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Wednesday, November 30, 2011

GETTING ORGANIZED: Fixing a Negative Cash Flow Budget

This week I thought I would continue our discussion on creating a household budget. Last time we covered HOW to create a basic plan or budget. If you recall, I had you create two budgets, one from memory and one from reality (based on banking statements and receipts).  Hopefully doing this exercise has given you some insight on your spending habits. Now, most people (hate to generalize) that don’t follow a plan of some kind tend to run out of money before the end of the month, am I right?  So today I just want to touch on what to do when you have discovered that you have a NEGATIVE net income (expenses exceed your income). 
Where to start? In the most simplified terms, if you have a negative net income, you either have a spending problem or an income problem. So I’m asking you, which is it????
I can hear it now…”If only I made $10,000 more, I could save, or I could pay off this or that”. Well we all want to make more money, but what are you going to do in the mean time? I tell you, you will not be successful if you have a negative cash flow every month. This means you are most likely going into debt to cover your expenses.  First things first, you need to develop a plan (budget) that balances. Wow, a balanced budget!  Something even Congress can’t seem to do! 
Okay let’s get started. You have your piece of paper, right; the one with all the categories of expenses? Well get that out and at the bottom of your paper you will have the amount of your NEGATIVE NET INCOME amount; this is the amount you need to cut back by. 
There are two ways to fix this: Priority OR Balanced
1)      Priority Approach
Take out another paper and put your income at the top of the page.  Now re-list those categories, but in order of importance.  Let me help you…1) Food, 2) Utilities, 3) Shelter, 4) Transportation, and so on…Once you have that list completed, you will use it as a guide on how you will spend your money…all the way down the page. You will stop when you reach zero (net income). Everything else gets cut.
 
2)      Balanced Approach
This involves cutting a little of everything. You have the same list of categories, but you take a little out of everything that is discretionary, until you reach your needed number. Lots of ways to cut back…eat out less, reduce cable/satellite package, cheaper cell phone plan, clip coupons for grocery/household items, or DRIVE LESS! 
Okay, you get the point. Basically you have to make it BALANCE.  I recommend a healthy budget consist of 50% of income going to things you NEED (food, lights, shelter), 20% of income going to things you WANT, and 30% of income going to savings.
If you are wondering why I didn’t tell you to do that in the first place, it’s because the tendency is to load up your budget with a lot of ideals that don’t exist.  For example, before I started really paying attention, I thought we (hubby and I) only spent $250 for food/dining/household items, turns out it was more like $750 (yeah we were eating out a lot).  Well, I have tried and tried and the lowest I can get it is $450 (including diapers and household items).  I have to keep it real; I just need $450 a month, period. I can work with that reality much more then my imaginary $250 budget! Make Sense?
So, this week’s homework is to get your budget plan to BALANCE!
I know you are shy out there, but I would really like some feedback, have any of these exercises helped you?
Enjoy your week,
MsMoneyGuru

Thursday, November 24, 2011

ARE YOU THANKFUL?

