Tag Archives: paying debt

Knowledge is Power by Ed Clark

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The KEY to making a change is knowledge and that knowledge doesn’t have to be complicated it just has to be executed. Take a look at these 4 simple principles and see where you can make a change.

4 Personal Finance Principles to Live by For a Richer Life

Taking control of your personal finances is key to living a more stress-free and stable life — a truly rich existence. All you need to do is take the first step: start becoming more aware of your bank account, and live by these very basic principals that just about sum up what personal finance is all about.

1. Pay yourself first

This is a common personal finance phrase that many people live by. But what does it really mean? No, paying yourself first isn’t buying anything you want and letting your bills collect dust. Basically, it means that before you spend your new paycheck on necessities or wants, you should squirrel away a portion of it to your savings. Getting into this habit is helpful because you’ll learn to prioritize saving, and the steady stream of monthly contributions is the best way to grow your emergency, savings, and retirement accounts. The best and easiest way to pay yourself first is to automate it so that the process is mindless.

2. Live within your means

Don’t spend more than you can afford to spend. Don’t take on loans or debt if you can’t afford it. This even means being cautious on what is generally considered “good” debt. Ever since the financial crisis, all of us had to reassess what we initially thought of as good debt, which includes mortgage, school, and car loans. Once people started getting laid off and defaulting on payments, the good debt very quickly becomes bad. That’s not to say that you shouldn’t go to the college of your dreams; but you should still weigh the costs while keeping in mind realistic expectations of job prospects postgraduation. And if it’s truly worth your investment, you should find ways to cut costs. Other than not taking on debt, conscious spending is also part of what it means to live within your means.

3. Prepare for the long term and the worst

Don’t spend your time living only in the here and now. Think ahead, and start preparing for your retirement and emergencies by starting an emergency fund and contributing to your retirement accounts.

4. Knowledge is king
Keep reading and keep learning about how to better your personal finances. This is just the start of your journey, and there is so much out there to learn

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The best way to start saving

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People think that there is some magic bullet to start saving but I’m here to let you know that there is no magic bullet when it comes to saving.  Saving money is not easy, but it is essential to achieving financial well-being and securing your future. Honestly it’s about setting realistic goals, prioritizing how you’ll manage your money and sticking with it. Below are some ideas to get you started with saving without feeling pressured.  It’s important to understand the difference between Gross Income vs. Net Income, creating goals: short and long term goals, creating a simple budget, saving (ER fund, 401K, IRA, etc), paying off debt, and enjoying life.

 1. Gross Income vs. Net Income:  People really need to understand the difference between Gross Income vs. Net Income before   they start creating a budget, saving and paying off debt. Gross income is your salary, the total dollar amount your employer agrees to pay you over a given time period. Net income is what you take home: the amount you earn after your employer makes deductions for taxes, benefits, etc.  People make a huge mistake of budgeting from their gross income when they should be budgeting off of the net income.

2.  Create Saving Goals:This is important to understand why and what you are saving for and how much you will need to achieve your goals.  Creating short and long-term goals will get you pumped and motivated about saving.  Short-term goals (1-5 years) may be: family vacation, buying a new car, buying a video game system, paying off small debt amounts.  Long-term goals (5 years-longer) are saving for retirement, buying a house, having a baby, paying off large debt amounts, becoming financially independent.

Your circumstances do not matter. It is important to realize  your goals and start saving for those goals.  Once your goals are identified you can begin making your dreams a reality. When your goals are clearly defined on paper you are more likely to make those goals come true.  Remember to start small and build up from there.  With goals outlined and attainable it will make it easier than you thought to save and achieve those goals.

3.  Simple Budget: It is crucial to create a simple budget to track your income and expenses.  My budget consist of no more than two columns in an excel spreadsheet:

                                            a)      Income

                                            b)      Expenses

Your budget may change throughout the year due to circumstances outside of your control.. I really enjoyed the following website about simple budgets:http://frugalandthriving.com.au/2009/creating_a_simple_budget/.

