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Reducing Debt and Spending

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  1. 1. © 2008 Financial Health Counseling Services, Inc. Presented by: Diane R. Schmidt Certified Financial Health Counselor diane . [email_address] .info Successful Debt Reduction
  2. 2. Importance of Financial Literacy <ul><li>The more financial errors you commit, the more money passes through your hands </li></ul><ul><li>Money is not a taboo subject with children - discuss the limitations, realities and details of your spending plan </li></ul><ul><li>Seek professional advice before purchasing any financial product that you don’t understand </li></ul><ul><li>The information on the following page is sobering: </li></ul>
  3. 3. How costly is financial illiteracy Many people do not understand the concept of “Universal Default Rate” Many people do not understand that the cost of the insurance for a car or house is tied to their FICO* scores * Insurance companies have their own FICO model 53% of people who took a multiple choice investing quiz didn’t know that total return was the best measure of a mutual fund’s performance More than 80% of consumers don’t understand that interest begins to accrue from the date of purchase on accounts with outstanding balances Nearly 80% of consumers do not know how the grace period on a credit card works. Only 8% of people who invested in the stock market knew that there’s no “insurance” against fraud in your portfolio Fewer than one in four adults can explain what a municipal bond is. Less than 10 percent of American adults understand a 401(K) well enough to explain it to someone else. One of every two marriages in America ends in divorce. Studies show that financial disagreement is one of the leading causes of discord 20% of baby boomers are saving adequately for retirement and one quarter of adults between 35 and 54 have not even begun to save for retirement
  4. 4. What is holding you back? <ul><li>Lack of financial knowledge which stems from a lack of personal financial education. </li></ul><ul><li>Financial Illiteracy knows no socio-economic boundaries </li></ul><ul><li>Some blame financial shortcomings on not earning enough money </li></ul><ul><li>Financial Success and more importantly personal happiness has virtually nothing to do with how much income a person makes rather what they do with what they have been given </li></ul><ul><li>Do you have good financial habits? </li></ul>
  5. 5. What are Good Financial Habits? <ul><li>What are you currently doing to improve your financial heath? </li></ul><ul><li>Do you participate in an employer retirement plan </li></ul><ul><li>Do you have a family WRITTEN spending plan? </li></ul><ul><li>Do you track your impulse purchases? </li></ul><ul><li>Do you include personal savings in your spending plan? </li></ul>
  6. 6. BEST Financial Habit <ul><li>Managing your Personal Finances means forming a plan for making the best use of your limited time and dollars </li></ul><ul><li>Know where your money goes!!! </li></ul><ul><li>Seek assistance when you don’t understand a financial product </li></ul>
  7. 7. Measuring your Financial Health <ul><li>Determine your net worth - Financial assets - liabilities </li></ul><ul><li>Examine your Credit Report for accuracy </li></ul><ul><li>Improve your credit report </li></ul><ul><ul><li>Late or missed payments more than 7 years old, ask to be removed </li></ul></ul><ul><ul><li>PAY ALL YOUR BILLS ON TIME - sign up for automatic bill payment or direct withdrawal from your pay check </li></ul></ul><ul><ul><li>Be loyal if it doesn’t cost you - The older the age of the account you have open, the better. Don’t be loyal if you can reduce your finance rate, annual fee, reduced late charge fee. </li></ul></ul><ul><ul><li>Do not apply for every offer that comes in the mail. The inquiries will lower your scores </li></ul></ul><ul><ul><li>Limit your debt and debt accounts </li></ul></ul><ul><ul><li>Work to pay down consumer revolving debt. Balances 30% above the highest amount charged will affect your scores </li></ul></ul><ul><li>Get all credit report errors corrected </li></ul><ul><li>Side step “Credit Repair” firms. If issues on your credit can be fixed, you can fix them yourself without the outrageous fees </li></ul>
