The Importance of Saving

Spending plans and savings are oftentimes thought of as bad words. They just sound like a pain- a bad homework assignment- keeping us from being free spirited or doing what we want to do. Despite this, I bet that we can all think of times when we have had to give up something because it was out of our reach. We just didn’t have the money saved up.

What is the key to being comfortable or maybe even making it big? Savings. Savings can allow each of us the opportunity to take advantage of potential investments. Having a savings account in a bank or credit union can help prevent future financial disasters in the event of an unforeseen event or an emergency. Savings equals stability and opportunity!

In addition to feeling like there is not any money left over, we all fall prey to constantly being bombarded with the latest and greatest “must have” items.

So, it is human nature to put off savings… until tomorrow, or when I get that raise or bonus at work. Well, unfortunately, when we get that well-deserved raise, it is far easier to simply spend more than to put the extra money into a savings account.

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Spending Wisely (for gifts)

To help combat negative spending habits, especially during the holidays, the following blog contains several tips called: Spending Wisely for Gifts

Make a gift list and check it twice- determine how much you can afford to spend and divide that amount among the people for whom you want to buy a gift.

Track what you spend- try to avoid buying on impulse and track your expenditures.

Shop early and take your time- shopping early allows you time to shop for bargains.

Be creative-be creative and consider items like offering homemade certificates to babysit, house clean, or any number of special tasks.

Delay some purchases- some purchases may be best delayed this may also allow you to take advantage of post-holiday sales.

Watch other expenses- with too much focus on gifts, it is easy to lose track of other holiday expenses.

Talk over a tight spending plan- if a spending plan is tight, let the family know that you will not be spending as much this year and why.

Start saving for next year- try to put money away each month in a savings account in a bank or credit union to help alleviate the financial stress of holiday spending.

Keep giving in perspective- the best gift for you r family may be financial stability for the rest of the year and beyond.

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Do You Have Any of These Habits?

If you answered yes to any of the questions below, then you need to step back and take a closer look at your spending habits because you may be risk of damaging your credit and setting yourself up for financial difficulties.

Let’s take a few mintues and go back through each of the question on this page and talk about the potential risk that a “YES” answer presents.

No savings- unable to attain goals, a crisis or emergency may be devastating.

Reached the limit on credit cards- access to additional funds are depleted without obtaining additional credit, which in turn makes matters worse.

Making minimum monthly payments- paying excessive interest charges and the charged items “true total cost” are far more than they are worth.

Buying to feel good- immediate gratification, but does not solve problems.

Buying and returning- a waste of time and money.

Borrowing from savings- savings should be used for emergencies and achieving goals. If used for current obligations, it is not “saving.”

Exceed 20% of take home- in over your head with debts. Financial counseling assistance should be considered.

Denied credit- damaged credit history, over-extended, financial counseling assistance should be considered.

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Steps for Developing a Successful Spending Plan

There are several factors that need to be considered to establish a spending plan that works.

The key to successfully developing a spending plan is to be realistic and focused. Do not set yourself up to fail by setting unrealistic goals. If you do, you will only become discouraged and go back to thinking that is impossible to live by a spending plan and save any money.

Determine your monthly income

List you’re fixed monthly expenses. Fixed expenses stay the same every month, for example, your rent, your telephone bill, your heating bill, or a car payment.

Know your variable expenses. Variable expenses change from month to month, for example, groceries and doctor’s visits.

• Track and plan for large, periodic expenses
• Compare income with expenses
• Set priorities, goals and limits
• Set a savings plan and make it a priority
• Always keep an emergency fund
• Plan ahead for major purchases, thus avoiding impulse decisions

Please note that if you send money to your relatives living in another country on a regular basis you should include this amount in your spending plan. If you send the same amount of money each month (such as $200 per month), add it to your fixed expenses. If you send a different amount of money each month (such as $100 one month, $125 the next), add it to your variable expenses.

Keep in mind that several goods and services-related expenses may be paid only periodically, for example, once, twice, or quarterly per year. Therefore, remember to include at least 1/12th of these annual expenses in your monthly spending plan. (For example: Robert pays his car insurance bill of $580 every six months for a total of $1160 per year. Therefore Robert needs to divide $1160 by 12 [which equals $96.67 per month] to determine his monthly spending plan for his car insurance.)

