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Surviving Spending? Steven K. Shapiro 2009 – DATE \@ "yyyy" \* MERGEFORMAT 2020 All Rights Reservedsks@When I started writing this article, I had a lot to say about how we are taught to spend, encouraged to spend, how we are an instant gratification society, and how we have been taught to gratify ourselves by spending, even if we don’t have the money. I hit the delete key. I realized that I don’t have to actually say the words. We all know this. Many of us are living it. But what can we do about it?Several years ago I started hearing this Dave Ramsey guy on the radio. At first I thought him to be a first class idiot. A lot of what he was saying went against a lot of what I had learned. But the longer I listened, the more it made sense. It made a lot more sense when I went from just listening to him, to checking out his web site and reading about the details of the things he was talking about. His web site is a treasure trove of information. Sure he is selling himself and his products and commercializing what he is teaching, but I have found that it is not necessary to purchase any of his products to be able to put his teaching into action. Maybe some people need these products, and I do not disparage them, all I say is that I don’t think that it is necessary to buy anything to be successful in doing what he is teaching.I started by looking at what I owed. MY DEBT. I then put together a budget to account for every penny of what I earned and what I spent it on. I used my budget to be able to create savings while I was reducing my debt. I also decided to eliminate my use of credit cards wherever possible. Finally, I incorporated all of this into accomplishing what Dave calls his ‘7 Baby Steps’. The following are my thoughts on what I am doing and how I am doing it. I have also included a link to Dave’s web site as he has pages and pages of details that I couldn’t hope to provide in this short article.DebtDebt is dumb. You’ll never get rich spending money. You get rich by saving money. You save money by spending less money than you earn. You have to decide for yourself about the tradeoff. What are you willing to NOT have in order to have the money to put into savings? BudgetingIf you’re not in control of your money, your money is in control of you. The only way to get control of your money is to know where it comes from and where it goes. This is what a budget does. It is a TOOL for finding out what happens to your money. A budget should go down to the penny if possible, but don’t go overboard. There’s no need to hire a tax accountant and pay them thousands of dollars to find out where your money is going. You can do this for yourself with simple Excel spreadsheets; or use Quicken and sometimes even your bank will have online tools that help to categorize all of the money you spend via checks, electronic bill pays and debit card purchases. Update it on a regular basis and keep it current. SpendingOnce you have your budget in place, you will be able to make a spending plan. The first thing you will want to do is figure out how to reduce your spending. When it comes to spending, you need to determine what is a NEED and what is a WANT. Even then there are choices to make. You may NEED a cell phone, but do you NEED the $395 product, or just WANT it? You may NEED a car, but do you NEED a new one, or just WANT it? To be able to save more, you must narrow your spending closer to the NEEDS and farther from the WANTS. SavingMy goal is to have my money work for me so that I don’t have to work for my money. The more I save, the more interest it earns. The more I save, the more I can invest and have even more money work for me. In fact, the more I am willing to put into risk-free fixed rate investments, the higher the interest rate that they are willing to offer me. However, without a savings plan, I will never have enough money to work for me. Savings doesn’t have to start out big. In fact, most savings start out small, with a small initial amount and then by adding to it little by little on a regular basis. You must also have the will power to say that whatever you put into savings is UNTOUCHABLE. If you put it into savings, you must do so with the agreement to yourself that it is not available. I can already hear you asking: “Steve, what about an EMERGENCY!!!? Well, you know that there is going to be an emergency. There always is. You may not know WHAT it is, but you know that at some point in time, there is going to be an emergency where you need to get a hold of some cash . . . fast. Well, that should be part of your budget. An emergency fund that is in ADDITION to savings. So now you ask: But Steve, what if its NOT ENOUGH? What if I need MORE? I am sure that you can always envision the ultimate catastrophe. However, based on your years of experience, and the emergencies you have experienced in your life, what is a reasonable amount? Set this amount aside and do your best. If you NEED (not want, but need) to dip into savings, make sure you have a plan to repay it.There are many ways to set aside money for savings. Some people use the ‘envelope’ method, where each week they put an amount into an envelope until they reach their goal. Others setup many separate savings accounts at their bank and put money into them in a similar manner. Whatever it is that works for you, start doing it!Credit CardsI have learned to hate these things. They are too convenient. They make it too easy to get into debt. Don’t have the cash? Just charge it! (I remember back to an old ‘Flintstones’ episode with Betty and Wilma). I have an agreement with myself that nothing goes on a credit card that I am not prepared to pay for with my discretionary income. Basically, if