16. By the end of the year, your balance is $1,050.95. Looking at it in the chart below may make it even more dramatic Years 4% 6% 8% 10% 10 $1481 $1791 $2159 $2594 20 $2191 $3207 $4661 $6728 30 $3243 $5743 $10,063 $17,449 Over the long haul, thanks to compound interest, your money grows at a faster and faster rate. And, of course, making contributions to the savings every month, makes it grow even faster. BANKING You need to have a bank account either at a Bank, a Savings & Loan or a Credit Union. Establishing a relationship with a financial institution helps build credit. And none of these institutions are likely to get you into a financial arrangement that you cannot afford. Other lenders will not be as protective of you. A bank is where you will start a savings account if you don't already have one. It is a resource for financial education. Bank employees are trained to help their customers understand interest and savings and loans. It is one of the ways you can track expenses. If you have never balanced a bank account to a bank statement, a bank employee will help show you how to do that. Balancing your bank statement is called reconciling or a reconciliation. That simply means that you are making it match to what you show in your own check register or online program. Additionally, there are instructions on the back of every bank statement. If you use or are going to use a software program to track your banking activity, that program will have a bank reconciliation module in it to help with balancing your statements. Whether or not bank reconciliation continues to be something you do, it is vital to your understanding of where your money goes. Learning about bank fees, bounced checks, earned or paid interest -- all of these things provide you with financial knowledge that you need. 7 My Personal Finance-A Guide to Conscious Spending SAVINGS Saving is critical to your financial health. If it isn t already part of your budget, that should be one of your top goals. Likewise, if it isn t already a part of your banking life. Having savings prevents disaster in times of emergencies. And it can provide happiness when accumulated and used for special gifts or vacation. Savings are usually put into the safest places or products and allow you to access your money at any time. Most savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC). The trade off for safety is usually a low rate of interest. Before you open a savings account (or even if you already have one, consider some of the following: Can you access your money at any time? How much interest is it earning? - Compound interest helps build riches faster. Interest get paid on top of previously earned interest as well on the original deposit or investment. Example: Look at what happens with just $1000.00 Years 4% 6% 8% 10% 10 $1481 $1791 $2159 $2594 20 $2191 $3207 $4661 $6728 30 $3243 $5743 $10,063 $17,449 Can you move money easily from one account to another? How much of your savings is insured by the FDIC? What types of Money Market Savings Accounts, Certificate of Deposit (CD), or other accounts does the institution offer that might be helpful to you for short term savings goals? There are money 3 month, 6 month, 9 month term accounts that pay slightly higher rates of interest if you leave them in full term. Are there no fees if you maintain a minimum balance? Can you get check writing services? What types of service fees or early withdrawal penalties exist on the account? A basic saving goal should be to save 10 percent of each dollar earned. We know, we know - that seems ridiculously impossible when you may only be paying your basic needs. But as you practice the new ideas and actions you've been learning in this material, you will get to a place of financial security. And that security involves saving. When you are saving and investing, the amount of expected return is based on the amount of risk you take with your money. 8 My Personal Finance-A Guide to Conscious Spending INSURANCE Insurance is another way of protecting yourself and your possessions. Having sufficient insurance can sometimes be the difference between making it through a tough time or financial ruin. Automobile Insurance is a must have. Do not drive "bare". Make this a priority. If your car is old or not worth very much, you probably only need liability. Life Insurance is one of the few you may not need. It is really only necessary if you have family members who are dependent upon you and your income for their survival. If you do not have anyone dependent upon you, life insurance is most likely unnecessary. Health and Disability Insurance should be purchased whenever possible based on your personal desires, age, health and other circumstances. Be sure to check with your employer or employee assistance department to verify how much, if any, health, life and disability insurance is available through their group plan. Group plans are almost always cheaper and usually guarantee issue of insurance regardless of health status Homeowner or Renters Insurance is very important as it can protect you from loss of possessions. Homeowners Insurance also has many other protective benefits including a variety of liability protection. Check with a reputable company and agent to verify what you can get for what price INVESTING When you invest, you have a greater chance of losing your money than when you save. For example, a savings account at a financial institution should be fully insured by the Federal Deposit Insurance Corp. up to $100,000 for an individual. The interest paid on your savings will be generally less than the expected return on other types of investments. On the other hand, an investment in a stock or bond is not insured. The money you invest may be lost or the value reduced if the investment doesn't perform as expected. An investment is anything you acquire for future income or benefit. Investments increase by generating income (interest or dividends) and/or by growing (appreciating). Income earned from your investments and any appreciation in the value of your investment increases your wealth. There is an art to choosing ways to invest your savings. Take time to do some information gathering. Remember, you are learning how to take care of yourself and your money. The internet is a huge source of information. Don't pretend to know more than you do but also don't blindly accept what a supposed "professional" says is true. Seek advice from personnel at your bank or other trained financial experts. Read magazines, newspapers, and other publications. And ask questions. If the "professional" you are talking to seems to talk down to you, makes your questions sound stupid or uses many words that you don't understand and won't explain things, walk away! Find someone who is not threatened by questions and wants to help you understand things, not create a fog of confusion about things. True investing is never a get-rich quick scheme. Anyone claiming they can teach you how to earn big money by doing almost nothing or in a very short amount of time should be avoided. REMEMBER: If it sounds too good to be true, it probably is! There are many types of investments - and far too many ways to invest to go over in this material. From stocks, bond and mutual funds to real estate and small businesses, each has its pros and cons. INVESTMENT RISK Generally, the higher the risk of losing money, the higher the expected return. For less risk, an investor will expect a smaller return. It is important to think about how much risk you want to take when deciding which investment to choose. Some things to consider are: How much money do you want to accumulate over a certain period of time? 9 My Personal Finance-A Guide to Conscious Spending How long can you leave your money invested? If you know you'll need the money in a less than a year, it has to go into something very "liquid" - meaning you can get to it immediately, such as a savings account or a stock or mutual fund. Anything between one and five years allows you to invest in something that will pay much more. And something you know you won't need for 10 or 20 years means you can take much more risk. What is your financial risk tolerance? Are you in a financial position to invest in riskier alternatives? You should take less risk if you cannot afford to lose your investment or have its value fall. Any reputable stock brokerage (online or otherwise) will have a series of questions that you can answer to determine your risk tolerance. It will take into consideration all the things we've touched on here. There is also Inflation risk. This simply means how a particular investment reacts to the general economic inflation rate. Some investments have no risk of default but there is the risk that inflation will rise above the interest rate on the account. Add to your financial literacy vocabulary: The Rule of 72. This is a formula commonly used by lenders and investors to determine how long it will take to double an initial investment. The basic formula is to divide 72 by the interest rate paid on an investment, such as a savings account or mutual fund. The number you get is the number of years it takes to double your money. For example, if you have a $1,000 in a fixed-interest bond fund that pays 8 percent, according to the rule of 72, it will take nine years for that investment to reach $2,000 (72 divided by 8 percent equals nine years). 