Archive for September, 2009

Budgeting for People With Fluctuating Incomes

September 28th, 2009

I recently met with a couple to create a debt elimination plan and when we began discussing whether they had a budget they explained that they couldn’t live by a budget because their business income was sporadic.  Based on that conversation, I decided to write this post and give a 2-prong approach to budgeting when you have irregular income.

The first prong of this strategy is what I call priority-based budgeting.  With priority-based budgeting, list your expenses by priorities and pay as far down that list as you can whenever you receive income.

The second prong of the strategy is to plan for the bad months during the good months.  You do this by:

  1. Estimating your yearly income and divide it by 12 to determine what your average monthly income is;
  2. Establishing a savings reserve from which you can draw income during the months that you fall short (See Five Quick Ways to Create a Cash Reserve); and
  3. During the months that you earn more than your average monthly income, rebuild you savings reserve if you’ve had to draw from it.  Make it a goal to maintain a balance of at least one month of living expenses in this account.

Keep in mind that this savings reserve is different and separate from your emergency fund (Ingdirect is a great place to keep your emergency fund.  Send me an email if you’re interested in opening an account and getting a $25 bonus).  Keep this money in an account designated solely for this purpose and use it only to make up the difference in a slow sales (business) month.

By using these two methods together, people with sporadic income can create a budget and have accountability in their spending.  No more excuses–create your priority-based budget today!

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Christian Debt Elimination–Ten Places to Find Money Without Changing Your Lifestyle

September 26th, 2009

You’ve made the decision to live debt free. You’re convinced that as a Christian, debt should not be a part of your life. But, there’s one problem, you’re living paycheck to paycheck. You don’t have any extra money to get rid of the debt.  Here are ten places to find money to use to eliminate your debt.

  1. Reduce the interest rate on your mortgage.  On a $100,000, 30-year mortgage, reducing your interest rate by just 1% (from 8% to 7%) would save you $68.46 per month.
  2. Consolidate high interest credit cards and finance loans into a second mortgage.  You can free up a significant amount of money each month by consolidating debt; and you have the added bonus of possibly being able to write off the interest paid on this second mortgage.  This option is not for everyone.  Read Four Reason to Consolidate Debt With a Second Mortgage to see when debt consolidation is the right choice for you.
  3. Maximize your IRS deductions.  90% of Americans receive a tax refunds.  By failing to take the correct number of deductions, you’re providing an interest-free loan to the federal government.  By receiving that money in each paycheck, you’ll put the money back into your budget to be used to pay off your debt.
  4. Raise the deductibles on your automobile and homeowner’s insurance.  This won’t save you a ton of money, but even the little things add up.  Before doing this, make sure you have a cash reserve built up to cover the cost of the deductible amount.  Read Five Quick Ways to Build a Cash Reserve to see ways to build your cash reserve.
  5. Switch from whole life insurance to term life insurance.  Whole life insurance is always more expensive than a term life policy because of the savings component and additional fees associated with them.  Read Why Term Life Insurance is Better than Whole Life Insurance to learn why term life is better than whole life insurance.  [Caution:  Never cancel a life insurance policy before you have a new policy in place.]
  6. Cancel credit life insurance.  Credit life pays off the debt owed on car loans and mortgages in the event you die before the loan is paid off.  Credit life is a decreasing value life insurance policy.  With every payment you make on the loan, the value of the policy goes down, but the premium never goes down.  It is the most expensive form of life insurance you can get because you don’t have to qualify for it.  If you have a term life policy in place with the proper amount of coverage, you never need credit life.
  7. Temporarily stop your 401K contributions.  While you’re eliminating debt, stop the contributions and apply that money toward your debt.
  8. If you own a small business (even if its home-based) have a tax review done.  60% of people overpay the IRS due to incorrect tax preparation.  There are companies that will review your previous tax returns free of charge and charge you only if they are able to get you a tax refund.  Getting a lump sum like this can give you a great jump start to your debt elimination.
  9. Change banks.  If you’re paying for your checking account, it’s time to find a new bank.  Free checking is quite common, so you shouldn’t have any problem finding a bank that offers free checking.
  10. Search unclaimedfunds.org for money that belongs to you.  Not every state is included on this site, so do a search for your state’s treasure hunt or unclaimed funds site.  Use this “found” money to accelerate your debt payments.