  8. 8. GOOD DEBT VS. BAD DEBT <ul><li>GOOD DEBT - College Education, Home Mortgage </li></ul><ul><li>BAD DEBT - Purchases made on credit card*, High interest rate loans from finance companies </li></ul>
  9. 9. DO YOU HAVE BAD DEBT OVERLOAD? <ul><li>BAD debt - Higher-interest debt that generally depreciates in value. Purchases places on revolving credit card without the means to pay the bill in full when due. </li></ul><ul><li>Credit cards should ONLY be used if you pay the balance in full when the bill is received. If you carry a balance, you are being eaten alive with finance charges. More important, you are purchasing things that you don’t need with money you DON’T have. </li></ul>
  10. 10. Calculate your bad debt danger ratio 10 to 20 percent of your annual income is acceptable. When your bad debt ratio pushes and begins to exceed 25% of your income, you are reaching the danger zone .  Bab Debt danger ratio Bad debt  annual income
  11. 11. Credit Card Danger <ul><li>Only use credit cards to play the “float”. When your balance is paid in full each month, you are given a grace period to pay the balance due without finance charges. </li></ul><ul><li>If your credit card is blowing a hole in your budget, even if you pay the balance in full, cut up the plastic, forget the float, and PAY CASH </li></ul>
  12. 12. Analyze your Net Savings <ul><li>Your actual NET rate of savings is the amount your net worth increased over last year </li></ul><ul><li>Money on deposit during the year but used for emergencies like auto repair, doctor bill etc, does not count as savings. It did qualify for savings prior to your need to consume the money and also it helped you avoid financing the emergency </li></ul>
  13. 13. Where does your money go? <ul><li>At all income levels - people fall into one of three categories </li></ul><ul><ul><li>People who spend more than they earn </li></ul></ul><ul><ul><li>People who spend all they earn </li></ul></ul><ul><ul><li>People who save 2,5,10 or even 20 percent or more* </li></ul></ul>
  14. 14. <ul><li>By utilizing a form such as this, you can track where your money is spent </li></ul><ul><li>The forms that follow, offer a greater amount of detail. </li></ul><ul><li>The fact of the matter is, this process will take discipline. You are the only one who can determine the depth of your desire to attain your goal. </li></ul><ul><li>Goals should be set at three levels: </li></ul><ul><li>Immediate </li></ul><ul><li>Short Term - next 12 months </li></ul><ul><li>Long Term - 10 years </li></ul>
  15. 15. <ul><li>Once you have determined where your money goes - then you can spend less, and either save more or use the excess to pay down debt, existing consumer debt or previous credit obligations that are still unresolved on your credit report </li></ul>
  16. 16. DETERMING YOUR RELATIONSHIP WITH MONEY IS THE FIRST STEP <ul><li>Which money relationship category do you fall into? </li></ul><ul><li>Money and Achievement - In this category, money is strongly related to feelings of achievement. When you have this relationship you want something tangible to show for your efforts. </li></ul><ul><li>Money and Approval - This group sets out to please other people. Tend to over spend on gifts. Also the “Keeping up with the Jones” group falls into this category. </li></ul><ul><li>Money and Agitation - Spending is fueled by emotions. Purchases are made to relieve stress, feel better about themselves or to get back at someone. </li></ul>
  17. 17. Examine the roots of overspending <ul><li>Ease in access to credit </li></ul><ul><li>Use of credit cards to make consumption purchases you can’t afford in the first place </li></ul><ul><li>Use of credit cards to live beyond your means </li></ul><ul><li>Taking out a car loan for more than you need </li></ul><ul><li>Bending to outside influences and agendas </li></ul><ul><li>Spending to feel good </li></ul><ul><li>SOLUTIONS TO THESE ISSUES </li></ul><ul><li>If you can’t control your spending with credit cards - cut them up, freeze them in a bowl of water, or simply do not carry them </li></ul><ul><li>Resist the car sales man that tries to convince you that need the latest model, because the payment is ONLY </li></ul><ul><li>Stick to your long term financial goal. Do not go out for the spur of the moment dinner if it is not in your budget </li></ul><ul><li>Do not buy something on credit when you are mad, depressed or otherwise upset. Just remember how you will feel when the bill comes. </li></ul><ul><li>BE COMMITTED to your PLAN!!!!!! </li></ul>
