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Archive for August, 2013

Debt is a drag. Not only on your credit score, but also on your psyche. It’s a dark cloud that lurks over many corners of life, casting a shadow over your confidence, ambitions and relationships.

The stress that comes from debt “may even completely eliminate all the happiness that you can get from spending your money,” says Ryan Howell, associate professor of psychology at San Francisco State University and co-founder of Beyond the Purchase, a website that examines the psychological link between money and happiness.

But a massive debt payoff can bring a host of psychological benefits. The achievement can restore your self-esteem and help you pursue life goals. The debt pay-down process instills a sense of resolve that will help you stay financially healthy.

If that’s not motivation enough, consider this: the trickle-down effect can lead to improved health and restored relationships.

The benefits of paying off debt go well beyond the bank. So whether you’re nearing the finish line or miles away, think about these ways debt payment can help return balance to your mind and body.

Financial Recovery

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They say with investing that out of sight out of mind is a great idea or you’ll end up spending your money.  When it comes to paying monthly bills, it seems that the ‘out of sight out of mind’ philosophy is taking hold of how young people are managing their monthly bills.  It is really a good idea to pay your bills via autopay? Here are my pros and cons of the management of doing your bills through an electronic process.

PROS:

  • You help save the environment– Paying bills on line can do a lot to help save the environment. It not only saves money, but saves trees, water, and many other resources.  The additional cost of making paperwork come from your bank may invariably cost you more if your bank has to add extra cost over time. In fact, I think you’ll eventually see all banks charge for paper statements over time.  So, you could be doing yourself a favor by paying bills on line and not taking paper statements from either the vendor or the bank.
  • You save yourself time – Nobody to this date and time enjoys that Sunday once a month where they saddle up to their home office desk to begin writing out bills. Not only is this time emotionally draining, but it can physically take you an hour or more per month to pay out all of bills, address all of the envelopes and do what you have to do with your checking account. If you are in a relationship where you pay some of the household bills and your partner/spouse pays other sets of bills, you may also have to engage in a monthly discussion about where the finances are at based upon inflows and outflows.
  • It works best with recurring bills-  If you generally have 4 to 8 recurring bills that come up such as cable and mobile phone, those bills that come in at the same time of the month and generally carry the same bill cost each month can be an excellent idea to put on to this type of system. Of course for things like gas and electric you need to pay attention to the seasonality of the bills, but I like the practical point of paying the basic recurring bills on line each month.

CONS:

  • You stop reading the detail of each and every bill – Systems like credit cards and electronic bill paying have certainly made paying bills a heck of a lot easier.  However, most people have an idea in their mind every month on what the bill amount should be for their mobile phone, gas, electric, and cable. Essentially, the 8 to 10 bills that you pay every month. If the autopay system shows the amount of bill to be within the imaginary field goal posts you have in your head, you are likely to pay the bill.  Realize that companies have become wise to this concept and if they increase your monthly costs, they will do it in very tiny increments because they know you won’t likely question the increase. The only time you may actually read a bill is if the amount looks incredibly disproportionate to what you thought the actual bill was going to be that month. It’s important that you read the detail of the bills even if they come electronically into your banking system.
  • You let the computer reconcile for you- I remember when I got my first checking account. Each month, I would take the time to reconcile both the credits and debits to my checking account against what I had actually written in my checkbook to make sure the balances matched. Today, I see most young people reconcile their actual balances by either a) waiting to see what the ATM statement says, or b) checking on line and assuming that the balance reported is the actual balance. It’s a little scary because as the CEO of your family finances, you need to be in charge each month to make sure the direct deposits and monthly withdrawals look exactly as you thought they would.
  • It works worst with variable bills-  You may have bills that come in once a year potentially like a homeowners association dues, alarm system, or life/auto insurance. If you have bills that you pay that come in with less frequency than a monthly basis, I don’t recommend inserting these into the autopay process. Rates could change or the bill may be inaccurate and need your review before payment. It doesn’t mean you can’t pay the bill on line, just don’t have it set for autopay.

Automatic bill payment is another one of those advances in technology that can make our lives easier. However, it doesn’t remove your or absolve your from your role as CEO of your family finances. As one of my first leaders taught me, you still need to inspect what you expect. If you don’t want surprises, read all of your bills and only put recurring bills that have very little month to month volatility on autopay.

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The secret to setting up a budget you’ll actually follow
If nothing else, remember this one simple budgeting rule: Spend less money than you make.

Now that you’ve memorized that line, let’s fine-tune that advice.

Procrastinators, you can rejoice: There is such a thing as a budget that you can stick to. What’s the secret? Take every shortcut possible.