Finally, before fully developing your spending plan, you will need to calculate your gross monthly income.

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How to Develop a Spending Plan

The bottom line of a spending plan really comes down to income and expenses. There are two primary finds of expenses, fixed and variable.

Fixed expenses stay the same every month, for example, your rent and your car payment. Your variable expenses change from month to month, such as groceries, clothing, and doctor’s visits.

Note: If you send money to relatives living in another country on a regular basis, you should include this amount in your spending plan. If you send the same amount of money each month (such as $200 per month), add it to your fixed expenses. If you send different amount of money each month (such as $100 one month; $125 the next), add it to your variable expenses.

Keep in mind that several items may be paid only periodically, for example, once, twice, or quarterly per year. Therefore, remember to include at least 1/12 of these annual expenses in your monthly spending plan. For example, if you pay $580 twice a year for car insurance, multiply $580*2= $1160 and then divide $1160 by 12= $96.67 per month. Therefore, you should incorporate $96.67 per month for your car insurance payment into your spending plan.

Calculate your net (take home) income. Then use the formula corresponding to how often you are paid, for example, weekly, bi-weekly, semi-monthly, monthly, etc.

Create your spending categories; include both financial and non-financial goals.

List existing monthly expenditures for each category.

Project anticipated expenditures based upon both financial and non financial goals.

List anticipated income for each month.

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Why develop a Spending Plan?

A spending plan will help you combat the temptations of spending and take control of you money. There are several reasons to develop a spending plan.

Planning: developing a spending plan allows you to determine if your total income meets your total expenditures.

Motivation: a spending plan can help motivate you by making short-term objectives achievable.

Control: a spending plan allows you to control your finances by enabling you to see how you actually spent your income verses how you planned to spend your income. Given this information, you can alter your spending plan or spending habits.

What will a spending plan do for you? Consider the list below. It points out some of the pratical advantages of a spending plan.

1. Help you meet monthly financial obligations
2. Know where your money goes
3. Make payments on time
4. Eliminate or reduce unnecessary debts and loan balances
5. Increase savings for emergencies
6. Determine what you can and cannot afford
7. Prevent or reduce impulse spending
8. Save for education, retirement or big purchases
9. Reduce over-spending

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Teaching Others Needs versus Wants

The importance of teaching others needs and wants and the basic principles of money management cannot be overstated.

This is particularly important today. As children grow up and move out on their own or go off to college, they are faced with numerous credit cards offers and telephone solicitations.

With social pressure to do what their friends are doing and with little or no knowledge of how credit “works,” they may be an easy victim for financial ruin.

Think about your parents or grandparents for a minute. Did they grow up in a world of credit cards and telephone solicitations? Probably not. Therefore, you must take the responsibility for learning about credit and sharing the pitfalls and tips with others. That means if you have not invited your friends to my blog. What are you waiting for?

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Needs versus Wants

Make a list of your “needs” (items necessary for survival).

Make a list of the items that you have purchased out of “want.”

Now, estimate the cost of each item. In other words, what is the total cost of your “needs,” such as housing, food, and clothing?

Now, consider items that you may be making payments on that were purchased to satisfy your “wants.”

Are you spending as much for your “wants” as for your “needs?”

It is important to note that these “wants” are neither good nor bad. However, you should personally balance your needs and wants so that you can successfully establish a savings plan and good spending plan principles. This will help you establish and maintain good credit and work toward achieving long-term financial security.

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Tips for Maintaining Good Credit

Before taking on additional debt, we should all ask ourselves the following question listed below:

1. Do I really need this item right now or can I wait?
2. What is the true (total) cost of using credit?
3. How much is the monthly payment and when is it due?
4. How many months will I have to make this payment?
5. Can I afford the monthly payments?
6. What will happen if I don’t make the payments on time?

Remember that everything we do relating to credit will have one of two consequences:

1. Get us closer to achieving our long-term goals by maintain good credit.
2. Create additional barriers and increased cost.

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Despite Financial Difficulties

As we all know, it is too easy to receive bills in the mall, set them aside, and forget to pay them on time. Therefore, it may be a good idea to keep bills and loan payments in a special place, and develop a system to pay them on time.