  19. 19. SOUND FAMILIAR <ul><li>The fact that knowing exactly where your money goes EVERYDAY is the basis for every sound financial plan. </li></ul><ul><li>Debt reduction is a piece to the financial puzzle that begins with the written plan and tracking of your spending </li></ul>
  20. 20. EXERCISE: <ul><li>List everything you spent money on </li></ul><ul><li>yesterday: </li></ul>
  21. 21. Did you forget any of the following: <ul><li>Gas purchase </li></ul><ul><li>Bottled water, coffee, pop, beer, wine or other beverages </li></ul><ul><li>Cigarettes </li></ul><ul><li>Gum, candy, chips, pop corn, other snacks through the day </li></ul><ul><li>Vending machine purchases </li></ul><ul><li>Bus tickets/monthly or weekly pass purchases/tolls </li></ul><ul><li>Fast food/dining out budgeted or not </li></ul><ul><li>Any magazine/tabloid purchase at grocery store </li></ul><ul><li>Any purchase at the grocery store that is not on your shopping list </li></ul><ul><li>Lottery Tickets </li></ul><ul><li>Pets </li></ul><ul><li>Parking </li></ul><ul><li>Movie, dvd rental/movie clubs, cd/music clubs </li></ul>
  22. 22. <ul><li>Add together all the items you purchased YESTERDAY! Multiply that by 7 days. Total times 4 weeks. </li></ul><ul><li>FOR EXAMPLE: Assume that all the items you purchased yesterday equal $11.00. And as you honestly review the items and feel you spend that most days. You spend about $77.0 per WEEK. Over the course of a month you have spent $333.67. </li></ul>
  23. 23. <ul><li>Lets further assume the $11.00 you spent yesterday was spent on: </li></ul><ul><ul><li>Cigarettes $3.85 </li></ul></ul><ul><ul><li>Bottle of water $1.99 </li></ul></ul><ul><ul><li>Fast food $5.29 </li></ul></ul><ul><li>Cut out only the water and fast food and you will save $7.28 per day/$50.96 per week/$220.82 per month </li></ul><ul><li>WHAT COULD YOU DO WITH $220.00 PER MONTH?? </li></ul>
  24. 24. MAKE SMALL CHANGES <ul><li>Keep a refillable bottle of water in your refrigerator. </li></ul><ul><li>Take a shopping list to the grocery store. DO NOT BUY anything not on your list. </li></ul><ul><li>Clip coupons </li></ul><ul><li>Buy only when on sale, if possible </li></ul><ul><li>DO NOT CHARGE new purchases on your credit card </li></ul><ul><li>Try to use a debit card </li></ul><ul><li>Ask if your employer can withhold a few dollars into a savings account </li></ul><ul><li>With each new purchase, ask yourself “How will buying this improve the quality of my life”. “Will my life be less fulfilled if I DO NOT buy this. </li></ul><ul><li>Create a spending plan - in writing !!! </li></ul>
  25. 25. Small changes <ul><li>Limit your dining out </li></ul><ul><li>Brown bag your lunch - it is healthier and will save you money </li></ul><ul><li>Join a wholesale superstore </li></ul><ul><li>Review your cell bills for unused minutes - could change plan </li></ul><ul><li>Trim your taxes - be sure you are taking advantage of employer sponsored retirement plans </li></ul><ul><li>Investigate BUDGET billing with the utility company </li></ul><ul><li>Eliminate magazine subscriptions </li></ul><ul><li>If possible, quit smoking </li></ul><ul><li>Review insurance for savings on deductibles and coverage options </li></ul><ul><li>If you generally get a tax refund, change you withholding to have the money monthly. What do you generally do with that refund check? </li></ul>
  26. 26. <ul><li>Objectively observe your family living habits in regards to energy efficiency </li></ul><ul><li>Turn down your thermostat when you are at work and sleep. </li></ul><ul><li>Don’t watch the TV shopping networks. You will be tempted to buy what you don’t need </li></ul><ul><li>Turn your computers off. Don’t leave in sleep mode </li></ul>