10 My Personal Finance-A Guide to Conscious Spending Your Budget: Planning For the Future With all the new information, awareness and help you have gained so far, you are ready to start making a conscious plan. A financial plan starts with a budget and then leads to goal setting. Budgeting is really about getting to know your finances. A budget is a tool you use to measure what money is coming in to the household (income) and what cash is going out (expense). Budgets are necessary because they give you a clear view of your spending habits. The main reason people get in trouble with their finances is because they don't keep track of what's coming in and going out. It doesn't matter how much money you make; if you don't know how to manage it, it will manage you! Surely you've heard of the people who win a lottery or get a huge inheritance and within a year or two, they're broke. That happens to people who never learned how to manage their money. Instead, their money manages them. They just spend whatever is there until there is none. The two main parts of a budget are income and expense: Income--Income may include wages, self-employment income, rental income, dividend & interest income and other business income. Depending on what type of income you have, you might have to gather information from pay stubs or W-2's, 1099's, tax returns, bank statements, or your own income records. Tip: Remember -- to get an average, add the amounts from each month, then divide that total by the number of months- so if you're adding up 3 months, the total will be divided by 3 to get a monthly average. In a budget, you enter gross income and any withheld taxes/deductions. The remainder is net income, often called your "take home pay". It's what's left for you to spend after taxes and other deductions. For some people, it makes sense to adjust the number of deductions (or allowances) you have reported to your employer. That number determines how much of personal federal and state income tax is withheld. Check with your Human Resources or Payroll Department for help with this. If they cannot explain it well, check with a tax preparer. Expense --Under the expense section, there are usually 4 types of expenses: fixed, variable, periodic and discretionary. Fixed Expenses are those expenses for which you pay the same amount every month. The subcategories that you find under this heading include mortgage/rent, fixed debt payments (like car payments), childcare costs, child support, alimony, utilities, and savings. Variable Expenses are items that occur monthly, but the dollar amount is different each month. The sub-categories may include food, utilities, gasoline, phone bills and variable debt payments (like credit card payments). Most people can make pretty good guesses about these expenses. If you really want to be more accurate, just go through your checkbook register or your online banking info and look over the past 3-6 months to figure average amounts. Then use the Daily Spending Log (see forms at end of booklet) over the next 30 days and see how close your estimates are to reality. Most people are very shocked at the reality of their spending. It may be alarming at first but it is an incredibly important step in the process of taking charge of your money. Periodic expenses are those expenses that occur on a regular -but not monthly-basis. They are the expenses many people don't plan for, such as quarterly insurance premiums, membership fees and dues, or property taxes. These types of expenses are the things that often cause emergency "charging" on credit cards from which people might never recover. These are also items people don't want to think about - like cars breaking down and emergency medical expenses. Once you start planning for these types of "emergencies", you will experience control over your financial destiny. It may seem impossible right now to consider saving money for some unforeseen event but it can happen for you. 11 My Personal Finance-A Guide to Conscious Spending Again, these types of things require averaging, most likely over the entire previous year. Total the amount spent during the year then divide by 12 to determine your average monthly need. And guess what? If, at the end of some year, there weren't enough emergencies to use it up, you get to put it toward one of your savings goals! Discretionary Expenses can be defined by thinking of the first things to go when crisis hits. Things like gifts, vacations, clothing, entertainment, subscriptions, personal care, and charitable giving. WANTS or NEEDS? By now, you may have realized that you've been spending money on a lot of unnecessary things. Perhaps things that you don't even have any longer. Or perhaps you saw that your credit card balances included food, drink, vacations that are long gone but the price tag seemed to go on forever. Although food and drink are definitely needs, paying for them for months after you bought them is a warning signal that something is definitely wrong in your financial world. Many people don't know what a discretionary expense is because so many of us have never really stopped to think about the difference between what we want and what we need. A need is something required to stay alive and healthy- food, shelter, clothing (and that doesn't mean designer clothes) and probably transportation (not a new car). Wants are just about anything else, especially if it has the word luxury anywhere in the description. We aren't saying you don't get to shop or you have to live like a pauper. Find a couple of inexpensive treats that make sense for your life. Also, spend a little time learning how to window shop. That means you get to shop all you want, you just don't buy. You can make a game of it. You learn more about discipline and you get to do comparison-shopping. Almost anything you want or need can be found somewhere, sometime on sale. WHAT S NEXT? If you have a balanced budget (meaning you get a zero or positive number), congratulations! Check your expenses one more time to make sure you haven't forgotten anything. If you find that you're not balanced (meaning you get a negative number), go back over the budget and look for ways to increase your income or decrease your expenses. Most importantly, don't panic! Most Americans don't have a balanced budget the first time through, but the reality is that if you don't find a way to balance your budget, you're definitely going to have financial problems. Find realistic ways to cut back on your spending and/or increase your income, then follow through and stick to your budget. PAY ATTENTION. BE MINDFUL. BE HONEST. This may be the first time in your life that you have become willing to be painfully honest about money. It won't be easy, but you can do it. And after a few little successes, you will be amazed at how empowered you feel. Don't let money continue to control you. You can control it and no longer be held in shame or confusion about what everybody else seems to know or have. Remember, most people lie about their financial situations. Don't compare yourself and your situation to what anyone else says. The only person you have to worry about is you and your family. We strongly suggest that if you're a family, do this exercise together. If everyone in the family participates, it'll be easier to stay on budget. Being accountable to each other will help with follow through. Also, nothing will teach your children more about budgeting than sitting down with you and "crunching" some real numbers. AVOID THE 2 BIG TRAPS: The first trap is not being honest with yourself when you create your budget plan. The second is not following your budget. When you create your budget, be honest about your 12 My Personal Finance-A Guide to Conscious Spending expenses and your income. It's easy to say that you'll balance your budget by doubling your income, but how realistic is that? Force yourself to make the hard choices, but make those choices realistic for you and your family. The more realistic your budget, the easier it will be to avoid the second trap. HOW DO YOUR EXPENSES STACK UP? Now you've done the hard part. You gathered all the information and filled in the forms with all your financial information. You are ready to face the facts. Figure your percentages from the numbers you entered in your budget forms or daily spending logs and you can compare your spending to some recommended guidelines. The guidelines are used throughout the financial community. Add up the figures you entered for each type of category and divide that total by your net income to get your percentage. Take a close look at the breakdown of your spending to see what you can change. Use the Daily Spending Log included at the end of this booklet. You will likely be surprised to see where the money goes just one day at a time. It might seem more trouble than its worth at first but you can really get into it and get excited about what you can save on a daily basis (especially if you do it as a family). Category Recommended Percentage Housing 25%-35% Transportation (include loan pymt, fuel, maintenance, etc) 10%-20% Savings 5%-10% Insurance 3%-5% Utilities 5%-10% Food 10%-15% Personal Debt (Credit Cards & etc.) 5%-15% Misc Personal (Clothing, Entertainment, and etc.) 3%-5% Other Misc. 10%-20% Your Percentage REDUCING EXPENSES No doubt you've already seen many things that you now wish you had done differently. Spending for things that you really didn't need or maybe even want! Maybe you were pressured into spending because of someone else's influence or your belief that they needed something from you. Perhaps you've come across receipts or other financial papers that reminded you of items you purchased and consumed or threw away months or years ago and are still paying for. All of that has added up to an intense awareness of