Since money advice is our full-time jobs, we’ve been through the budgeting process enough to spot the corners that can be cut and the steps that can be skipped.

The purpose of this budget is to come up with a system to govern everyday spending. I’m leaving out housing, insurance, and the all-important savings categories for now.

So let’s start corralling your cash flow…

Step 1: Take a snapshot of your spending
Every budget starts with sniffing out your spending habits and determining exactly where your money goes on a day-to-day basis. Don’t skip this step: After all, if you don’t know how much you’re spending and on what right now, you can’t decide where you want to spend and on what from now on.

For those who do most of your spending on one credit card (paid off in full each month, right?) or with a debit card, review the raw data your bank provides on your monthly statement, and come up with general categories for spending areas in which the amounts you shell out make you shudder. It’s even better if your financial institution provides a year-end spending summary, with your weak spots fully graphed in four-color bar charts.

If most of your spending is done with old-fashioned cash, go about your business as usual for one week — just write down all of your expenditures. Then project the results over four weeks. Now you have a rough idea of where your dough goes. As stated above, pinpoint the big categories where your overspending occurs.

Step 2: Plan your next shopping spree
After you get over the horror of your daily spending, the next step is to go on a virtual shopping spree.

  • Grab a piece of paper, a pencil, and a snack. 🙂
  • Make a list of what you need to buy or do over the next three to six months. These could be physical purchases (like new tires for the car, airfare for the family vacation) or financial plans (such as paying off a credit card, maxing out this year’s IRA or adding to your emergency fund).
  • Do the same for planned long-term (one to five years) purchases.

Yay! You have a “spending plan” (so much nicer than the word “budget,” don’t you think?).
Meaning every time you whip out your wallet, you have a tangible list of money goals to help drive your spending decisions and propel you financially forward. Bonus points to those who make a laminated wallet-sized version of the list for everyone in the family.

Extra credit: If you’ve got time, repeat the same exercise, only focus on the emotional uses of your money: List five uses of your money that will positively affect your life in the near-term and the long-term. Then, list five uses of your money that will add little to your quality of life in a decade or more. This touchy-feely step may seem odd, but thinking about what you really want to do with your money can greatly affect your plans for spending and saving it.

Step 3: Do some simple division
With your money goals in hand, pencil in how much each item on your “wish list” is going to run you on a monthly basis. Simply divide the total amount for those new tires by the number of months until you need them.

Step 4: Set up a no-brainer savings system
With your targeted spending plan in place, it’s time to direct your money towards your goals. If, in the past, you’ve been derailed by daily expenditures or surprise “can’t-live-without” purchases (ahem), here’s an instant fix: Hide your money from yourself.

That’s right: The best way to save your money is to keep your cash out of spending reach by diverting it to a separate savings account — one different from the checking account you use for everyday expenditures.

You’ve already figured out the monthly amounts you need to sock away, but, don’t worry — there’s no need to bother remembering to move your money from your checking to your savings account month after month. Tell your bank to do the work for you.

Set up automatic recurring cash transfers from your main checking account into your separate savings account. (Though you can set it and forget it, we do recommend checking in to make things are kosher every once in a while.)

With your savings on autopilot, all that’s left to do is stay out of your own way. Ah, but that can be much easier said than done, which means going into spending triage mode…

Step 5: Stop mindless overspending
Life is full of temptations.  The “envelope” method of budgeting will instantly structure your everyday spending. It’s simple:

  • Come up with a reasonable weekly amount you’ll allow yourself to spend in your biggest categories. (Those are typically “food” (or, depending on your lifestyle, get more specific such as “lunch,” “family dinners out”), “entertainment” (e.g. happy hours, movies, tabloids to pass the time), “transportation” (gas, parking, taxis, public transportation), “apparel/services” (dry cleaning, bangs trim, cute shoes.)

    For guidance, consider that the four biggest budget categories for typical American household are housing (34%), transportation (18%), food (13%) and entertainment (4%). Of course we encourage everyone to be better than average, so if you can spend less of your budget on these big categories.

  • Create envelopes for each of those categories.
  • Put the allotted amount of cash to cover a week’s worth of expenses into each envelope. (You don’t have to carry the entire wad with you every day, but do make sure you don’t cheat with extra visits to the ATM.)
  • Once the cash is gone, so is your weekly stipend.

As with all of our lazy budget shortcuts, feel free to add or subtract layers of complexity, depending on how much detail you can stand. But don’t tax yourself too much: Remember that in dollars-and-cents (and sanity) terms, sweating the big stuff before all else will save you the most coin. Plus, it will leave you plenty of time to procrastinate about stuff besides your finances.

So….do you think this method will work for you? Try it out and let us know……we would love to get some feedback.

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