budgeting banking-credit presentation for rce vets program-07-15
TRANSCRIPT
The Three “Bs” of Successful Financial Management:
Budgeting, Banking, and Borrowing
Dr. Barbara O’Neill, CFP® Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension [email protected]
Twitter: @moneytalk1
Can You Relate to Ziggy?
Workshop Segments • Budgeting
• Banking
• Borrowing
• Online Resources
• Your Questions?
Cash Flow Coat of Arms
Many People Today are Living on Less so It’s Time to Develop a Spending Plan • Low or no increases in salary or decreased income
• Higher living costs (e.g., utilities, property taxes)
• Increasing payroll deductions for health insurance premiums
• Other (e.g., child care, college tuition, bills)
“New Normal” Analogy Trump Plaza Hotel
Penthouse (Atlantic City, NJ)
Budgeting
Key Point: If You Spend More Than You Earn , You Will Go Broke….So “Act Your Wage!”
Extreme Case Example: At the age of 21 (1933), Woolworth heiress Barbara Hutton (1912-1979) had almost $50 million at her disposal. Married seven times, she lived above her considerable means. She died at age 66 in a Los Angeles hotel with about $3,500 to her name.
Why “Spending Plan”? • “Budget” (and “Diet”) are turn-off words
• 3 D’s: Denial, Deprivation, Don’t
• 3 C’s: Cut back, Cut out, Can’t
• The word “spending” is positive: people like to spend money
• The word “plan” emphasizes that you are in control of your money
Reasons To Have a Spending Plan (Budget)
• To determine where money is currently being spent
• To decide where to spend your money in the future
• Helps you save money
• Puts you in control of your financial future
Common Spending Plan Errors
• No allowance for large, irregular expenses
• Unrealistic figures
• Vague expense categories
• No allowance for the unexpected
• No allowance for inflation
Cash Flow Statement • Do prior to developing a spending plan
• Requires careful tracking of income and expenses
• Summary of cash receipts (income) and cash outlays (expenses) for a given period
Total cash
received during time period
- Total cash outlays during
time period
Cash surplus or deficit =
Managing Household Cash Flow
• Relationship between income and expenses – Positive cash flow (income greater than expenses)
– Negative cash flow (expenses greater than income)
• Three ways to improve cash flow – Increase household income
– Decrease household expenses
– Do both
Know Your Take-Home (Net) Income
• Take-Home Pay = Net Pay = Disposable Income – Income remaining after mandatory deductions (e.g., state and
federal taxes, FICA tax) and other paycheck withdrawals
• Discretionary Income – Money left after paying household expenses
– Include savings for goals as an “expense”
Ways to Increase Income • Adjust tax withholding/tax benefits (EITC)
• Second job, overtime, sideline freelancing
• Increase/collect child support/alimony
• Charge adult children room & board
• Bartering skills and services
• Access public benefits
• Upgrade job skills
• Sell assets
• Other?
W-4 Form for Tax Withholding
Taxes deducted from your paycheck are based on your W-4 form
Impact of W-4 Form on Net Income
0 allowances = max taxes deducted* = Smaller take home pay =
Larger tax refund
+ allowances = less taxes deducted =
Larger take home pay = Smaller tax refund
* Can add extra withholding beyond “0” allowances; e.g., +$50 more)
Ways to Reduce Household Expenses • Housing
• Food
• Transportation
• Clothing
• Utilities
• Other expenses
Thrift Shopping A “Win-Win-Win-Win-Win”
– Non-profit organization gets needed funds
– Donors get tax deduction and satisfaction from helping the non-profit and other people
– Shoppers get great deals on clothes, housewares, furniture, home furnishings, etc.
– The environment is helped by less landfilling and reuse of items
– Local economy is improved
Bag Sales: Thrift Shopping on Steroids!
Personal Experience: Two bags @ $5 = $10 40 usable items @ 25 cents (jackets, suits, pants, blouses, shirts, scarves, belts) 12 other items donated to Fire Department clothing box
Couponing Use for supermarkets, restaurants, department stores, entertainment venues, etc.
• “Single Play”- Use coupon alone to lower price
• “Double Play”- Sale price or markdown + coupon
• “Triple Pay”- Sale price/markdown + coupon + product rebate or other reward
Renovation • Refinishing furniture
• Gluing or nailing broken furniture
• Caning and rushing chair seats
• Painting and repolishing items
• Removing marks and stains
• Sewing hems, rips and tears, etc.