I don’t already have the cash or will have it in my next pay check, I just don’t use it. Lately I travel quite a bit for my employer. I use my credit cards for my travel expenses and as soon as I return, I fill out my expense reports and am reimbursed. I don’t wait till the end of the month when I get my statement. I go online and pay it off immediately so that I am not tempted to spend the money elsewhere and let that balance stay on the card. So now I hear you asking about all those wonderful ‘rewards’ points and ‘frequent flyer miles’ etc. that you get by using your credit card. I say no problem. Use the credit card all you want to pay for things, just be sure to pay it off immediately so that you don’t carry a balance and don’t have interest charges. Remember, if you carry a balance, those ‘rewards’ are depreciated at your interest rate of your balance. So if you carry $1000 average monthly balance on your card for a year, at a rate of 20%, you are spending $200 / year for that ‘reward’. So how much have you actually been ‘rewarded’?Baby StepsI like these the best. Once I understood what they were and how to use them, I can’t recommend them highly enough.$1,000 to start an Emergency FundPay off all debt using the Debt Snowball3 to 6 months of expenses in savingsInvest 15% of household income into Roth IRAs and pre-tax retirementCollege funding for childrenPay off home earlyBuild wealth and give!Step 1. Earlier I talked about savings and creating a separate emergency fund. Start with $1000 as a guideline. If you think you need more, then by all means, make it more. You need to adjust it to your life so that it works for you, but do not be without it.Step 2. I love the debt snowball. I don’t know why I never thought of it. In the past, I just paid a bit of money across all of my outstanding debts and it never seemed to help. This works. It’s for credit cards, car loans, furniture loans, and all the rest of your ‘signature’ type loans. Here is how it works in Dave’s own words: “The math seems to lean more toward paying the highest interest debts first, but what I have learned is that personal finance is 20% head knowledge and 80% behavior. The principle is to stop everything except minimum payments and focus on one thing at a time. Otherwise, nothing gets accomplished because all your effort is diluted. You need some quick wins in order to stay pumped enough to get out of debt completely. When you start knocking off the easier debts, you will start to see results and you will start to win in debt reduction. So list your debts in order with the smallest payoff or balance first (excluding the house). Do not be concerned with interest rates or terms unless two debts have similar payoffs, then list the higher interest rate debt first.”So I made a list of those outstanding signature debts, smallest to highest dollar amounts. Using my budget, I cut back on as much as I could so that I could put as much as possible into paying off this first debt (I still made the minimum payments to the other debts). Once it was paid off, I took all the money I was paying towards this debt that no longer existed, and applied it to the next debt. It took me about 9 months to get them all paid off. It could have taken less time if I had been able to work a part time job or find some other source of income, but I could not. If you have that option, then that will only increase the speed at which you get them paid off.Step 3. This is the step I am currently working on. Depending on your job, 3 to 6 months of expenses in savings may not be enough. If you are self-employed, you might want to consider having a full year of expenses saved in the bank. Also, bear in mind, that this is for the ‘loss of job’ emergency. You don’t have to have half a year’s salary in savings, but half a year’s EXPENSES. And if you lose your job, I am pretty sure that a lot of those WANT expenses are going to get zeroed out until you are employed again. This emphasizes the importance of Step 2. If you have a lot of mandatory expenses, that is to say, paying off signature loans, then it is not so easy to remove them in an emergency. So get that car and those credit cards paid off ASAP so that you can reduce this expense even further.Step 4. I have a 401k with my employer and he does a very generous matching funds. While I cannot afford to invest 15% of my income (yet), I can invest the max that he will match. Basically if I invest 3%, he will match it with 2% and that’s found money in my opinion.Step 5. When I moved to Florida, I opened a Florida Prepaid College plan for each of my kids as soon as they qualified. Back then my car was paid for and the total cost of the Prepaid College plan for my kids was about what I had been paying towards my car payment. Dave recommends against a Prepaid College Plan and recommends other investments for this purpose. You will have to decide for yourself which plan is best for you.Step 6. When I was making mortgage payments, I used a mortgage amortization calculator I found on the web and I realized that by being 1 payment ahead and by paying an extra $100 or so on the principal each month I could cut the duration of the mortgage in half. I have seen several other techniques that people have used to shorten the duration of their house payments. You will have to decide for yourself which plan is best for youStep 7. I sure am looking forward to this step as it accomplishes my original goal: Have my money working for me rather than me working for my money.You can see for yourself what Dave has to say by checking out his web site at: , we are embarking upon a brand new year, so maybe one of your resolutions can be to become debt free. ................
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