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Budgeting (Part III): Debt checkup – how much do you really owe?

Credit cards, car loans and the mortgage are all contributing to your debt load. If you want to pay off debt faster or just be in a better financial situation a year from now, it’s time to work on your budget. We’ve been working on setting up a healthy household budget this past week, and today, we’re going to dive right into debt management. It’s important to keep in mind that not all types of debt are necessarily bad — some forms of debt, such as your mortgage, are actually considered to be a ‘good’ debt because they help to prove creditworthiness. Other forms of debt, such as store credit cards, car loans and payday loans, fall into the ‘bad debt’ category because they can have a negative impact on your credit score and may be a sign that you are living beyond your means.

Debt checkup step-by-step

This week’s budgeting task is to focus on debts listed in your fixed or variable expenses categories. Use this step-by-step guide to analyze your current debt load:

  1. List all current liabilities. Pull out all billing statements and loan payment stubs to determine how much you are responsible for paying each month. You need to include: all credit cards, bank loans, personal loans, business loans, student loans, taxes and mortgage payments in this list. Make a comprehensive list of the minimum payment for all of these liabilities and the interest rate you’re paying then make a list of the outstanding balances.
  2. Prioritize your debts. Go back to your list of liabilities and determine which debts have higher balances and high interest rates. Rank your credit cards from highest to lowest interest rates to see which credit cards need to be paid off faster.
  3. Review the budget. You need to know how much you have available for debt payments before you can put together a realistic payoff plan. Comb through your budget to determine how much you have left over after all income has been accounted for and all expenses have been taken care of, including any savings contributions. You can adjust these figures after you have a baseline to work with.
  4. Negotiate interest rates. If you have a good track record of making payments on time, you may be able to negotiate interest rates with your lenders. Contact credit card companies and your bank to find out if any of your rates are negotiable.
  5. Organize payments. Go through each type of debt individually to determine how much you can realistically pay each month. Choose a figure that’s higher than the minimum payment on credit cards so you aren’t paying high interest rates. Consider making larger payments towards your mortgage, student loans, and other ‘fixed’ payment debts if you can afford to.
  6. Budget for debt payments. Turn those debt payments into a recurring expense by putting the total payment amount right into your budget. As long as you are making more than the minimum payment on those credit cards and paying down other loans consistently, you will be on track to pay off that debt sooner than later.

Debt payoff tips

Here are some other things you can do to pay down that debt load that much faster:

  • Find ways to increase income to make more payments towards your debt load (in a perfect world, right?)
  • Consider balance transfer offers
  • Pay off higher balances and high-interest rate credit cards first
  • Negotiate rates on your bills, such as cable and telephone, or switch providers to save money and make larger debt payments
  • Consider consolidating high interest debt under a lower interest line of credit. This is also a good time to cut up those high interest credit cards.
  • Scale back spending on entertainment and luxury purchases to free up cash for debt payments
  • Consider dipping into savings to pay off debt
  • Consolidate high-interest debt like store credit cards into a single, lower interest debt like a line of credit. Word to the wise: This is a good time to take stock of your credit cards and which ones you actually need. Avoid the temptation of running those credit cards back up.

We’ll discuss more debt payoff strategies and money-saving tips in future posts. Stay tuned for the next segment where we’ll talk about creating a solid savings strategy.

Budgeting (Part II): Where does the money go?

Last week, we shared some tips for taking control of your finances and recommended tracking daily expenses for at least 72 hours. If you’ve been logging your purchases for the last few days, you now have a fair idea of how much you are spending on those little extras — fast food, coffee, or impulse buys at the convenience store. Today we’ll focus on the expenses column of your budget so that you can classify and organize your expenses, and see exactly where your hard-earned money is going each month.

Fixed vs. variable expenses

Take some time to list all of the bills you pay and purchases you typically make over the course of the month. This master list will make it that much easier to identify your fixed and variable expenses, and account for all of your monthly expenditures.