spending behaviors and patterns that you can change. Reducing expenses in general is something you can do each day. The following expenses require special attention. HOUSING - Housing expenses often take up more than a third of the average person's total income. When that happens, it can begin a slide into overwhelming debt as you struggle to keep your home 13 My Personal Finance-A Guide to Conscious Spending while charging up credit card debt or simply letting bills go unpaid. Because so much emotion is tied into our homes, this can be a difficult place to cut expenses. If you are part of a family, this is definitely something that required family involvement and discussion. If you aren't already having family money meetings, this is good time to start. Even if it means moving, downsizing, and starting over, that stress may be less than the stress of trying to maintain a home that is simply not within your current means. Remember - home expenses include insurance and taxes as well as maintenance. TRANSPORTATION - Depending on the area of the country you live in, private transportation can be a need, not a want. However, there are still many ways you can cut back here. New cars are never a good buy. The cost of registration and insurance will almost always be at least a couple of thousand dollars more than for even a 1 year old car. Maintenance costs are higher on certain types of cars than others. Try to use your transportation sparingly and plan your errands so that they are in a circular route out and back to your home. Park in a central place when possible and walk between places whenever possible (good for your health, both physical and financial). Be sure you do preventive maintenance on your vehicle - regular oil changes and tire pressure checks can both affect mileage and wear. HOUSEHOLD - This is an area fraught with problems. Perhaps you buy things for the house because of a belief you were raised with. Or maybe your spouse or partner has very set beliefs about what a house needs to be a home. Whatever the reason, if your budget is not balanced and you have identified many wants and unnecessary expenses, you must stop. If you or someone else in your household that is financially connected to you is unable to stop shopping, they need help. Contact your county agencies for free or reduced cost counseling. Find out about Debtor's Anonymous in your area. It is a free self help program. Many household expenses can be reduced by implementing comparison shopping or coupons or waiting for something to come on sale. Grocery shopping should never be done while hungry or without a list. Clothes shopping does not have to be done at high dollar name brand stores. And don't think just because a store is in an "outlet" that it is necessarily cheaper. There are many "lesser" name stores and discount chains that are more appropriate for your budget. RECREATION - Having some fun is absolutely necessary for mental health! So don't stop having some kind of recreation for yourself and your family. But gym memberships may have to stop for awhile in lieu of community center facilities or some of that equipment laying around gathering dust. Going to the movies can be expensive but cut costs by going during the reduced matinee priced hours and be sure you've already eaten so you don't spend $20 at the snack bar for overpriced food. Instead of buying books, check out your local library. Dining out only once a month or once a week instead of every night will sharply reduce your food costs. Make a special treat of creating a meal at home with family or friends GOOD DEBT VS. BAD DEBT Not all debt is bad. Surprised? Just think about trying to buy a car or a home without a loan. There are not many people in our society today who are in the position to do that without taking on debt. With the rising cost of college, most young adults need to finance at least some portion of their education with student loans. Even a reliable automobile may require some financing in the form of an auto loan. All of these examples could be considered "good debt. So what is "bad debt"? Debt is typically considered "bad" if you are using it to finance a purchase for good or services that will be gone or used up by the time you are done paying for it. It is "bad debt" to buy dinner today and still be paying for it a year from now. Interest, Fees, and Charges--Almost any type of loan and lender will charge some type of fees. Of course, friends or family members may be the exception to that. However, keep in mind that the pressure and bad feelings that can build up between friends and family members over borrowed money can sometimes be as bad as hefty fees and debt collectors. 14 My Personal Finance-A Guide to Conscious Spending Possibly the most important thing to know about loans is how the interest or finance charges are computed and whether they are revolving or installment. Credit & Retail Cards are usually revolving accounts, meaning that interest is computed daily and there is potentially no end to the amount of time that you could be paying off the debt, depending on your usage and payment amounts. Secured loans such as mortgages or car loans are generally considered installment loans or notes, with interest computed just once at the beginning of the loan for the entire life of the loan with payments set for a specific period of time. LOANS Unsecured Loans--There are many types of unsecured loans. They are all, basically, loans given with no security or collateral. Unsecured loans might be made to you by someone you know who simply trusts that you will pay them back what you borrow. They may or may not have a written agreement or some type of interest or fees attached to them. If a bank makes this type of loan, it is based on your good history with the bank, your signature on an agreement and generally a good credit score and credit history. Unsecured loans often have a higher interest rate than secured loans. Any type of unsecured loan, even though not backed by a security, can be brought to court if you do not pay it back according to whatever terms were agreed upon at the time of the loan. Even a verbal agreement can be used against you in the event of non payment. Secured Loans--As you may have already figured out, secured loans are those which have some type of "security" or collateral to back up the amount of money being loaned. They may even be referred to as securitized or collateralized loans. The two most common examples are mortgage loans for homes and loans for automobiles & other vehicles. And, as stated above, secured loans such as these are generally considered installment loans or notes, with interest computed just once at the beginning of the loan for the entire life of the loan with payments set for a specific period of time. At the end of that period, the loan is "closed" and you own the item outright. A couple of things to consider on these types of loans is the relationship between length of loan and interest rate, especially on home loans. You may want to consider a lower interest rate if you can handle a higher monthly payment for a shorter amount of time. On mortgages, people can "buy down" interest by paying more of the loan or escrow costs out of pocket rather than having them rolled into the loan. These are just two of many, many ways you can negotiate on loans. Always ask questions and if the sales person makes you feel like an idiot, walk away and find someone who's willing to explain things to you. Credit & Retail Cards--Credit cards fall somewhere in the middle of the good vs. bad debt argument. They are convenient and almost a requirement in today's society. The trick is how long you carry a balance on the card. If you can afford a thing, such as clothing, personal care items, and entertainment or even groceries, buying them with a credit card is not the problem. It becomes a problem if you don't pay the card off with the money you budgeted for those things that same month. When you start carrying a balance forward from month to month, you get into trouble. You most likely think of these all as credit cards, which, technically, they are. However, retail cards are designed to work only at a designated store and often come with a higher interest rate than other credit cards. Some credit cards actually do require you to give them a "deposit" that than allows you to charge up to that amount or some similar arrangement. Those are referred to as secured credit cards because you have secured them with money. However, most of these cards are simply guaranteed by your signature (and a credit check on your credit score & history). You can then charge up to a predetermined limit at a particular interest rate. NOTE: Most credit card agreements include some type of statement allowing them to change fees and rates at any time by giving you written notice. 