4.  Make saving automatic and effortless:  You should start out by saving a minimum of 5% of your income and make it automatic; the more you can save the better.  My savings are automatically taken from my paycheck so I don’t have to think about it.  Paying myself before I pay anyone else is an important concept to understand. The benefit of making your savings automatic is that you don’t see it; therefore you don’t miss it.  I have been using IngDirect to do this since 2002. Remember it’s not how much you save. It can be $5, $10 or $15 every time you get paid. It’s about making it automatic and effortless so it becomes a habit.

  1. Emergency fund: This is where you should first start. I recommend saving enough money to cover your basic living expenses for three to six months. The money in your emergency fund should be kept in an easily accessible savings or money market account so it is easily accessible if an emergency was to occur.  It is important to only use the money set aside in your emergency fund in the event of an emergency, such as your car breaking down, receiving unexpected medical bills, losing your job etc.
  2. 40lK or 403b Plan: If your employer offers a retirement savings plan, such as a 401(k) or 403b plan, sign up and contribute all you can. Your taxes will be lower, your company may kick in more, and automatic deductions make it easy. Over time, compound interest and tax deferrals make a big difference in the amount you will accumulate. Find out about your plan. For example, how much would you need to contribute to get the full employer contribution and how long would you need to stay in the plan to get that money.
  3. Roth/Traditional IRA: You can put up to $5,000 a year into an Individual Retirement Account (IRA) and you are allowed to contribute more if you are 50 or older. IRAs provide tax advantages. When you open an IRA there are two options:  a traditional IRA or a Roth IRA (you should talk to your financial advisor or research which  one is best for you based on your income). The tax treatment of your contributions and withdrawals will depend on the IRA you select. IRAs can provide an easy way to save, you can set it up so that it can be  automatically deducted from your checking/savings account and deposited into your IRA.
  4. Investing: If you are thinking about investing I believe you need to think about  how to buy rather than what to buy. You should understand that investing is risky and you can’t eliminate that risk but you can become an educated investor who makes informed decisions. Being educated about the market allows you a margin of safety and a cushion in case events go against you. Once you start thinking about investing in stocks, bond mutual funds, your first steps should be to talk to a financial advisor. You need to understand what type of investor you are and what risk you are willing to take.

5.  Paying off Debt:  Paying off debt is definitely going to mean making sacrifices and going without sometimes. It’s the sacrifice you make to live debt free. As a debt-free individual I can’t tell you how much pleasure I get from having no consumer credit card debt or student loan debt. It creates so much happiness and freedoms that you don’t get to experience with having credit card debt.  It is important to pay more than the minimum payment each month. Paying the minimum of the outstanding balance only prolongs the torture of paying the debt off.  The longer you keep your credit card debt the more you become best friends with the banks that you owe and of course the more you will owe them. The system that I used to eliminate my debt was simple I used the snowball elimination:

  1.   I listed my debts from lowest balance to highest balance and I created a timeline of when I wanted to have the debt paid off;
  2. I called my credit card companies on a monthly basis to have them lower my interest rate (most of my cards had an interest rate of 6.99% or lower);
  3.  I designate a certain amount of money to pay toward debts each month;
  4.  I paid the minimum payment on all debts except for the one with the lowest balance;
  5.  I threw every other penny I possibly could at the debt with the lowest balance;
  6. When I eliminated that debt, I did not alter the monthly amount used to pay debts, but what I did was threw all I could at the debt with the next-lowest balance;
  7. This method allowed me to become DEBT-FREE.

*While trying to become debt-free remember to try and live as frugal as possible AND to increase your income (yard sales, selling items on craigslist, get a weekend or second job, babysit, etc), if possible.  The combination of living frugal and increasing your income will make it easier to pay off your debt quicker. Also do not use your credit cards while paying them off (don’t close your accounts just don’t use them).

6.  Living Life: It is important to remember to live your life while putting all of these steps into place.  It is a lot to think about, but you have to make sacrifices in order to become independent and wealthy. You also do not need to sacrifice so much that you are taking the happiness out of your life.  The point of all this to make your life easier now and in the future– so just remember to make sure to enjoy putting these steps into place so you can enjoy life in the future.