Fixed expenses are the costs that don’t change (much) from month to month. These might include:

  • Mortgage or rent payments
  • Property taxes
  • Insurance premiums (medical, dental, car, life insurance, etc.)
  • Income taxes if self-employed
  • Utilities
  • Cable and Internet
  • Phone services
  • Subscriptions, memberships and monthly dues
  • Savings or investment contributions
  • Debt payments (if the amount is the same from month to month)
  • Recurring medical expenses

Variable expenses are expenses that tend to fluctuate from month to month, and are costs that you do have a certain degree of control over. These might include:

  • Groceries
  • Debt payments (if it varies from month to month)
  • Entertainment
  • Gas and transportation
  • Gifts and donations
  • Clothing and personal items

Adding up the total expenses from each category will help you determine how much it costs to live your current lifestyle. Doing this for even a few months can help you get a fairly accurate idea of what your actual cost of living is, based on current needs and habits. At this stage, you also need to accommodate for one more ‘type’ of expense: miscellaneous expenses.

Making room for the miscellany

This would be a good time to take a closer look at that spending log you started a few days ago. Making room in your budget for ‘miscellaneous expenses’ can make it that much easier to manage your budget and still enjoy some spending freedom. Are you really going to create a budget for those coffee runs? Unless it’s a daily habit, it’s unlikely those coffee fixes or the occasional meal out is going to be a fixed expense.

Let those extra purchases fall under a miscellaneous category so that you can:

  1. Enjoy little luxuries like coffee, drinks after work, or going to the movies without going over budget
  2. Account for extra purchases as a whole, based on your average weekly spend from your spending log calculation.
  3. Have peace of mind knowing that those extras are already accounted for.

Think of your miscellaneous expense category as your own expense account — one you may or may not end up tapping into over the course of the month. When you have a handle on how much you are spending in this area on a weekly basis, make room in your budget for it as a fixed expense. It will simply serve as a cushion to help you better manage your budget.

Stay on budget with this simple tip

One of the first things most people do when it’s time to start budgeting is to cut out all extras. If you eliminate all of your favorite things at once, the effects of ‘depriving’ yourself can trigger the urge to spend more … and go over budget.

If you’ve discovered that you are, in fact, buying unnecessary items or shopping impulsively, focus on curtailing those habits instead of cutting out all spending. If your goal is to save more money over the course of the month, focus on culling some of the larger variable expenses in your budget and work from there.

We’ll share tips on scaling back on certain expenses in future posts.

Stay tuned for the next segment of our series where we’ll do a quick debt checkup and provide tips for putting together a debt payoff plan.

Quickstart guide to a healthy household budget (Part I)

piggybank_360.pngTable of contents

  1. Quickstart guide to a healthy household budget (Part I)
  2. Budgeting (Part II): Where does the money go?
  3. Budgeting (Part III): Debt checkup – how much do you really owe?
  4. Budgeting (Part IV): Savings essentials – How much should you be saving?
  5. Budgeting (Part V): Financial checkup – Five tips for cleaning up your spending habits
  6. Budgeting (Part VI): Staying on course – Keeping your budget on track

We know it’s not easy to put together a budget and if budgeting tends to fall low on your priority list, you could be setting yourself up for financial stress month after month. Creating a realistic budget is actually fairly simple but does require taking an honest look — a very honest look — at your spending habits and current financial situation.

Benefits of budgeting

But why bother with budgeting in the first place? A few reasons that might motivate you to get started:

  • Deciding where your hard-earned money is going, instead of feeling like you’re at the mercy of bills
  • Having more control of your financial situation
  • Making better purchasing and spending decisions
  • Saving money by avoiding costly money mistakes
  • Dealing with less financial stress because you’re living within your means

 
Over the next few weeks, we’re going to walk you through the budgeting process so that you have all the tools you need to create a budget that’s aligned with your needs and lifestyle — and is one that you can stick with for the long-haul.