15 My Personal Finance-A Guide to Conscious Spending As stated above, Credit & Retail Cards are usually revolving accounts, meaning that interest is computed daily and there is potentially no end to the amount of time that you could be paying off the debt, depending on your usage and payment amounts. Be careful with your credit card usage. If you find yourself charging groceries and other daily living expenses on a credit card and cannot pay off those balances at the end of each billing cycle, that is a red flag warning that your finances are seriously out of balance. Predatory Lending--Beware of payday loans and predatory lenders. People can get deep in debt when they take out a loan against their paycheck. They write a postdated check in exchange for money. When they get paid again, they repay the loan. These loans generally come with very high, double digit interest rates. Borrowers who can't repay the money are charged additional fees for an extension, which puts them even deeper in debt. Borrowers can continue to pay fees to extend the loan's due date indefinitely, only to find they are getting deeper in debt because of the steep interest payments and fees. Predatory lenders often target elderly and low-income people they contact by phone, mail or in person. GATHERING YOUR CREDITOR INFORMATION Now you have a good handle on different types of credit and loans. Use the form at the end of the booklet to gather your creditor information and help determine which/when and how much to pay. You will need that to accurately analyze your finances and figure your debt to income ratios in the next section. 16 My Personal Finance-A Guide to Conscious Spending DTIs WHAT?? (That s Debt To Income Ratios) This is an important ratio since it is what almost every lender and creditor looks at to see if you meet their particular guidelines in order to grant you credit. It will help you understand and how others view you financially. It gives a particularly calculated picture of your financial health. Notice that the DTI does not consider any of your monthly living expenses and most times does not consider mortgage the same as someone having a rent payment. Always ask if the DTI a particular lender is using includes your mortgages (with or without insurance and taxes) Your Debt to Income Ratio (DTI ratio) is figured by taking your total monthly debt payments (that means everything you have a loan payment on) and dividing that by your total monthly income. If you are at a DTI of 15% or lower, you're in good shape. Between 15 & 20%, you're okay but probably don't want to take on any more debt. A ratio of over 20% indicates you are heavily indebted. If that's where you're at, take that into consideration when analyzing your budget and making your decision on which next step is best for you. Total Monthly Debt Payments / Total Monthly Net Income = Debt To Income Ratio KEEPING RECORDS Now that you've got all your paperwork together and know what it all means , why not keep it simple from now on - it never has to be so hard again! Regular record keeping can help make it much easier. First, be sure you have a decent file. Some people get by easily with sturdy cardboard or plastic file box - others may have a small 2 drawer metal cabinet. Whatever you use, be sure there is enough space to hold all your receipts (including reconciled bank statements) for a full year. Make file folders for keeping your receipts easy to find and refer to if necessary. Label them for expenses such as medical, utilities, credit card, auto, etc. Of course, you will be reconciling your bank statements every month, right!?! So have a file folder for those statements after they're reconciled. And one to keep the copies of budgets because you will be reviewing and likely changing those budgets at least once during the year or whenever there is a significant change in your income or expenses. If you have a home computer and aren't already using some type of bookkeeping software like Quicken, that would be an excellent investment. 17 My Personal Finance-A Guide to Conscious Spending GOAL SETTING After completing a budget and tracking daily expenses, you've got a realistic look at what you've got and what you don't and what you're going to do to make it work. Now you can make a realistic plan about attaining something you've decided is important. You can set a goal and attain it! Setting a goal really just means making a plan about how you're going to get something you need or want. Since you know about the difference between wants and needs and you are practicing healthy money behaviors, your first goal will hopefully be focused on getting your budget in balance. Once you get good at attaining the things that are necessary, you can even start with a small want! Most goals cost money to achieve, whether it's a new car or an early retirement. That's why making a budget comes before goal setting. You're already practicing discipline living within a budget. At this precise moment, your only goal may be to get through your current situation in one piece. Eventually, you will have other goals. It's important to know how to plan for those goals and how to accomplish them. Why Set Goals? Simple Answer: Setting a goal and meeting that goal is very empowering. The average person has to sacrifice something to live within a budget. Sometimes achieving a goal is the prize for living with that sacrifice. It makes you feel good. You did it! Then you know you can set more goals and achieve them too. Doing it perfectly is not as important as practicing the willingness and discipline it takes to make constant improvement. When you commit to your budget and goals and hold yourself accountable to a family member or close friend, you will be more apt to follow through and be successful. After several experiences of being successful, your mental habits and thought process starts to change. Where once you might have been very hopeless, whiny, envious, depressed, etc., you will begin to experience hope, satisfaction and contentment, possibly even joy! Goals can be anything from acquiring "stuff" to developing financial independence. Short Term Goals - These are usually something that can be attained within 1 year, with fairly small amounts of money. Start small and realistic so that you don't set yourself up for failure. Perhaps one small credit card balance with a high interest rate. It might simply be an extra night out for dinner and a movie, a new item of clothing or a special gift for someone important in your life. It's really important to build some confidence with these small, short term goals at the beginning. Mid Range Goals - These are usually between 1 and 3 years and require a larger amount of money. It could be paying off your next largest debt balance, perhaps a car loan. Have one of these on your list along with your first short term goal. Try starting on a mid range goal within 2-6 months of beginning your first short term goal. Long Range Goals - These are truly longer range with a projected completion of more than 3 yrs and require much more money and long term discipline. Something like a savings account for a home down payment or a child's school tuition. Goals need to be in writing--Putting your desires and wishes in writing helps transform them into realities. Writing down your goals is the first step in achieving them. Make a list of your goals and categorize them as short, mid or long term. Then prioritize them by placing a number from 1-3 beside each one. Decide on a dollar amount required for each and write it down, also. Next, based on your budget, determine how much you can put towards each goal every month and then figure out the date you will be able to achieve the goal based on that amount. You may have to adjust the monthly amount or the end goal date. Changes might occur as you pay off something else or if you get a bonus or unexpected money gift. Remember these are goals, not absolutes. If you don't quite make it, look at your progress. Of course, if you have made a financial payment agreement with a creditor or lender, that must take priority and it is important to make those payments on time. 18 My Personal Finance-A Guide to Conscious Spending Or you may use a list like below and figure out the dollar amounts separately Debt Goal Range Priority Pay off retail card of $500 Short 1 Purchase Home Long 5 Pay off Student Loan of $500 Short 2 Pay off Auto/Truck Mid 2 Pay off Credit Card of $1,000 Mid 1 Another way of setting goals is writing the same information down on a 3x5 index card (or any piece of similar sized paper). Use one for each goal. You can pick one out of a box or bowl and work toward it, then pick another. Of course, certain goals will need to be completed sooner than others so choose accordingly! YOUR NET WORTH You may have thought that only businesses had balance sheets, net worth and assets & liabilities. That's a big mistake and most people make it. It might hurt to look at it this first go round. Just remember, you are taking your first steps toward financial health. Making any type of change often feels painful just because it's so different. And making positive financial changes can be especially painful because our egos are so wrapped up with our wallets!!! You do have Assets & Liabilities and you can have a positive net worth as a result of the changes you are going to make. Starting right now, right here. Very simply, an asset is something you OWN (or are buying) and a liability is something you owe. So, for example, you will likely have your automobile under both headings, the asset portion will be whatever its market value is and the liability portion will be the current loan balance. Asset Anything with commercial value that is owned and adds to net worth. Usually refers to items that can be sold and converted to cash. Balance sheet An accounting statement that shows the amount of a company or individual's assets, liabilities, and net worth on a certain date. Debt Money owed; also known as a liability. Equity Ownership interest in an asset after liabilities are deducted. Liabilities A financial obligation, debt, or claim against a person or institution. Market value The amount a seller can expect to receive on the open market for merchandise, services, or securities. Net worth Total assets minus total liabilities ************************************************************************* Calculate Your Net Worth by using the form in the back of the booklet. Remember, net worth can change often, depending on what your assets and liabilities are worth at any given moment. 