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Survive and Thrive Job Seekers Workshop

Forsyth County Public Library

Budgeting, September 14, 2009

Introduction

Do you think of questions after a session has ended? Want more information? Check out the Survive and Thrive blog at:

Speaker

Patsy Dwiggins

Cash Flow Planning

The ideas in this presentation are from Dave Ramsey’s Total Money Makeover System. For more information, check out his website at:

Why do a budget? To make sure your short term goals (your immediate needs) and your long term goals (big purchases like a car, retirement) can be met.

Pay Necessities First: The Four “Walls”

• The four walls are your basic needs: shelter, transportation, food, and basic clothing.

• These needs should be evaluated based on your own personal situation.

How to Get There?

• A child does what feels good; an adult develops a plan and follows it.

• Spend every dollar on paper first; make sure all income is designated for a purpose.

• YOU tell your money what to do.

• If you are married, have budget committee meetings once a month. Each person is responsible for keeping on track with a budget.

Are you a nerd or a free spirit about budgeting?

Nerd rules:

• Write up the budget draft ahead of time. Have your say, and then be quiet.

• Be brief.

• Be a team player.

Free Spirit rules:

• Make sure to come to the meeting.

• Express your ideas in the meeting.

• Make a contribution to the budget, even if it is very small.

How to keep track

• List all forms of income; list how often it comes in (bi-weekly, monthly, etc.)

• This system relies on a month by month budget rather than a general yearly budget that does not factor in the difference in expenses for each month. For example, the heating costs will be different for winter months than for fall months.

Monthly Cash Flow Plan

• Remember, each month is different.

• Start with an emergency fund.

• List out expected expenses for the month (see instruction sheet 5)

• Keep in mind that each dollar will be accounted for each month.

• Once money is allocated to the essentials (the four walls), divide up the rest. A great place to put any extra is in an emergency fund. This is especially important for job seekers.

Recommended Percentages for Allocating Income to Categories

• Charitable gifts: 10-15%

• Saving: 5-10%

• Housing: 25-35% the lower the better!

• Utilities: 5-10% evaluate- do you need all that technology?

• Food: 5-15% includes groceries, restaurants, etc.

• Transportation: 10-15% all vehicle needs- gas, inspections, repairs, etc.

• Clothing: 2-7%

• Medical Health: 5-10%

• Personal: 5-10%

• Recreation: 5-10%

Allocated Spending Plan

• You have spent the income on paper, now it is time to keep track of what you actually spend. On the worksheets included in this presentation, the money spent is to the left of the slash and the amount left to spend is to the right. See sheet 7.

• Spent / amount left to spend

• This system will help you keep track of your income closely.

• This system also allows for flexibility with bills that come due at different times of the month.

Irregular Income Planning

• This budget system can be adapted for people whose income is sporadic, such as those who are self-employed.

• Keep an item wish list; this can help prioritize expenses to be paid if there is money left over after the basic needs are met. This can also be helpful for people with a regular income as well.

Debt Snowball

• Take care of debt once your emergency fund has been built up. An emergency fund should be able to sustain your basic needs for 3-6 months, or even longer.

• List out all debts: loans, credit cards, etc.

• The first debt you list should have the smallest balance, then the next smallest, and so on until the last debt listed is the largest debt.

• Work on paying off the first and smallest debt first.

• Paying off small debts soon can help motivate you to pay off more debts.

• Always make sure to keep up with other debts by making the minimum payments.

• Once a debt has been paid off, redirect the same amount of money you used to pay for it each month and add it to the minimum payment for the next debt on the list.

• Closing credit cards once they are paid off: 2 schools of thought

o If you do not want to have debt at all, you do not care about credit scores and you can close the account.

o If you plan on using credit in the future and need to maintain a good credit score, keep in mind that closing an account can hurt good credit scores.

Baby Steps Toward Long Term Goals

• $1000 emergency fund; this is a starting place only, and can be used for small emergencies.

• Pay off all debt, except house; this includes car loans, student loans, etc.

• Full emergency fund; 3-6 months or longer of expenses.

• Fund retirement.

• Fund college.

• Pay off your house early.

• Build wealth and give.

Step One, $1000 emergency fund

• Money goes into a money market account or a savings account, NOT a checking account. This is for emergencies ONLY. If you make less than $20,000 a year, your emergency fund should start at $500.

Step Two, Pay off debt

• This includes car loans, equity lines, credit cards, etc.

• Consumers who use credit cards spend 12-18% more using a credit card, even if they pay the bill each month. Pay cash when you can!

• One way to use cash is the envelope system that Dave Ramsey advocates. Click here for more information:

• Use a debit card when necessary.

Step Three, Full emergency fund

• 3-6 months of expenses.

• Save towards the higher end if only one person is working or there is an anticipated loss or decrease in income.

• Again, this goes into a savings account or a money market account.

Step Four, Retirement

• 15% of the household income should go to retirement.

• If your workplace offers matching for a 401K plan, invest to the maximum of the match.

• A Roth IRA will net more in the end, beating any tax advantages of other accounts. Place retirement funds in a Roth IRA if your 401K plan does not receive matches.

Step Five, College

• Look into an Education Savings Account (ESA) or an Education IRA

• In a 529 Plan, you control the mutual funds.

• Never buy a plan that freezes your options.

• Never buy a plan that changes your investments based on a child’s age.

• Never save for college with insurance, savings bonds, or pre-paid tuition.

Step Six, Pay off your house early

• Make extra payments to help pay off your house early.

Buying a house

• Your best option is paying 100% down.

• Your house payment, including taxes and insurance, should be no more than 25% of your take home pay.

• Apply for a 15 year fixed rate loan.

• Pay at least 10% down.

• After closing on the house, you should still have a full emergency fund. Do not use emergency funds to help pay closing costs, etc.

Step Seven, Build wealth

• Understand your investments; make sure your financial advisor listens to you and is willing to work with you.

• Look at good growth mutual funds.

• Diversify.

• Keep it simple.

• Build slowly.

Now that you are secure in your choices, you have choices!

For more information, check out these books from the library:

• The Total Money Makeover by Dave Ramsey

• The Millionaire Next Door by Thomas Stanley

• QBQ! The Question Behind the Question by John G. Miller

• 48 Days to the Job You Love by Dan Miller

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