Happy Thanksgiving to all! I want to first start off by saying that I am THANKFUL for the reality of 2011 and for the hope of 2012, I’m thankful for my family, and of course all of you! 
My question to you this week is ARE YOU REALLY THANKFUL?  
Just to give you a little background: Throughout my adult life, I have been quite ambitious. I, for the most part have always been focused on some goal.  To be honest, a lot of my goals were financially driven. Not to mean that I was materialistic, but I definitely had the “consumerism” bug; and while I never thought money equaled happiness, I definitely believed that money allowed you access to opportunities that I could build my life around.  I also enjoy giving, and for those of you that enjoy the gift of watching the amazement on a friend or family members face when you surprise them with a gift or act of generosity, this is something you can understand.  Additionally, I’ve always been well aware that broke people can’t help other broke people; so that was more of a motivation to stay on the right track and accomplish my goals.
Well after a series of financial mistakes, I found myself truly B-R-O-K-E.  See, up until 18 months ago I didn’t really consider myself broke because my husband and I earn a good income…I was always able to out earn my stupidity!  But I kept thinking, “We should be living better than this”. When everything was really getting bad, I wasn’t even able to give (to my church or others), this hurt the most.  I felt really bad; I couldn’t enjoy myself without feeling uneasy or guilty.   Then one day I listened to a radio host by the name of Dave Ramsey of the “The Dave Ramsey Show” and I was changed, completely. It was like Paul (in the bible) literally hearing the voice of God and falling off the horse and never being the same. I did an about face and totally change the trajectory of my life and how I thought about money.
Now with open eyes, I am TRULY THANKFUL.  I know this because I finally know what it means to be CONTENT. "Contentment" seems realistically defined as "enjoyment of whatever may be desired" (Wikipedia.com).  Contentment use to be a dirty word for me, it meant that you had no goals, that you didn’t want better for yourself...it meant (to me) to settle.  My whole life, Philippians 4: 13* has always been my favorite scripture. But ever sense my “Ramsey” conversion (I use that loosely), I truly see what Paul was talking about in Philippians 4:10-13*. He is saying that it’s not that he doesn’t care about his well being, but that he has a spirit of contentment, he says ”I have learned the secret of being content in any and every situation, whether well fed or hungry, whether living in plenty or in want. (Therefore) I can do all this through him who gives me strength”.  Of course I’m not saying that you shouldn’t strive for bigger better things, that is what this country (USA) is about and it’s almost your obligation as a citizen to do so. But BE CONTENT….truly THANKFUL for where you are and who you are.  Stop obsessing over what you don’t have! 
The paradox is clear!  On this Thanksgiving Day when we should be focused on what we are thankful for, we are painfully reminded that today is also the EVE of BLACK FRIDAY, on one hand is the noble message that we should be THANKFUL and GRATEFUL for what we have, on the other hand we are constantly told that we don’t have ENOUGH and we are encouraged to obsess, focus and lust after things we CAN’T HAVE or most importantly CAN’T AFFORD.  This spirit of discontentment is at the core of the financial crisis and our personal financial problems. 
You may say, “I don’t do that, I’m happy with who and where I am”, well this week I challenge you to look at yourself and measure how much of your daily thoughts are concerned with the things you DON’T have vs. the things you DO have.  I have to catch myself all the time from daydreaming about a “bigger”, “better” life, I have to pray to God to help me bring those thoughts into submission and focus on what I DO have and ask God on a daily basis, WHAT WOULD YOU HAVE ME DO TODAY WITH WHAT YOU (GOD) HAVE GIVEN ME?
BE THANKFUL…
MsMoneyGuru
*Philippians 4:4-13 (NIV)
 4 Rejoice in the Lord always. I will say it again: Rejoice! 5 Let your gentleness be evident to all. The Lord is near. 6 Do not be anxious about anything, but in every situation, by prayer and petition, with thanksgiving, present your requests to God. 7 And the peace of God, which transcends all understanding, will guard your hearts and your minds in Christ Jesus.
 8 Finally, brothers and sisters, whatever is true, whatever is noble, whatever is right, whatever is pure, whatever is lovely, whatever is admirable—if anything is excellent or praiseworthy—think about such things. 9 Whatever you have learned or received or heard from me, or seen in me—put it into practice. And the God of peace will be with you.
Thanks for Their Gifts
 10 I rejoiced greatly in the Lord that at last you renewed your concern for me. Indeed, you were concerned, but you had no opportunity to show it. 11 I am not saying this because I am in need, for I have learned to be content whatever the circumstances. 12 I know what it is to be in need, and I know what it is to have plenty. I have learned the secret of being content in any and every situation, whether well fed or hungry, whether living in plenty or in want. 13 I can do all this through him who gives me strength.