Nevertheless, even with the best of intentions, there may be several underlying factors that may negatively affect the ability to pay debts on time. While some of these reasons may be out of control, it is best to set up and regularly contribute to a savings plan to help prevent any of these “common cause” from impairing your credit history. To help you get started on putting money aside, savings ideas and tips will be reviewed later in this workshop.

Just remember, no matter what the cause of the payment or delinquent account, it account will be reported to the credit reporting agency. So make “on-time payment” a number one priority.

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How Do I Establish a good Credit History?

Think for a minute about your own credit habits. This may be either formally (with a lending institution) or informally (borrowing or loaning money from a friend or relative). How would you define good credit? How would you define impaired credit?

For example, as an employee, do you expect to receive your paycheck on schedule? What happens, if for some reason, you are not paid “on time?” How do you feel about your employer? Would this type of a situation make you wonder about the employer’s credibility or ability to manage money?

The same applies to making payments on loans or credit cards. First, you have to establish credibility that you can manage money by getting a credit card or small debt, and paying it back on time. If you go to a bank to borrow money, and there is no history of you ever having any credit, the bank may be reluctant to take a chance on you because it has no indication of whether you’ll pay back the money.

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Good Credit Will Help You Achieve Short/Long-Term Goals

Start to think about some of the ways that having good credit can help you, or better yet, how can it make your life easier?

Consider the items on the slide. So many things, even basic everyday items, are dependent on good credit.

Take, for example, renting an apartment. If two people apply for the same unit, one with good credit and one with a history of late payments or eviction, to whom would you be more likely to rent the apartment?

Good credit is also important to keep your other rates low. Some insurance companies, for example, are using credit reports and credit scores to determine rates on auto and homeowner’s insurance. The lower your credit score, the higher your insurance premiums will be.

As we have seen, a history of credit problems can affect your short-term goals. It is safe to say that it will have even greater effect on your ability to achieve your long-term goals.

Long –term goals, like examples listed above, are the things that all of us dream of or hope to achieve someday. With careful planning and by applying the information and tips received during this blog, you should have the tools to get closer to making it happen for you.

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Benefits of Good Credit

Given the information so far, you might be thinking, so what? We all know people who don’t pay their bills on time, and yet still have nice cars, nice clothes, and seem happy.

While that might be the case, will they ever be able to reach their full potential? It may appear that they have met some of their short-term goals, but will they be able to achieve long-term dreams and true financial security?

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Why Is Good Credit History Important (con’t)?

“Subprime” refers to loans made to consumers who do not meet the typical credit standards of market rate (“A”) loans. As a result of the potentially high risk, “subprime” loans have higher interest rates and fees.

“A” is the credit industry term used to describe a loan that reflects the best possible interest rate terms, and conditions. Consumers need to demonstrate good credit in order to secure a “A” loan.

Consumers with impaired credit may be offered “B” or “C” loans. These loans impose higher interest rate and fees.

Some lenders specialize in “A” loans, some in “subprime” loans, while other lenders offer both.

Car Loan

• A $20,000 car loan at 8% for 5 years, cost $405.53 per month. After making all 60 of the payments, (12 months * 5 years) the total paid is $24,331.67.
• A $20,000 car loan at 14% for 5 years, cost $465.37 per month. After making all 60 of the payments, (12 months * 5 years) the total paid is $27,921.90. That’s a difference of $3,590.23 in extra interest. What would you do with an extra $3,500 in your pocket right now? It would be nice to have, right?

Home Mortgage

• A $125,000 home mortgage at 7% for 30 years, cost $831.63 per month. After making all 360 of the payments, (12 months * 30 years) the total paid is $299,386.12.
• A $125,000 home mortgage at 12% for 30 years, cost $1,285.77 per month. After making all 360 of the payments, (12 months * 30 years) the total paid is $462,875.66. That’s a difference of $163.488.86 in extra interest over the life of the 30-year loan.

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Why Is a Good Credit History Important?

Think back to when you loaned someone money. If they promptly paid you back, you felt good and chances are you would be willing to loan them money again in the future, upon request.

Now think about someone that you loaned money and never got it back, or had to repeatedly ask him or her to pay you back. Are you likely to lend them money again?

It is also important to note that having “no credit” may keep you from getting credit. In the event that a consumer has “no credit,” the person will have to build an “alternative credit” history. This may include things like rent payments receipts, telephone company bills, utility bills, etc.