• See http://pinterest.com/paperstories/home-renovation-ideas/ for great photos
Repurposing • The use of something for a purpose other than its original
intended use
• Can be done by modifying an item or simply using it in another way
Examples: •Two tables into a hutch •Wine rack into a towel rack
Small Savings Add Up • $5 a day = $1,825/year
• $10 a day = $3,650/year
What are Your Spending Leaks?
Spending Plan/ Budgeting Systems
• Mental Budget – “In our head” (may be okay if finances are limited)
• Physical Budget – Envelopes, folders or containers
• Written Budget – On notebook paper
• Computerized Budget – Spreadsheet or specialized software
• Online Budget – Examples: www.mint.com and www.mvelopes.com
Envelope/Mvelope Method
Sum of Envelopes = $1,200 Sum of paycheck is equal to sum of envelopes
$400 $25 $75 $100 $150 $75 $25
$90 $25 $25 $125 $75 $10
Medical Gifts Donations Taxes Education Vacation
Cash from paycheck = $1,200
Mortgage Gas Electrical Vehicle Groceries Savings Misc.
How to Develop a Spending Plan (Budget)
• Add up take-home income
• Total fixed expenses (e.g., rent or mortgage)
• Total flexible expenses (e.g., food, clothing)
• Pro-rate (1/12 per month) occasional expenses
• Include money for emergencies and financial goals
• Balance the bottom line: income = expenses
• Take action: http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf
Average U.S. Household Budget Allocations
“Pay Yourself First” • Treat savings as a household “expense” • Give it the priority of a car loan payment • Make savings automatic
– Employer retirement savings plans
– Mutual fund and stock automatic investment plans
– Checking to savings transfers
– Consider doing a “Savings Challenge”
– Need more ideas? See http://www.americasaves.org/
Small Steps to Health and Wealth™ Strategies
http://njaes.rutgers.edu/sshw/
Step Down to Change
• Don’t cut out something completely
• Find a better alternative http://njaes.rutgers.edu/sshw/workbook/20_Step_Down_to_Change.pdf
Convert Consumption (Calories and Spending) Into Labor
• Health: How many hours of exercise are needed to burn off extra food? – Is eating a certain food “worth the calories?”
• Finances: How many hours of work are needed in order to buy something (use after-tax dollars)? – Is buying something worth the time worked? http://njaes.rutgers.edu/sshw/workbook/12_Convert_Consumption_Into_Labor.pdf
Meet Yourself Halfway Reduce discretionary spending by 1/3 to 1/2
–Spend less than you do now
– Look for less expensive options http://njaes.rutgers.edu/sshw/workbook/10_Meet_Yourself_Halfway.pdf
Kick It Up a Notch! • Pay more on outstanding credit card balances
• Automatically increase savings at regular intervals
• Save $1 a day plus loose change
• Do more of anything positive!
http://njaes.rutgers.edu/sshw/workbook/21_Kick_it_Up_a_Notch.pdf
Include Savings for Your Financial Goals in
Your Spending Plan
Save All or Part of Your “Extra” Paychecks
Time + Money = Magic
Source: TIAA-CREF; assumes an 8% average annual return
Financial Goals Reflect Your Dreams and Values Financial goals should be SMART
– Specific – Measurable – Attainable – Realistic – Time-related
• Short-term (less than 3 years) • Intermediate-term (3-10 years) • Long-term (more than 10 years)
http://njaes.rutgers.edu/money/pdfs/goalsettingworksheet.pdf
Start with Your Bucket List
Go For The Goal • Set SMART goals with a time
deadline and a price
Example: “Save $3,000 for an emergency fund within one year”
• Build the required savings amount into your spending plan as a fixed expense
Banking
Meeting Daily Money Needs • Routine spending activities require a cash
management plan • Payment options: cash, check, credit cards,
and debit cards Common Errors:
– Overspending
– Insufficient liquid assets
– Using savings or borrowing to pay for current expenses
– Failing to use an interest bearing account
Electronic and Online Banking Services
• Direct deposit – Paychecks and other regular income
• Automatic Payments and Fund Transfers – Recurring payments such as utilities, loan payments, insurance – Remember to deduct them from your check register!