Wednesday, November 16, 2011

ARE YOU READY TO BUY A HOUSE? MsMoneyGuru’s Steps to Buying a House

A few weeks ago I posted an article in which I advised couples to avoid buying a house within the first year of marriage or commitment.  In that post I also promised “The MsMoneyGuru’s Steps to Buying a House”. 
Okay, first a little background. When I was a young professional starting out in my career, and single, I purchased an investment property.  This choice at such a young age proved to be a smart thing to do in the short term.  It forced me to get on a budget, gave me a huge responsibility, taught me about delaying gratification and saving, and gave me a head start on wealth building.  However, I failed to realize that I had purchased a home at a very unique time; it was at the beginning of one of the biggest real estate booms in recent history, and within two years I had “made” over $100k in equity. 

Like most booms, the bubble burst 4 years later, but not before I purchase two (YES TWO) additional properties!  This decision was based in part on the short term success I had experience during the first 4 years.  Of course being the over-achiever I am I did this the same year I got married!  As you can imagine, this did not proved to be the best decision, but like most, I failed to consider the risks before me.  I only considered the “up” side because I was limited by my own experience up ‘til then. 

Today, I no longer own those properties, and have focused my efforts on building wealth in a different way, but the important part is that I have come away with REAL LESSONS LEARNED from my experience.   
This list represents what I would do differently.  It also represents what I have learned from hearing countless stories from others who have gotten in over there head with real estate.   
So, here it is— 5 SIMPLE STEPS:
1)      Be debt free (including auto, student loans, and all credit cards)
2)      Save an Emergency Fund (3-6 months household expenses)
3)      Save for a Down Payment, enough to avoid PMI (Mortgage Insurance)
4)      Take out 1 mortgage only, do not do an 80/20 or 95/5 deal
5)      Your Payment on a fixed  interest rate mortgage should be  25% or less of your net income (gross-taxes)

**If you haven’t accomplished at least these 5 things, you are not ready to buy a house.  Remember your bank or real estate agent doesn’t always have your best interest in mind.  It’s YOUR responsibility to put the brakes on a situation that doesn’t work for you or your family.

Additional Tips:
1)   Homeownership is a long term decision (5+ years), not a short term one, so choose wisely…the longer you stay in a house the more of a benefit you get out of it. LEAVE FLIPPING TO THE PROFESSIONALS!
2)   Location, Location, Location…no matter what a house looks like, it will always be limited by the neighborhood it’s in.
3)   Don’t get emotional about house buying; there is a house on every corner.
4)   Estimate 25% of your annual carrying costs for repairs (in your budget).
5)   Consider a 15 year mortgage, they tend to have better terms. Why would you want to stay in debt for 30 years? Set a goal to pay off your home early, you will be richer in the long term.
6)   Never take out a second mortgage or HELOC; don’t borrow against your house to pay for ANYTHING, debt is never the answer to your problem.
7)   Never take out a variable rate (or balloon) mortgage; you can’t predict the future, and it’s a riskier way to go.
8)   The Deal is made at the PURCHASE (not the sale), don’t think you can “improve” your way out of a FULL PRICE Money Pit, you will lose money.
9)   Never finance an investment property or second home, buy it with CASH; this is the only way to maximize your return on investment—it’s unacceptable to have a negative cash flow.
10) Anyone who tells you to use “Other People’s Money” doesn’t understand that “The Borrower is Slave to the Lender” (Proverbs 22:7). Why would you want to be a slave?

What experiences have you had while buying or owning a property?
If you have had a negative experience, did you miss any of MsMoneyGuru’s steps?

Check back next time…MsMoneyGuru

Tuesday, November 15, 2011

GETTING ORGANIZED: Creating a Household Budget for Success, Part 1--You Get More Time!