19 My Personal Finance-A Guide to Conscious Spending You and Your Credit Let s talk about credit, credit reports, and credit scores--what they can do for you and some things you need to know about them. Credit, simply stated, is cash or the availability of cash given to you by some type of lender. You, the borrower, pay fees or finance charges or interest to the lender for the privilege of using that money. Credit is not bad. Without credit almost no one would be able to purchase a home. However, using credit without knowing what all the terms and types are or using too much credit can put you in a bad financial situation. Credit is not free money or new money or more money. Credit scores are numbers that are computed by credit bureaus based on a variety of factors. Credit bureaus or reporting agencies are neutral. They do not make recommendations about whether or not you should be given a loan. They simply take the information submitted to them from other agencies and compile that information. It involves taking all the information that is reported to them or that they gather from public sources, applying a formula, and coming up with a numeric value that becomes your credit score. A credit score is often referred to as a FICO, which is actually a calculation done by a method called Fair Isaac. Moneycentral.msn.com reports in a 2006 article, that the calculation is based on data provided by each credit bureau (22 pieces of data is common). The final number is a composite of 5 categories: Payment History, Length of Credit History, New Credit, Types of Credit Used and Debt. Debt and Payment History count most heavily. Income is not considered at all. A person can have a very high income and still have a horrible FICO. Not all credit bureaus will use the FICO. They each have their own formulas, too, and since each is different, the exact same applicant run through all three credit bureaus may end up with three different credit scores. Each credit bureau or financial institution compile and computes differently. They each have their own unique formula. It involves taking all the information reported to them about you, then applying their formula and coming up with a numeric value. Scores vary between 300 and 900, although most people are somewhere between 500 and 800. The U.S. average credit score is 678. The higher your score and better your credit history the better interest rates you are able to get. Being 60, 90 or 120 days late on a loan can have a very serious negative effect on your credit score. Having a credit card or other debt in collection status will affect the score even more. NOTE: 2008 changes by Fair Isaac will change impact of certain items. Follow the link to read important information Credit Reports--Your credit score is a fluid number that changes as your credit report changes. It is important to monitor your credit reports especially if you know your credit is bad or if you have been the victim of fraud. You can do this yourself through credit monitoring services (around $35.00 per year) and by getting annual copies of your credit reports. You are entitled by law to get one free copy of your credit report per year You can get a free annual copy of your credit report online at www.annualcreditreport.com by phone at 1-877-322-8228 1-877-322-8228 or downloading and completing the Annual Credit Report Request Form and mailing it to: Annual Credit Report Request Service, PO Box 105281, Atlanta, GA 303485281. You will need to provide your name, address, Social Security Number and date of birth. You will also need to verify your identity by providing some information that only you would know. An example would be the amount of your monthly mortgage payment or a beginning date of a loan. It is a good idea to get a copy of your credit report yearly. Mistakes can often happen or one of the three company's information may be different from the other. Reports are available to consumers free, once per year or at any time that credit has been denied. In addition to the 3 primary credit bureaus (TransUnion, Equifax & Experian), a variety of other specialty reporting agencies that report on only certain issues, such as bounced checks, medical bills, late rents or gambling debts. Just like with the other bureaus they are governed by the Fair Credit Reporting Act. You are entitled to one free report once a year from each bureau. They include names such as Accufax, MIB, Telecheck, CLUE and National Tenant Network. Check on line for current contact information for 20 My Personal Finance-A Guide to Conscious Spending them. Even if you don't think you need (or want!) to see your credit report, it's part of your financial literacy training to become familiar with how to read them and see how you look on paper. You will then know if there is something that may require an explanation. Experian: 888-397-3742 888-397-3742 www.experian.com TransUnion: 800-888-4213 800-888-4213 www.transunion.com Equifax: 800-685-1111 800-685-1111 www.equifax.com There are many other ways and reasons that an individual may be entitled to a free credit report. Some of them are: If you have been denied credit in the past sixty days, you may receive a free copy of your credit report from the one company that influenced the lender's decision to deny you credit. That lender/landlord, etc., must inform you in writing of their denial and give you the information about the credit-reporting agency they used. If you are unemployed and planning on looking for a job within the next sixty days. If you are on welfare or your report is inaccurate due to fraud. Most importantly -- don't despair: time does heal all credit wounds. Creditors normally look for a twoyear history of consistently paying bills on time to establish or re-establish credit. Tax liens 15 years for unpaid 7 years from date paid</P.< td> Bankruptcy, Chapter 7 10 years from filing Bankruptcy, Chapter 13 7 years from filing Civil Judgments 7 years from filing Trade lines 7 years from date of last activity Consumer Statements 2 years minimum Inquiries 1 year for credit transactions, 2 years for employment WHERE DOES YOUR CREDIT INFO COME FROM? You may be surprised to find out that most of the information a credit bureau gets about you has come from you, although indirectly. Your name, address, social security number, employment and any other information you enter on any application for credit is often sent to one or all of the agencies. So be careful, write neatly and only put down information that is accurate and that you are willing to have shared with other credit bureau clients and customers. Other information is gathered from public records, such as liens, garnishments, money judgments, bankruptcies and, in some states, child support or alimony. There is often confusion about what credit bureaus can report, what they can't report and what they do report. Let's look at what goes into your credit file. Personal information-full legal name, aliases or nicknames, current and previous addresses, your telephone number, your Social Security Number, and any variation of that number that has been used or reported. Sometimes, there is a name or number that is wrong simply because your writing on an application was illegible or someone typed it into a system incorrectly. Personal information does not 21 My Personal Finance-A Guide to Conscious Spending include any health or medical history, nor will it include your race, gender, ethnicity, political affiliations, religious preference or any other information that is not directly related to credit. There are specialty agencies that do gather and provide reports on Medical bills paid and unpaid, negative Landlord reports, Bad Checks, etc. Credit Information-Credit information will show each individual account that you currently have open, or which has seen any activity within the past seven years. Even if an account has been paid or closed, it will still indicate the opening date, the highest balance, who closed it, what it's past status was and any delinquencies. Open accounts will typically show date account was opened, the creditor's name, account number, current status of the account, total credit and high balance and current amount in use; It will, of course, also indicate any delinquencies. They are usually reported in 30-day intervals. If an account has been or is in collection status, it will indicate the collection agency's name and contact info. Anything noted as a "charge off" means the company had to "charge it off" or "write it off" as a bad debt, so that is not a good thing. You still owe the money, and the company will still try to collect it. Usually items are "charged off" when they are over 180 days late on open-end retail account (such as a credit card, charge card or an unsecured credit line) or 120 days on closed-end retail account (such as a personal loan, car loan or equity loans.) Public Records -The public records section never shows good news! The public records that are reported include tax liens, judgment liens, overdue court-ordered child-support or a bankruptcy filing. Consumer Statements-Consumers (that's you!) are allowed to place a statement of up to 100 words on their credit file. This is usually done when consumers dispute information on their credit file. The other type of statement is a general statement and is used to explain a circumstance, such as an illness or job loss, which may have resulted in delinquency. If you decide to place a consumer statement, be sure you make it very concise. Do not put in any personal information. And, remember, you can always include an explanation to a potential lender/landlord, etc whenever necessary. Inquiries-Inquires are requests for your credit report. Those could be because you applied for something that required a credit check or if you requested your report. Each time you apply for something that triggers or requires a credit report an inquiry is logged. Excessive inquiries can result in a negative scoring. If a current lender makes an inquiry to monitor your account, employer inquiries and your own personal inquiries DO NOT count against your score. Multiple inquiries of the same type within a 14 day period will count only as a single inquiry. 