• ATM Access – Obtain cash, check account balances, and transfer funds – Check out the fees! (use own bank ATM)
• Debit Card – Deducts money directly and immediately out of checking account
(no “float” time) – Lost card liability $50 (2 days) to $500 (up to 60 days); unlimited
liability after 60 days
Beware of ATMs Like This
Cash Management Tools • A low-cost, interest-earning checking
account from which to pay living expenses
• A savings account for irregular expenses, emergency cash, short-term goals
• When income begins to exceed expenses regularly, consider a money market deposit account or mutual fund or transfer some funds into longer-term savings instruments – Examples: CDs, U.S. Savings Bonds
Types of Financial Institutions
• Commercial Banks – Organized as corporations (answer to stockholders) – Offer a full range of services including checking,
savings, lending and other services (e.g., trust management)
• Credit Unions – User-owned cooperative businesses that provide
comprehensive financial services – Generally lower fees and lower loan rates than
many banks and higher interest paid on savings
• Pawnshops
• Check-Cashing Outlets (Currency Exchanges)
• Payday loans
• Car title loans
• “Rapid Refund” lenders
High-Cost Financial Institutions
Evaluating Savings Plans – Annual Percentage Yield (APY) compares interest – Compounding frequency increases return
End of Year Daily Monthly Quarterly Annually
1 10,832.78$ 10,830.00$ 10,824.32$ 10,800.00$ 2 11,734.91$ 11,728.88$ 11,716.59$ 11,664.00$ 3 12,712.17$ 12,702.37$ 12,682.41$ 12,597.12$ 4 13,770.82$ 13,756.66$ 13,727.85$ 13,604.89$ 5 14,917.62$ 14,898.46$ 14,859.46$ 14,693.28$
Annual Yield 8.33% 8.30% 8.24% 8.00%
Compounding Method$10,000 at 8 percent APY
Compounding- Earning interest on previously-earned interest
Managing a Checking Account
Writing Checks
1. Record the date
2. Write the name of the person/organization receiving the check
3. Record the amount of the check in figures
4. Write the amount of check in words
5. Sign the check
6. Note the reason for the payment (memo line)
Check Format
Check Register
Reconciliation Process 1. Compare written checks with those
reported paid – Subtract the total of all checks written but not
yet cleared 2. Determine deposits not on the statement;
– Add the amount to the statement balance 3. Subtract fees or charges and ATM
withdrawals from the checkbook balance 4. Add any interest to your checkbook balance
What should you do if the balances don’t match?
Checkbook Reconciliation
Break Time!
Borrowing
The Five C’s of Credit • Character - Do you pay bills on time?
• Capacity - Can you repay the loan?
• Capital - What are your assets and debts?
• Collateral - What assets do you have to secure a loan?
• Conditions- Lenders will also consider how general economic conditions will affect borrowers’ ability to repay a loan
Look For a Credit Card With These Features
• A regular (non-teaser) APR of 15% or less
• A grace period of at least 25 days
• Transaction fees of 3% or less
• No annual fee
• No penalty APR or a rate less than 20% (e.g., credit union credit cards may have)
• Good “perks” (if you are a “convenience user”)
Source: The Credit Card Trap, The State PIRGs
Disclosure Format
Credit Reports • Compiled by Credit Bureaus
– Companies that collect information about how promptly people pay their debts and manage credit
– Obtain information from banks, stores, credit card companies, other lenders, and from public records
• Review credit report for accuracy every year and before making application for a large loan
• Credit File Request Form (handout) or online at www.annualcreditreport.com
Three Major Credit Bureaus • Equifax: 800-685-1111 or www.equifax.com
• Experian: 888-397-3742 or www.experian.com
• TransUnion: 800-888-4213 or www.transunion.com
• Have different pieces of data about borrowers in their files • Social Security number acts as a “magnet” to assemble data
and create a credit report
Four Main Parts to a Credit Report
• Identifying Information: name, SS Number, current/previous addresses, birthdate, employer
• Public Record Information from Local Courthouse: liens, foreclosures, bankruptcy
• Other Credit History Information: list of loans and credit cards, timeliness of payments, defaults and negative information (for up to 7 years)
• Inquiries: Usually 2 years; self-initiated and promotional (for marketing purposes)
Time Limits on Negative Information
• Negative information can be reported for 7 years
– Late payments, repossessions, collections, foreclosures, etc.