I’ve decided to give you all more time to participate this one. I will resume this subject in the coming week.
That means it’s not too late to do the Budget Experiment from last week… I want to hear some feedback people!
MsMoneyGuru

Wednesday, November 9, 2011

GETTING ORGANIZED: Creating a Household Budget for Success, Part 1

Hello out there!  So, for this week’s post, I thought I would give some insight on how to get organized and on a budget.  One of the themes of my posts to date have been the importance of establishing a budget, it is essential to any financial plan.
There are TWO steps in creating a Household Budget for Success…1) The Budget itself, and 2) The Cash Flow Plan. Today we are going to focus on Step 1: The Budget.
What is a Budget? 
Well, according to Investopedia.com, a BUDGET is an ESTIMATE of the given REVENUE (INCOME) and EXPENSES over a specified future period of time. THAT’S IT! If you look at the definition clearly, you will see there is really nothing to be scared of.  First: it’s an “estimate”, which means the amounts don’t have to be PERFECT, or EXACT.  Second: it’s for the “future” which means it’s done ahead of time. Third: it’s for a “specific period of time” which means it can change.  You are not locked it for the rest of your life! I change my budget all the time depending on the circumstance.  The important part is that it’s a PROACTIVE way to manage your money.  A budget is not a dream crushing, fun killing monster, it’s just a PLAN!  You will find that you actually enjoy yourself MORE when you live on a budget.
So now that we know what a budget is, let me tell you the best (in my opinion) and easiest way to build one and live on one. This post requires some participation!
DISCLAIMER: the following is an example of the way I create a simple budget, the budgets used in personal counseling are a lot more complex, the example in this post is to help you get started and to give you some general ideas on how a budget is created.
Let’s start simple, depending on how organized you are, this may take little or a lot of effort.
1.      Get out a piece of paper.
2.      Write your monthly income at the top of the page.
3.      Under your Income write the following Expense Categories:
·         Giving (charity, tithes, offerings)
·         Savings
·         Rent/Mortgage
·         Homeowners Assoc  Dues
·         Insurance
·         Child Care
·         Loans
·         Credit Cards
·         Internet
·         Cable/Satellite
·         Electricity*
·         Gas*
·         Telephone*
·         Water*
·         Trash*
·         Groceries*
·         Eating Out*

4.      Fill in your “estimate” of what you typically spend in a month next to each category.  Some items are going to be easy, your loan or credit card payment, and rent are items which are typically fixed. However you might have a hard time estimating your “discretionary” categories (* see asterisk).
5.      Subtract the Income Amount from your total Expenses Amount; the result is called NET INCOME.
Whalah! You have a budget!
Do the amounts left over make sense?  Does your NET INCOME match the amount you have in your pocket at the end of the month? 
This is where most people get in trouble.  They try to manage their life on this initial budget (based in memory), but after a week or two of failing, they give up out of frustration…Why? Is it because you can never budget for everything? Something always comes up that wasn’t in the budget. TRUE, but that’s not why the budget didn’t work...most likely it didn’t work because it’s not based in reality. Even the most detailed budgets fail to predict every dollar down to the cent…that’s why a budget is a living document…it will change…just embrace the change.
So at the beginning of this post I told you that I was going to show you how I create a budget.  Guess what?  We are not done.  This way is going to take a little more effort on your part. 
1.      Get out a piece of paper.
2.      Pull out your last month’s worth of paystubs. Or bank statement.
3.      Write down the amount either the paystubs or the bank statements say you take home in a month; whatever is most accurate.
4.      Under your Income write the following Expense Categories:
·         Giving (charity, tithes, offering)
·         Savings
·         Rent/Mortgage
·         Homeowners Assoc Dues
·         Insurance
·         Child Care
·         Loans
·         Credit Cards
·         Internet
·         Cable/Satellite
·         Electricity*
·         Gas*
·         Telephone*
·         Water*
·         Trash*
·         Groceries*
·         Eating Out*

5.      Pull out your last month’s bank statement (checking/savings).
6.      Look through the record of transactions.
7.      Fill in the amounts spend on each category based on the bank statement.
You may have to make a category for CASH withdrawals if you can’t remember what you spent the money on.
6.      Subtract the Income Amount from your total Expenses Amount; the result is called NET INCOME.
8.      THIS TAKES A LITTLE MORE BRAINSTORMING…On a separate piece of paper, list of all the expenses that occur more sporadically, like DMV Registration and Costco Memberships. Include the amounts for each category and put the list to the side. This will be use for the Cash Flow Planning step.