Once you’ve freed up money to apply toward your debt payments, you need a plan to get out of debt as quickly as possible.  Get your free debt elimination plan here.

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Five Quick Ways to Build a Cash Reserve

September 26th, 2009

Having a cash reserve is critical to your financial success.  A cash reserve keeps you from relying on credit cards when you have an emergency and going back into or further into debt.  Remember, the goal is to not only get out of debt but to also stay out of debt.  Initially, I would aim at saving up $2,000.  So here are 5 ways to build this reserve quickly:

  1. Sell something you don’t need.
  2. Switch your cash value life insurance policy to a term life policy.  Move the cash you get back into your emergency account.
  3. Find one area in your daily spending (i.e., vending machine purchases, having coffee out, etc.) that you can stop temporarily and save that money in your cash reserve fund.
  4. Temporarily stop your retirement contributions and that money redirected by direct deposit into your cash reserve account instead.
  5. If you receive a tax refund each year, increase your federal tax deductions at work and bring home more each pay period.  Use the extra to build a cash reserve first.  [Warning:  Be sure you don't raise the deductions to a point that you will owe at the end of the year.]

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Six Reasons to Get Life Insurance

September 26th, 2009

To determine if you need life insurance consider these factors:

  1. Marital status:  Do you have a spouse who depends on your income?
  2. Dependents:  How many dependents do you have that are counting on you for support?
  3. Debts:  Do you have any debts that will need to be paid off upon your death?
  4. Parents:  Do your parents rely on your financial support?
  5. Taxable estate:  Will your heirs need cash to pay your estate taxes?  Life insurance proceeds can be used to fulfill this obligation.
  6. Charity:  Do you want to leave money to a charity, church, or other non-profit?  Proceeds from a life insurance policy are a great way to do so.

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Four Reasons to Consolidate Debt With a Second Mortgage

September 26th, 2009

Consolidating debt is not always the right thing for everyone.  If you haven't decided that your purpose for doing this is to ultimately get out of debt, don't consolidate.  You cannot borrow your way out of debt.  Using a debt consolidation loan needs to be part of a bigger plan for eliminating debt.  That being said, here are four reasons for consolidating debt with a second mortgage:

  1. The first reason to consolidate debt with a second mortgage is to reduce the interest you're paying on higher interest rate consumer credit cards.

  2. Another reason to consolidate debt with a second mortgage is to lower the amount of the monthly payments you're currently paying on consumer debts.

  3. The third reason is to pay off your debt faster.  If you're paying a lower interest rate loan you will be able to pay off your debt much faster.

  4. The final reason to consolidate debt with a second mortgage is to make managing your debt easier.  If you have one payment to make, it makes it a lot less likely that you will forget to make a payment or make a payment late and incur a late fee.

If you're consolidating debt with a second mortgage please be aware that you're turning unsecured debts into secured debt, collateralized by your home.  It's not a step to be taken lightly but it does have many benefits.

Other recommended reading:

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Why Term Life Insurance is Better than Whole Life Insurance

September 26th, 2009

Life insurance exists as a product to create a false estate for an individual.  Think about it, early in your career you haven’t amassed any wealthy yet; but, if you were to pass your spouse and children would be financially devastated by the loss of your income.  So you get a life insurance policy to offset that loss.  (Read Six Reasons to Get Life Insurance to find out if you even need life insurance.)  But as you get older, you build a significant portfolio and no longer need life insurance.

For the average person, life insurance was never intended to last your whole life as it does with a whole life policy.  By looking at the purpose of life insurance alone, you get a glimpse into the first reason term life insurance is better than whole life insurance.  Term life fulfills its purpose and then it ends.  You will no longer be paying the expense of life insurance as long as you have been diligent to save and invested wisely during the term of that insurance policy.

The second big reason term life is better is because it meets your need and costs a lot less.  Let’s look at how whole life insurance works in general.  The insurable portion of a whole life policy is term life insurance; but on top of paying for that insurance, you’re building cash value in an investment portion of the policy.  On the surface it doesn’t look too bad.  It actually sounds good.  But in reality it’s not good for at least 5 reasons:

  1. The cash (that’s your money) cannot be taken from the policy unless you borrow it and pay it back with interest.
  2. Upon your death, the insurance company keeps your cash.  This is great for the insurance company because they’ve just offset their risk by the amount fo cash accumulated in the policy.  It’s not so great for your family because if you had been saving that money outside the policy, they would have the life insurance proceeds plus the cash.
  3. The investment portion of the policy grows at a very low rate of return.  On average, with whole life policies the yield is 2.6% per year.
  4. Whole life policies are often sold as a retirement savings vehicle.  However, the investment portion does not qualify as an IRA, so you lose any possible tax deductions you would be entitled to.
  5. For the first 3 years of the policy you’re not building any savings.  The extra money you’re paying is going towards expenses associated with owning the policy.  (I believe that this is why 70% of all life insurance policies sold are cash value policies–an insurance agent makes a lot more money selling whole life insurance than he does selling term life.)