22 My Personal Finance-A Guide to Conscious Spending CREDIT LAWS THAT PROTECT YOU From Wikipedia comes the following: The Fair Credit Reporting Act (FCRA) is an American federal law (codified at 15 U.S.C. Section 1681 et seq.) that regulates the collection, dissemination, and use of consumer credit information. Along with the Fair Debt Collection Practices Act (FDCPA), it forms the base of consumer credit rights in the United States. It was originally passed in 1970 and is enforced by the US Federal Trade Commission. Fair Credit Billing Act - Similar to the Credit Report Laws, this law helps consumers correct information and charges to their credit cards. If you are not in the habit of closely checking your credit card statements start immediately. Many people don't check because they afraid too see how much they're spending! Remember, you are now taking positive action and moving away from negative habits! So start verifying those statements. You'd be amazed how many times mistakes are made OR illegal charges are made. Usually the phone number for the merchant is included on the same line. Call them first. If you cannot get immediately satisfaction, write a letter (keep copies and get proof of delivery). This must be done within 60 days. Then the merchant has 30 days to respond. Depending on your credit card company, you may also be able to call them, alert them to the disputed charge and have them hold it in abeyance until merchant responds. Collection & Harassment - The Fair Debt Collection Practices Act was put in place to protect consumers from collection harassment. Basically they cannot call you before 8 am or after 9 pm. They cannot call you at work once you've told them not to. They cannot use profane, threatening language or threaten you with imprisonment, violence or seizure of your property. If you are the recipient of any of these actions, you should tell them to stop with the following phrase: "Pursuant to the Fair Debt Collections Practices Act.." finishing your sentence by filling in whatever action they are doing, such as "I am telling you to stop swearing at me" or "stop calling after 9pm" If the actions persist, you may make a report to the Federal Trade Commission. You may also ask an attorney or legal aid person for help with a "cease and desist" letter. But be aware that none of these actions on your part can prevent a creditor form taking correct legal action to collect a debt that you owe them. Correcting Errors--If you find mistakes on your credit report, you should act quickly to dispute the inaccuracies. Use the forms provided with your credit report and follow their directions carefully. Be sure to keep copies of your correspondence. The bureaus will check on this information with the merchant/company that reported it and should respond to you within 30 days. If the reporting merchant/company believes the information is correct, it will stay on your credit report. Remember, the credit reporting agencies or bureaus only report the information that is reported to them by merchants & other companies you have a financial relationship with. In that case, you must contact that merchant/company directly. They may find the problem and get it corrected. If so, be sure to request in writing, again, that the reporting merchant/company send written correction to the credit bureau(s). If you are unable to get the reporting company to agree to the correction, you are allowed to place a 100-word statement on your credit report explaining your side of the story. Keep your statement short and to the point. As a Recap Handle credit report errors quickly: 1. Alert the credit bureau to the error, using the forms they provide 2. Send the credit bureau copies of cancelled checks or other payment information 3. Explain the problem in a brief letter. The credit-reporting agency must investigate your complaint within 30 days and get back to you with its results. 4. Keep copies of all your correspondence 23 My Personal Finance-A Guide to Conscious Spending 5. Contact the creditor if the credit bureau disagrees with you. When you resolve the dispute, ask the creditor to send the credit bureau a correction. 6. Keep on top of it. Nobody else will. It can be time consuming but it is very important to your financial health Don't believe a person or company who promises to "fix" your credit score. No company can legally remove accurate negative information from your credit report nor can they legally help you obtain a new personal identity number. There is no secret or magic answer. If an offer to repair credit seems too good to be true, it most likely is! You must maintain your credit through money management, responsible spending and checking your credit report at least once a year to determine if there are any false or incorrect items. Moving Forward You've done a lot of work to get here. You've gathered all your information and reviewed it. You've taken a realistic look at where you're at. If you find yourself in a financially overwhelming situation, there are several options to consider. You can: Handle your financial situation and debt on your own Consult with a reputable company for a debt management plan (BE VERY CAREFUL AND READ THE CAUTIONS BELOW** File for bankruptcy Whatever you choose, be sure to seek out competent help. The next few pages will provide information about each of the above options. Of course, the first step in handling your debt on your own is doing what was suggested in the previous pages: Look realistically at your budget and creditors; Use the worksheet at back of this booklet Make a goal list that involves paying off each of the creditors or each item of debt Assign specific dollar amounts and dates for each payment. Make contact with each creditor or lender and attempt a settlement. Some good rules of thumb are: Pay the cards with highest interest rates first Pay more than your minimum payment Try to negotiate with your creditors for lower rates If you have saved enough money to offer an immediate lump sum payoff of at least half the balance, some creditors will take it (they may also allow you a few months rather than immediately). NOTE: There is a chance with this type of settlement, that your creditor will report the portion they wrote off to the IRS on Form 1099 as income to you. And, almost certainly, your credit report will show a" settled" or "charged off" amount. More often, you will be making some type of payment plan and there is the chance the a creditor will allow lower monthly payments, lower the interest rate or possibly even reverse certain charges or fees. It varies greatly between lenders. Ask if there is any type of hardship program available from each lender or creditor you speak with. Be sure to get any of these arrangements in writing 24 My Personal Finance-A Guide to Conscious Spending Hopefully, you do not choose the "Do Nothing" plan as a way of handling your debt by yourself. And you definitely don't want to do that without seeking legal advice. You could be sued for anything you have now or in the future. Depending on your situation, perhaps you can Borrow from friends or family If your credit is still in good enough shape and your signature is worth something, you might qualify for a Debt Consolidation loan, which combines all or most of your debt into one loan, That way you don't have multiple interest charges on multiple balances and you are making one payment instead of several. Many of these are actually handled by credit card companies. Perhaps you have some assets that are valuable enough to sell or borrow against. If you can pay off debt in full rather than settling for lesser amounts and write offs, definitely do that. It looks much better on your credit report to have a "Paid in Full" than a "Settled for Less" or "Charged Off". If you are a homeowner and have any Equity in your home, you might qualify for a HELOC or Home Equity Line of Credit or Refinance Loan, that allows you to take some of the equity in cash. Be aware, this raises the balance of the mortgage against your home and, of course, creates a larger payment there. The equity in your home can also be used in the same way as a Consolidation Loan described on the previous page. ** Debt Management Plans & Companies Debt Management Plans have become synonymous with credit counseling agencies. They are not necessarily the same. If you decide to have some type of credit or debt counseling agency help you with your financial situation, do your homework and research the agency before committing to them. Most if not all of the reputable agencies are non profit organizations, are members of their local Chamber of Commerce and/or Better Business Bureau. They usually have informative websites and should be able to clearly explain their services. Many lending