A Note for Younger People. You should know that it is possible to generate negative credit report entries even before you reach the legal age of 18. If you borrow money, use a credit card, or even pay rent, your payment behavior can impact your credit at any age.

If you were a lender or the owner of a credit card company, think for a minute about lending money or extending credit to couple of your friends. If one friend promptly paid you back and the other friend was reluctant to pay, or never paid you back, which person (if you were a lender) would you charge more fees, or a higher interest rate, or perhaps deny providing a loan?

It is the same within the credit industry. If credit is extended to the “higher-risk” person, he or she is likely to be required to pay a higher interest rate, and/or extra fees, etc., to offset the increased risk of default or nonpayment. This is known as “risk-based” pricing.

The more you pay in interest and fees, the less money is left over for savings, investments, and purchasing things with cash. You could end up always being short of money and playing “catch-up,” juggling between payments on several bills.

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What is a Credit Record?

If any of you have ever used traditional credit, such as a car loan, a school loan, or opened a credit card account, you have a credit record on file. The record includes whether you make timely payments and the amount you still owe.

These records of accounts and payment habits over time become your credit history. This history may be reviewed periodically by current lenders and creditors. Additionally, this history is accessed and reviewed every time that you apply for new credit or the extension of additional credit.

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Credit History and Credit Report

A good credit history is important. Your credit history demonstrates how well you have handled credit in the past and how you use it right now.

Mortgage lenders, loan officers, credit card companies, insurance firms, and other companies review your credit history-in the form of a credit report- to determine if they’ll loan you money to buy a car, get a mortgage to buy a home, obtain a credit card, and the like.

Your personal credit report begins from the first time you apply for credit. From that point on, every time you apply for a car loan, another credit card, store card, or vacation loan from your bank or credit union, information is added to your report.

The most critical component of a credit report is an indication of whether or not payments have been made in a timely fashion.

Any time that a credit report shows late payments, (30 days, 60 days, 90 days, or more than 120 days) a “red flag” is raised and credit may be denied or may be more costly to obtain.

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Interest Rate and APR (Annual Percentage Rate)

These are important distinctions because some lenders may try to convince you that the monthly payment is all you need to know. In truth, you need to know how much it will cost you to “buy” this money. To figure that out, you need to know the interest rate, the costs and fees, and length of time you’ll be making payments.

The APR is what allows you to comparison-shop because it takes into account the interest rate, the fees, and cost associated with getting the money, and the length of time you’ll pay or the “term” of the loan.

For example, let’s say you are interested in buying an $85,000 new home. The home builder offers you a fixed-rate loan with interest rate of 6%. Your credit union quotes you the same mortgage terms (6%) but with an origination fee equal to 1% of the loan amount. Without looking at the APRs on the mortgages, it appears as if the home builder’s offer would be the best deal.

Next, you request the APRs from the home builder and credit union. The APR discloses the real cost of the loans, including the interest rate, costs and fees, and the length of time you’ll be making payments. You learn that the home builder did not disclose a 2% origination fee. In this example, the APR for the home builder turns out to be 6.24%; the credit union’s APR calculates to 6.15%. The cost of a mortgage with the home builder is actually higher than the cost of a mortgage with the credit union.

Nevertheless, you still need to exercise caution and comparison-shop when reviewing APRs because they can be misleading or cause further complications. This is especially the case for mortgages. You should calculate the fees over the full term of the loan or the time you actually plan to hold the loan. In doing so, you will get a more useful and realistic assessment if the cost of the loan, and the APR will help you identify the least expensive mortgage you can get.

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What is Credit/Debt?

Is credit a privilege or a right? Frequently we may believe that lenders are obligated to provide us a loan. In reality, access to credit, particularly at reasonable terms and interest rates, is earned by demonstrating that we have managed our money and credit responsibly in the past.

Therefore, in order to increase the confidence of lenders, and to improve our chances of obtaining credit at reasonable terms, we need to demonstrate our financial stability and security by possessing a stable income and the ability and willingness to repay any and all borrowed funds in a timely fashion.

Debt is when you owe, usually money, for the purchase of goods or services without immediately paying for them. You owe a debt when you use credit instead of cash to make these purchases.
Your promise to pay the debt is usually stated in a contract that is enforceable in court.

Remember: Debt spends your future income now.

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