Whalah! This is your TRUE budget! At least it was last month!

Does your New NET INCOME match the amount you had in your pocket at the end of the month?  Probably a lot closer than before.  Hopefully this amount is not negative…more on that later…today we are just building a budget as we stand today.

Now, go over the 2ND BUDGET and ask yourself the following:

1.      If I could go back to first of the month, would I change the way I spent my money? For example, perhaps you didn’t mean to spend $150 on Starbucks??? JUST GUESSING.
If the answer is “yes”, then change the amount in the category to the desired amount.  If the answer is “no”, then keep everything the same.
2.      Is there any category that isn’t on the current list that should be based on your spending from last month? (Like haircuts or gym membership)
If the answer is “yes”, then add the category and put the amount you spent next to it, or put the amount you want to spend next to it.

THIS IS TOO EASY, RIGHT?
I counsel people all the time, and it never fails how wrong they are about what they actually spend…my philosophy is to start small, this is a good exercise to do if you are NOT facing an emergency, but know that you need to get organized!  I also believe that if you are going to be successful, you should start with little changes and build your way out. 
By doing this exercise you have uncovered TWO THINGS:
 1) Where you thought your money was going, and
2) Where it actually went!
Like I mentioned last week, a budget is a process, it takes time to perfect.  You can’t start on a journey if you don’t know where it begins... 
So, this week I want you to DO something!  For the next week try to build a budget, you will have two versions, one based on memory and one based in Actuals. NOTHING FANCY, JUST DO IT ON PAPER!
Next week I will take you to the next step in budgeting…Cash Flow Planning…it’s the HOW after the WHAT!
Check back…MsMoneyGuru

Wednesday, November 2, 2011

YOUR’S, MINE, & OURS: Tips on Combining Income with Your Spouse/Partner: Part 2: Home from the Honeymoon…

Congratulations!  You’re married!  Hopefully you had a chance to get away with your new husband/wife.  I know after all the stress of planning your wedding; you were due for some rest and relaxation.  Now you find yourself dropped off into the reality of actually being married. 
The purpose of this post is to share my thoughts and advice on building a strong financial foundation for a new marriage or commitment.  I am not trying to dictate whether you should start a family or buy a house as soon as you land home, you are free to disagree with me. Everyone’s situation is different.  All I know is what I went through when I first “came home from the honeymoon” and what I learned from it. 
So here it goes:
1)      DO NOT BUY A HOUSE
You just got off the roller coaster of Engagement and the last thing you need is a house! Believe me…never be in a hurry to make so many commitments at the same time.  Unless you have a unique situation (like you lived together before you were married) or one of you already owns a house, I would hold off buying a house for at least a year.   A house brings so much financial stress (unexpected expenses, repairs, etc.), and this is a time to get to know each other and to get a financial system (yes it’s a system) established.  If this is the first time you and your partner have ever combined incomes, you have a lot of adjustments to make and its way more enjoyable without a mortgage hanging over your head.   EVEN if it is cheaper to buy then rent, EVEN if you are paying through the roof in taxes, EVEN if everyone is doing it and they think you are crazy to rent “in this market”, I don’t care if you are 25 or 45, DON’T DO IT!  
The Ms Money Guru has a checklist to determine whether you are ready to buy a house (more on this later) and it is IMPOSSIBLE to have that completed by year 1 anyway…so forget about it!
2)      INSURANCE

Seems very obvious, but still worth mentioning.  You are now a REAL household and you need to make sure you are adequately protected. Now that you are married, you need to reexamine all of the needed insurances because your situation has changed…in some cases, your premiums may go down!