institutions--especially mortgage lenders offering FHA or VA loans-- may regard participation in a Debt Management Plan the same way they'd regard active participation in a Chapter 13 bankruptcy proceeding. No debt mgmt company (or consolidation as they sometimes call themselves) is legally able to obtain funds from you until they have provided a service and reputable companies are restricted by law to maximum fees usually not more than $100 administrative and a very low ($25-35) monthly fee One of the main attractions of these agencies for many people is that they do all the planning and budgeting, contact with creditors and payments for you. You will receive education and counseling about money management. After obtaining all your information, a counselor will discuss your entire financial situation, sometimes including housing, if indicated. The counselor will develop a plan specifically for you. Although consumers can negotiate with creditors themselves, one of the other attractions for people is that these agencies usually have more credibility with most of the major credit card companies and lenders than you as the consumer in trouble. Once the counselor has an agreement signed by you, he or she is able to contact your creditors and confirm that you have entered into this agreement and plan for repayment. At that point, you should stop receiving most of the harassing collection calls AND the counselor will likely negotiate reduced balances, interest, etc. . There may also be negotiated debt consolidation and many of the other things discussed previously. The primary difference being that you are taken out of the conversations and the counselor works on your behalf. There are fees for the services, although they may be reduced in certain circumstances. 25 My Personal Finance-A Guide to Conscious Spending GET OUT OF DEBT - THE SIMPLE PLAN TRY Find $10 a day out of your regular expenses and pay off your debt. How is that possible??? $10 per day equals $300 per month payment. that could be a loan or credit card It might be a fast food lunch for your 2 kids a 10th pair of shoes! a tattoo more underwear?- really? a different shirt or blouse or pants or dress because you have somewhere special to go The bottom line is, you have to make choices every day about your priorities. Do you need it or just want it? or maybe you really want to need it? ------ 26 My Personal Finance-A Guide to Conscious Spending BANKRUPTCY-What is it? Bankruptcy is a federal law. It will temporarily suspend (during the course of the proceeding), and later prevent, all debt collection actions for debts you had at the time you filed your bankruptcy petition. Note: A debtor can be denied a discharge for certain "bad acts" such as concealing or fraudulently transferring assets prior to filing and personal injury caused by you driving while under the influence of alcohol or other drugs. There are also other debts that can never be discharged. These include: alimony and child support most student loans most taxes court fines or court ordered restitution Hopefully, bankruptcy is your last choice. It will likely stay on your credit report up to 10 years. However, you can start rebuilding your credit immediately after a bankruptcy filing is completed (or discharged). There is light and hope at the end of the process. Just be sure you start changing your money behavior now to prevent finding yourself in same financial trouble down the road. There are several types of Bankruptcy, all of which stop your creditors from contacting you as soon as you receive a certificate from a course and get the case filed. We will focus primarily on the process of Chapter 7 & 13 as those are most commonly used by individuals. Chapter 7 Bankruptcy This is often called "regular" or "straight" bankruptcy or even "liquidation". Chapter 7 is the most basic form of bankruptcy. It "discharges" (or removes) all secured debt with no repayment plan required. A trustee is appointed to take over your property. Any property of value will be sold or turned into money to pay your creditors. You may be able to keep some personal items and possibly real estate depending on federal laws and your state laws. You can only receive a Chapter 7 discharge once every 8 years. Other rules may apply if you previously received a discharge in a Chapter 13 bankruptcy Chapter 11 or 12 Bankruptcy Chapter 11 is used mostly by business. You may continue to operate your business but your creditors and the court must approve a plan to repay your debts. There is no trustee unless the judge decides one is necessary; if a trustee is appointed, the trustee takes control of your business and property. Chapter 12 is very similar to Chapter 13 but is only for family farmers and family fisherman. Chapter 13 Bankruptcy Many people will decide that there are advantages to them filing a Chapter 13 Bankruptcy rather than a Chapter 7. You can usually keep your property as long as you have wages or other source of regular income and your repayment plan and budget are approved by the court. If you had loans with co-signers for property, that property may remain with the co-signer until and unless it becomes obvious that your repayment plan will not cover costs of payments for that particular property. This is just a "stay" but is sometimes desirable and appropriate. You may also be able to reinstate your mortgage if you show ability to makeup any delinquent payments over the life of your repayment plan as well as make your regular monthly payments. A trustee is appointed by the court to make sure that you live up to the terms of your repayment plan. You are able to file Chapter 13 bankruptcies repeatedly but each filing will appear on your credit record and will be reviewed by the trustee to prevent abuse. Of course, any bankruptcy must be filed in good faith. There are many details of bankruptcy law that cannot be covered here. Consult with a bankruptcy attorney or other reputable, dependable and trustworthy professionals before making a final decision. Each person and family is different and has different considerations. This is a very personal and very important step in your life. Use the information you have gained wisely. Make the best decision you can for yourself now to start on a brighter financial future. 27 My Personal Finance-A Guide to Conscious Spending DEBT WARNING SIGNS Use the checklist below to help come to terms with and face your financial reality. Once you've gotten your finances in your control, be sure to use it periodically so you are able to maintain your financial empowerment. If you answer yes to more than a couple of the below statements, you re likely to beheading toward real debt problems. You're not sure how much you owe and don't really want to find out. You can only pay the minimum amounts due on my credit cards or other bills each month. The total amount of money you owe isn't getting any smaller. You often pay bills late. You put off going to the doctor or dentist because you can't afford it. Your credit card balances are rising while your income is decreasing. You're juggling bills. For example, you apply for another credit card and use cash advances from it to pay an existing card. You are at or perilously near the limit on each of your credit cards. You consistently charge more each month than you make in payments. You are working overtime to keep up with your credit card payments. You have received phone calls or letters about delinquent bill payments. Your credit cards are no longer used for the sake of convenience, but because you don't have money. You are dipping into savings or your IRA to pay your monthly bills. You lie to friends or family about your spending and debt. You have just lost your job, or are fearful that you are about to, and are concerned about how you will pay all your bills. You've been denied credit. You bounce checks or overdraw your bank accounts. LEARNING ASSESSMENT POST TEST This is the post course test. Remember you took the pre test at the beginning. Now you can see what you learned. This helps us continue to improve our methods and course structure. Thank you again for choosing us to help you through this difficult time. We wish you the best in your financial life going forward. TRUE OR FALSE TRUE FALSE 1.A credit score of 650 is good 2.Banks are a good place to get financial help 28 My Personal Finance-A Guide to Conscious Spending 3.A checking account help track expenses 4.Fixed expenses are part of a budget 5.Discretionary expenses are always needs 6.Daily spending logs are not very useful 7.Payday advances are good loans 8.Compounding interest is a savings tool 9.Auto insurance is less important than saving 10.Investing can help get rich quick 11.Gross income is the same as take home pay 12.After bankruptcy you must wait 2 yrs for credit 13.Credit bureaus decide if you are creditworthy 14.An asset is something you own 15.Net worth is only important to companies Answers: T,T,T,T,F,F,F,T,F,F,F,F,F,T,F PLANNING ASSESSMENT There is no wrong or right answer to the following. Please check the box that best describes your plans. Financial Behavior Currently Doing Plan to Do w/in Plan to Do w/in Do Not 30 days 1-6 mths Plan To Do Reconcile Bk Statements Maintain a Filing System Save Money Track Expenses Write a Goal List Have Family Meetings Make a Budget Follow a Budget Get annual copy of credit report 29 My Personal Finance-A Guide to Conscious Spending Compare prices Question Wants & Needs 30 My Personal Finance-A Guide to Conscious Spending REBUILDING CREDIT Damaged Credit can be the result of many things: late payments on credit