The bottom line is that term life insurance is better for the consumer (you) than whole life because it serves your needs, not the needs of the insurance company and its agents.

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Why Is A Good FICO Score Important?

September 19th, 2009
“A GOOD name is rather to be chosen than great riches, and loving favor rather than silver and gold.” Proverbs 22:1
In the financial world, your credit score is the same as your name. Having a “good name” can save you thousands of dollars in interest when you’re restructuring debt to reduce your payments and ultimately get out of debt. Just half a percentage point from 5% to 5.5% on a $100,000 30 year mortgage will cost you almost $11,148.26 in interest over the life of a loan. A full percentage point up would cost you $22,582.41 in extra interest payments.

FICO stands for Fair Isaac Corporation. FICO is a brand of credit score that is used synonymously with credit score much like Kleenex is used synonymously with facial tissue. The FICO score is calculated with information from your credit file. The data is grouped into five categories: payment history, amounts owed, length of credit history, new credit, and types of credit used.

This one little number determines your reputation with lenders. In the eyes of a banker, your FICO score reflects your character and consistency; and this is what it is created to do. The categories used to create the score, answers the questions: Did you pay your creditors as promised?; Did you pay on time?; Have you had credit for a significant period of time?; Did you use “good debt” versus “bad debt”?

Like it or not, this is the system we must operate in until we become debt free. Do you think your FICO score should be the primary determinate of your creditworthiness? What would be a better system?

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What the Bible Says About Money-Part 1

September 18th, 2009

The Bible has a lot to say about money.  Money is mentioned in the Bible more that 800 times.  In fact, 70% of what Jesus taught about was money.  Because there are so many verses in the scriptures about money, I will do several blog posts about what the Bible says about money.

You cannot serve two masters

Mastering the temptation of serving money is the key to abundant life that Jesus died for us to have.  In Matthew 6:24 Jesus said, “No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other. Ye cannot serve God and mammon.”

Most Christians would definitively say that they do not serve money (mammon).  They are sure, without question that they serve God wholeheartedly because they are saved, maybe they tithe, they give in the offering, and they volunteer at the church.  Christians would certainly never consciously choose to serve money over God.  But the fact is that many Christians are doing just that.

Jesus goes on in verses 25-34 to tell the real test of who you are serving:

“25Therefore I say unto you, Take no thought for your life, what ye shall eat, or what ye shall drink; nor yet for your body, what ye shall put on. Is not the life more than meat, and the body than raiment?

26Behold the fowls of the air: for they sow not, neither do they reap, nor gather into barns; yet your heavenly Father feedeth them. Are ye not much better than they?

27Which of you by taking thought can add one cubit unto his stature?

28And why take ye thought for raiment? Consider the lilies of the field, how they grow; they toil not, neither do they spin:

29And yet I say unto you, That even Solomon in all his glory was not arrayed like one of these.

30Wherefore, if God so clothe the grass of the field, which to day is, and to morrow is cast into the oven, shall he not much more clothe you, O ye of little faith?

31Therefore take no thought, saying, What shall we eat? or, What shall we drink? or, Wherewithal shall we be clothed?

32(For after all these things do the Gentiles seek:) for your heavenly Father knoweth that ye have need of all these things.

33But seek ye first the kingdom of God, and his righteousness; and all these things shall be added unto you.

34Take therefore no thought for the morrow: for the morrow shall take thought for the things of itself. Sufficient unto the day is the evil thereof.”

The gauge for whether you’re serving money, is whether you are spending your energy and time seeking the Kingdom of God or whether you’re spending your energy and time seeking things.  If you find yourself spending more and more time toiling and chasing money you may have just crossed over to serving mammon.  Judge yourself on this matter and if you have starting money make a decision to change today.

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