 I recommend everyone get 5 types of insurances:

Life Insurance:  20-30 year term life insurance, 8-10x your income…if you or your spouse dies the insurance payout can be invested in a mutual fund earning an average of 10%, should replace the spouse’s annual income.  Why only 30 years? The goal is to be able to self insure after 30 years.

Auto:  In my opinion, you should at a minimum carry full insurance with 100/300 ($100,000 per person, $300,000 per occurrence).  Some people will argue that is a lot of insurance, when I was first married we were so broke we only had 15k in liability…that is way too low. What if we hit a brand new BMW or even a Chevy Tahoe? Everything above 15k would be our responsibility. So until you can “self insure” (with a healthy emergency fund) against all these “what ifs”, it’s wise to just get the best coverage you can.  I’ll leave the size of the deductable up to you. 

Renters:  Since you are NOT buying a house, you need to insure the items inside your unit; your landlord will only cover the structure of your building. He won’t cover your belongings if you get robbed or if the rental burns down. You can add your wedding rings on this policy too.

Health:  Despite whether you have a job with full benefits or not, you need to look into health insurance. Health care bills are one of the top reasons people in this country go bankrupt.  Please get health insurance, it’s worth it.

Long Term Disability: Short term (less than 13 weeks) is not the problem, that’s what an emergency fund is for…it’s the long term disability that hurts most.  God forbid something happens to either one of you, and it takes you out of the working field for an extended period of time, you don’t want to depend on the state or your family for everything…be smart get some long term disability insurance.

3)      EMERGENCY FUND

Seems obvious…the general rule is 3-6 months expenses.  You should have this BEFORE you buy a house and before you go on your next vacation.

4)      GET ORGANIZED…THERES THAT “B” WORD AGAIN!

Funny thing that happens when you get married…Income goes up, Expenses go down.  Gone are the single days of pinching every penny, and making sure you can make your car payment and rent.  Now you should have TWICE as much money, RIGHT? 

WRONG!  There is a difference between PERCEIVED wealth and ACTUAL wealth.  When you get “married money”, for some reason you will feel like you got a little raise, a little bump.  Even if one of you is not working, you know that if push comes to shove you have an able bodied adult who is willing to pick up the slack.  Two is always better than one.  BUT that doesn’t mean you don’t need a budget! EVERYONE needs a budget, even Warren Buffet needs a budget, if he didn’t have one, he wouldn’t be Warren Buffet.  This is what RICH people do.  They live within their means, they save, and they buy things with cash.  It’s so plain and simple, yet for some reason so hard for ordinary people to do.  What couples tend to do is “grow” their lifestyle first, and then budget second.  If you create your budget FIRST, you will be in touch with your NEW households’ spending habits, and this will help avoid “growing” your lifestyle into your newfound income.  Remember PERCEIVED vs. ACTUAL…this is where that comes in.  You don’t want to buy a new car (with payments) and a few months down the road realize that it was a curse instead of a blessing because you can’t afford to enjoy your new life together.   Married people need to go on dates too!

So, BEFORE you get excited and run off to the mall and buy everything you see and sign up for a new car loan or God forbid a TIMESHARE.    You need to come together with your spouse, (remember the come clean ceremony from Part 1) and put all your obligations, including your new insurance premiums, new rent payment, etc. together, and see what you really have left over at the end of the month.  You want to live in that place for at least 3 months, and really get a feel for how your money flows.  For instance, I work for a company that pays me salary every two weeks, while my husband is a teacher and most of the time they get paid once a month and only for 10 months. So given the different variables, we had to plan for the summer (non paying months) and plan our bills around the timing in our pay (cash flow) as well.  It is a new process and it takes a lot of practice. MsMoneyGuru has WAY more on this subject and a step by step process to build a budget…more to come.

Are you in Debt?  Hopefully your come clean ceremony (see Part 1 of this series) opened your eyes to what you have before you.  Paying off your debt should be JOB #1.  Are you overwhelmed and not sure how to do it? MsMoneyGuru has the answer…more to come.

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