Tips for taking control of your finances right now

You can take charge of your financial situation at any time so don’t wait for a financial emergency to start budgeting. Give yourself the peace of mind knowing that you have plenty of money to cover your expenses and are also contributing to a savings vehicle (or two).

Here are some things you can do right now to take control of your financial future:

  • Get comfortable with a budget spreadsheet. Whether you want to use budgeting software like You Need a Budget or a basic household budget spreadsheet template, take a look around and choose an option that doesn’t feel overwhelming. The best programs and templates lay out expenses, income, and savings data in different columns and have space for notes and other entries that you might want to add along the way.
  • Start tracking daily expenses. Your challenge this week: Log every single purchase made for at least the next 72 hours. Not only will this make you more mindful about your spending habits, but it can also help you see exactly where your money is going each week. Whether it’s a few cups of coffee, lunch at your favorite spot, random household supplies you needed this week, or a last-minute grocery run, just start tracking all of your expenditures to get an accurate idea of what you spend your money on. We’ll go into more detail about managing expenses in Part II of this series.
  • Ditch the credit cards… at least for a week. Make a commitment to pay only with cash for at least the next seven days so that you can break the credit card habit. If you are in the process of making a purchasing decision for a big-ticket item, take the time to shop around for the best deals, seek out rebates, and determine whether you can really afford the item without putting it on a credit card. This can be difficult to do if you’re a frequent credit card user but breaking the habit sooner than later is a big step toward getting your finances on a healthy track.

 
What’s next: In the next instalment of this quickstart guide to the healthy household budget, we’ll be taking a look at spending priorities and where your money goes each week.

Five costly money mistakes you may already be making

piggybank_360.pngIf meeting your budget goals always seems to be a challenge, it may be time for a spending analysis to see exactly where your hard-earned dollars are going.

Going over budget month after month or turning to credit cards to manage everyday expenses are just a few warning signs of financial trouble ahead.

Identifying gaps in your budget will require an honest look at your spending habits and give you a chance to identify (and more importantly rectify) some money mistakes you may have made in the past.

Here are five common, costly money mistakes and how to avoid them.

#1: Overlooking hidden banking fees

Do you keep track of monthly banking fees and ATM fees? These extra costs just to manage your money can be easy to overlook but will add up over time. Even if it’s a few dollars a month, you need to track this as an expense somewhere in your budget.

Avoid costly mistakes by: Combing your monthly statements and / or calling your bank to find out if you are being charged any type of maintenance fees for your accounts or convenience fees for certain transactions. Determine whether you always seem to be paying overdraft fees and if so, set up overdraft protection to avoid charges in the future.

#2: Holding on to memberships or subscriptions you don’t really need

Whether it’s a warehouse club membership or an online service subscription, consider how much value those memberships and subscriptions really offer. If you’re paying for services or products that no longer serve you, stop making this an automated expense.

Avoid costly mistakes by: Do a personal audit to see which services and subscriptions you pay for actually add value to your life. Cancel those that don’t. Review cancelation policies so that you can get a refund for the remainder of your subscription or cancel at the right time to avoid extra charges.

#3: Buying items (just) because you have a coupon

Whether you’re a casual coupon user or an extreme couponer, buying products just because you have a coupon isn’t a smart purchasing decision. Stocking up on items that you never actually end up using is akin to throwing money away.

Avoid costly mistakes by: Only using coupons for items that you need or buy regularly and by taking the time to comparison shop when buying items you’ve never purchased before. When you are buying items that you use regularly, be on the lookout for coupons and seek out those items during a sale or promotional period for even more savings.

#4: Buying heavily advertised items

Whether it’s an infomercial, an announcement of a price drop via email or a direct mail piece, consider whether you would buy a heavily marketed product if you had discovered it on its own. Many purchases prompted by an advertising campaign end up being impulse buys and can leave you with a case of buyer’s remorse – and a lighter pocketbook.