• Bankruptcy can be reported for 10 years
• Most recent data affects credit score the most (vs. data from 5-6 years ago)
Your Credit Score = Financial GPA
• Rating scale of risk • Higher number is better: 300 to 850 range • Pay not have to pay a fee to obtain
Ways To Improve Your Credit Score
• Pay your bills on time (#1 weighted factor)
• Keep older accounts open
– Older accounts may establish length of history
• Keep debt-to-available credit ratio < 30%
• Get a mix of types of credit
– Revolving and installment
• Check credit reports and fix mistakes
• Avoid inquiries: supply own report to lender
Wise Credit Management Quiz http://njaes.rutgers.edu/money/wise-credit/
Debt Danger Signs • Getting a loan to repay existing debt
• Charging more each month than payments
• “Juggling” (rotating) payment of bills
• Using credit card cash advances for bills
• Chronically overdrawn bank accounts
• Depending on overtime to make ends meet
• Being at or near maximum credit limits
• Calls and letters about overdue bills
Consumer Debt Ratios Consumer debt repayments (monthly)
Take-home (net) pay (monthly)
Example: $390 = 21.6% $1,800
(over the 20% danger zone)
Annual Debt Ratio Consumer debt + mortgage or rent (monthly)
Take-home pay (monthly)
Example: 390 + 720 = 1,110 = 61.6% 1,800 1,800
(over the 40-50% recommended maximum amount)
3 Stages of Credit Difficulty • Early -Begin paying late penalties
–Pay minimum due
–A month or 2 behind
• Later - Bills are months overdue
–Difficult to pay minimum
–Creditors are making contact
• Final - Court proceedings threatened/pending
–Wages subject to garnishment
–Secured items (car, etc.) repossessed
Strategies to Reduce Debt
Contact Creditors ASAP When in Difficulty
• Seek a deferment or reduced payments • Overdue payments are added to end of loan
contract • Be sure account is reported as CURRENT in credit reports
Two Types of Late Payers:
– People having trouble but trying to work things out
– “Deadbeats” who don’t pay bills and ignore creditors
PowerPay (Debt Payoff Acceleration)
• Start by sending each creditor whatever amount was previously sent (minimum payment or above)
• As soon as you pay off one debt, apply the monthly payment amount (e.g., $30 to Sears) to a remaining debt
• Continue until all debts are repaid
• Greatest savings generally occur by repaying highest-interest debt first (e.g., department store credit cards)
• Can be done for free at www.powerpay.org
Required Information For a PowerPay Analysis
• Name of each creditor • Balance owed • Monthly payment (minimum or above) • APR (interest rate)
Credit Counseling • Budget counseling – Should be a nominal cost
• Debt management program (DMP) • Must incur no further debt and surrender credit cards
• Administrative fee charged for cost of repaying bills
• Will only take on clients with ability to repay debt
National Foundation for Credit Counseling 800-388-2227 or www.nfcc.org
In NJ, look for state-licensed counseling agencies: http://www.state.nj.us/dobi/division_consumers/finance/counselors.html
Debt Consolidation Loan • Take out one loan (e.g., home equity loan) to pay off
a variety of creditors
• Cannot not borrow your way out of debt!
• May increase overall cost of debt
• May pay a higher interest rate than before
• May consolidate debts previously interest free
• Temptation to overspend again
• Not a good option if you have “spending issues”
Voluntary Surrender • If unable to make payments:
– Return secured asset to creditor OR
– Obtain creditor’s permission to sell the asset
– Saves on repossession fees
– Avoids repossession being listed on credit record
– Sometimes creditor will accept asset as payment in full
• For a house, the term for a voluntary surrender is “deed in lieu”
Chapter 7 Bankruptcy (Liquidation)
• Erases all obligations except:
- child support - student loans
- alimony - federal and state tax
• Right to future income is retained • Surrender to trustee all assets that are not legally
exempt • In NJ, you can choose either federal or state
bankruptcy exemptions
Chapter 13 Bankruptcy (Reorganization)
• Plan approved by court to repay all or part of debt within 3-5 years using future earnings
• Creditors must get at least as much as with a Chapter 7
• Debtors must live within the plan
• Debtors allowed to keep property; make monthly payments to trustee to pay creditors
• Best for those with steady income and equity in a home and/or car
Online Resources
Financial Fitness Quiz http://njaes.rutgers.edu/money/ffquiz/
Investing For Your Future Home Study Course
• Free of charge and downloadable
• 11 units; do at your own pace
• Designed for beginning investors
• Monthly investment messages
• www.investing.rutgers.edu
Money Talk: A Financial Guide For Women
http://njaes.rutgers.edu/money/
eXtension Personal Finance Web Site
http://www.extension.org/personal_finance
Quote #1 “People don’t plan to fail…they fail to plan” A spending plan and financial goals help you take charge of your money
Quote #2 “Happiness is positive cash flow”
Quote #3 “There is no independence quite so important as living within your means” Calvin Coolidge, U.S. President
Questions and Comments?
Barbara O'Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management and Distinguished Professor, Rutgers University Phone: 848-932-9126
E-mail: [email protected]
Internet: http://njaes.rutgers.edu/money/
Twitter: http://twitter.com/moneytalk1