cards, delinquent child support, loans that were never paid back, tax liens, or court judgments. Whatever the reason, it can prevent lenders from approving your application for credit. Or, if you do get approved, you likely pay higher-than-average rates on fees and interest. Repairing or rebuilding your credit is an important undertaking. At the same time you build your credit, you also build your self worth. This isn't just about money, this is about your values and the principles you've decided to live by. Use the discipline you've been practicing with budgeting to follow through with phone calls or correspondence that may be necessary during the credit repair process. Use your new financial literacy and vocabulary to read and understand exactly what you are signing up for. Use your newfound confidence to ask questions when you don't understand something and to walk away from people who won't provide clear information for you. Remember that credit reports always reflect the most recent information on a line of credit or "tradeline". So, for an account that's still open, if you've paid on time for the past two years, that information will hold more weight than the fact that you were delinquent three years ago. Secured credit cards--The surest way to get credit if you don't have it is to apply for a secured card (check online for sites such as Credit.com or CardTrak.com. With a secured card, you make a savings deposit equal to your credit limit. For example, you deposit $500 into the savings account and receive a credit card with a credit line of $500. This type of account is not a bad way to re-establish a credit history after bankruptcy; you just need to be careful of fees and costs. Secured cards generally charge high interest rates plus an annual fee. Steer clear of cards that have setup fees. After paying your bills on time for about a year, you could qualify for unsecured status and better terms. Payment Reporting Builds Credit (PRBC)--You can also build your own payment history at Payment Reporting Builds Credit, an alternative credit bureau that gathers data on rent and recurring payments for cable, cell phone, insurance, utility and other bills. Enter your information into a Web file, which PRBC charges a fee of $15 to $20 to verify, or set up an automatic bill-payment system through your bank or credit union and have the records sent to PRBC. Co-Signature--If your credit report is really awful you may have someone co-sign a loan for you. This must be someone with a well-established credit history who agrees to "vouch" for you, but more importantly to the creditor, it means they legally agree to pay the debt if you fail to. Check out our Do-It-Yourself Credit Repair book at www.mybknow.com 31 My Personal Finance-A Guide to Conscious Spending In Conclusion You are now a much more financially literate person, who is well equipped with reliable information and an improved financial vocabulary. You've determined your budget, and you know how to obtain your financial goals. To help ensure success, request that anyone in your household responsible for financial decisions follow this personal money management commitment. You can proceed with confidence, knowing that you have a new ability to act in positive ways about money and finances. We are very pleased that you chose us to help you on this path. Please don't hesitate to contact us as with any comments or questions. Go forward and know that you can make the necessary changes to ensure that you achieve financial empowerment. We have great confidence in you. For now, you have plenty to learn by practicing the basics presented in this material. Once you are comfortable with budgeting and have attained some of your smaller short-term goals, we encourage you to continue your financial education. There is a tremendous amount of good information about various types of investments on the internet and in many books and magazines. Here is a recap of what you will be doing to keep yourself out of debt while promoting good money management, success, prosperity and wealth. Review this regularly with your family or the person you have committed to share your financial life with. Take the time to talk about each other's needs and wants so that everyone feels a part of the plan. Be prepared to compromise and work cooperatively. Agree within the household that everyone will take turns getting what he/she wants and even giving up something that is wanted. Work within the household toward a financial partnership. Every family member must exercise self control and avoid unnecessary spending. Strive to live within the household income, and limit the use of credit as much as possible. Make savings a priority. You can take control of your financial future by working together. Put off immediate gratification Begin a savings program- saving $11.00 each day will give you $4,000 in JUST ONE year! Always have a budget with needs and wants in mind Pay bills on time and always pay more than the minimum payment required Read and reconcile your bank statement regularly Build an emergency fund of at least 3 months living expenses Shop for the best rates on loans or credit cards Check your credit report annually Borrow only if you have a repayment plan Don't sign anything unless you truly understand it. Ask for help when you are not sure If your family's budgeting efforts don't bring the results you want, or if your debt seems overwhelming, consider seeking budget and debt counseling. Remember: The average middle-class American spends more than he or she makes and often lives from paycheck to paycheck. Comparing yourself to the lifestyle you see around you is not a safe way to make decisions. Living with a realistic budget and eliminating debt should be your financial goal. 32 My Personal Finance-A Guide to Conscious Spending MONTHLY BUDGET WORKSHEET 2 pages INCOME W-2 Wage Income Gross Pay ______________________ Rental Income ______________________ Self-Employment Business Income ______________________ Interest & Dividend Income _____________________ Child Support & Alimony _____________________ Other Income ______________________ TOTAL GROSS INCOME PAYROLL TAXES WITHHELD LESS Payroll Taxes/Deductions Federal Taxes ____________ State Taxes ____________ Social Security ____________ Medicare ____________ Other Payroll Deductions ____________ TOTAL PAYROLL DEDUCTIONS ____________________ NET INCOME = (Gross Income less Total Payroll Deductions) Deduct your TOTAL EXPENSE ________________ _________________ nd (from 2 page) To Get Your NET AVAILABLE INCOME___________________ If zero or positive, you have a balanced budget or excess If negative, you must increase income or decrease expense MONTHLY FIXED EXPENSES these are the ones that stay pretty much the same each month Rent or Mortgage . Savings . Credit Card & Loan Payments . Medical Insurance Premiums . Childcare . Alimony/Child Support Paid . 33 My Personal Finance-A Guide to Conscious Spending Internet/Cable/Satellite . TOTAL FIXED EXPENSE _________________ MONTHLY VARIABLE EXPENSES these are the ones that you pay each month but for different amounts get an average by dividing the total of several months by the number of months you have totalled Food .. Household . Utilities . Transportation Expense . (fuel/loan pymt/public transport/parking Phone . Other Variable Debt Payments . TOTAL VARIABLE EXPENSE _______________ PERIODIC EXPENSES remember to get an avg for your monthly budget amount- divide total by # of mths covered Automobile Insurance . Auto Maintenance . Home Maintenance . Auto & Personal Property Taxes . Life Insurance and Disability Insurance . Medical Expenses . Membership and Dues . Other Insurance . Other Periodic Expenses TOTAL PERIODIC EXPENSE________________ MONTHLY DISCRETIONARY EXPENSES Gifts Vacations Clothing Entertainment Subscriptions Personal Care Charitable Giving Other remember these are usually wants, not needs .. .. .. .. .. . .. .. TOTAL DISCRETIONARY EXPENSE________________ ALL EXPENSES - GRAND TOTAL ___________________ 34 My Personal Finance-A Guide to Conscious Spending YOUR PERSONAL BALANCE SHEET Assets $ CASH IN SAVINGS ACCOUNTS CASH IN CHECKING ACCOUNTS CASH ON HAND CERTIFICATES OF DEPOSIT MONEY-MARKET FUNDS U.S. SAVINGS BONDS MARKET VALUE OF HOME MARKET VALUE OF OTHER REAL ESTATE CASH VALUE OF LIFE INSURANCE SURRENDER VALUE OF ANNUITIES VESTED EQUITY IN PENSION PLANS VESTED EQUITY IN PROFIT SHARING RETIREMENT ACCOUNTS KEOGH PLANS MUTUAL FUNDS STOCKS /BONDS REAL ESTATE INVESTMENT TRUSTS OTHER INVESTMENTS COLLECTIBLES ESTIMATED MARKET VALUE OF: HOUSEHOLD FURNISHINGS AUTOMOBILES AND TRUCKS BOATS, RECREATIONAL VEHICLES FURS AND JEWELRY LOANS OWED TO YOU OTHER ASSETS Total Assets (A) $ Liabilities: Balance of Mortgages Auto Loans Student Loans HomeEquit yLoans Credit Cards Other Loans Total Liabilities (B) CURRENT NET WORTH EQUALS = A-B. Assets minus Liabilities 35 My Personal Finance-A Guide to Conscious Spending Dealing with Debt Worksheet Courtesy of BetterBudgeting.com ____________________________________________________________________________ Month ________ Year ________ Use this worksheet to manage your creditors and debts each month. Work towards getting them paid off as quickly as possible. You can do it!!! Creditors/Debts Balance Interest Rate Finance Charges Payment Made New Balance Debt 1 Debt 2 Debt 3 Debt 4 Debt 5 Debt 6 Debt 7 Debt 8 Debt 9 Debt 10 TOTALS Permission granted to photocopy for personal or non-profit use. Helpful tips for using this worksheet can be found at http://www.betterbudgeting.com/budgetformsfree.htm Copyright © by Michelle Jones. All Rights Reserved. 36