Avoid costly mistakes by: Determining whether you really are in the market for the product and taking some time to comparison shop online and offline. Steer clear of impulsive buying decisions so that you have a chance to evaluate whether the product is something you actually want or need.

#5: Living without a budget

If you’re living a freewheeling financial lifestyle, you won’t have a fair idea of how much you actually spend each month. You may be setting yourself for costly money mistakes or even a financial disaster. Putting together a realistic budget will not only help you live within your means but can also put you back in control of your financial situation.

Avoid costly mistakes by: Drafting up a realistic budget and updating it at least once a month to make sure it’s accurate. If you’re just getting started, use a budgeting app or online programs and track your weekly and monthly expenses.

Do you a tip to help stay on budget? Do you have a personal financing pet peeve? Let us know in the comments below.

Stay tuned: Next week, we’ll be kicking off a special six-part series on creating a household budget you can live with, identifying and dealing with debt, understanding fixed and variable expenses and much more. Follow the Smart Money section of the Ting blog and follow along!

Six things that can end up costing more when you buy used

piggybank_360.pngBuying used can be a great way to save money and stay on budget.

Whether you’re scouring deals on eBay or making your rounds at area garage sales, you’re bound to find a great bargain on household goods, furniture and even clothing.

However, there are certain items where buying used might not be the best idea. These items might end up costing less in the short term but thinking and buying for the long term, you can save yourself time, frustration and ultimately, money.

Here are six things that can end up costing you more in the long term when buying used:

#1 Computers

The life of electronic devices seems to get shorter as time goes on and buying used, you may find yourself out of the loop on the latest software and important operating system updates. If you’re working with a very tight budget and you need a modern machine, consider a refurbished one that comes with some type of warranty. A computer that’s even just a year or two old is that much closer to obsolescence.

#2: Digital cameras.

Like a lot of small electronics, digital cameras and video cameras may end up having a very short life when purchased used. The pace of change being what it is, buying a used camera that’s even a mere couple of years old may prove a risky venture. This is especially true at the budget end of the digital camera options and less so for higher end digital SLRs.

#3: Vacuum cleaners.

New models of vacuum cleaners come out every few months and buying an older, used item means that you may end up having to pay for repairs and go searching for hard-to-find (therefore, expensive) replacement parts. Stick with a brand new model that comes with a warranty so that any repairs that might come up are covered.

#4: Mattresses and bedding.

Not only will you be at risk for bringing bedbugs into your home, but you may find that used mattresses, bedsheets, and pillowcases need to be replaced within a very short period of time. Protect your health and save money on the cost of these household items by seeking out deals at your local department store or buying a mattress with a warranty directly from the manufacturer.

#5: Fine jewelry.

Whether you’ve just found a great deal on a diamond ring on eBay or are looking at a jewelry collection in a consignment shop, you have limited options for verifying whether a piece of jewelry is authentic or of high quality. Buying used fine jewelry and then discovering that the item is a knock-off could be a costly mistake and generally speaking, just isn’t worth the risk.

#6: Tires.

It might seem like an eco-friendly purchase — and could help you save some money in the short term — but buying used tires may put you at risk on the road. If you end up buying tires with low tread, you will be due for a replacement set. With a little forethought, you’ll have the luxury of time and can wait for a sale rather than having to purchase new tires urgently. Whatever the case, stick with new tires and make sure you’re aware of the tire’s lifespan before you commit to the purchase.

Five tips for creating a household budget you can actually stick with

piggybank_360.pngHow many times have you drafted up a household budget and then fallen short of your goals within a few months? If you tend to have a hard time sticking to your budget and are struggling to keep up with your financial responsibilities, it may be time to change your approach. Sitting down and taking a closer look at your spending habits isn’t easy, but it’s a necessary step for taking control of your finances.

Here are five tips for creating a household budget you can actually stick with:

1- Break down your weekly expenses

You might think you already know what you spend your money on and how much you are spending, on average, each week. However, writing it all down for just seven days might shed some light on how much you are actually parting with without even realizing it. Write down every single expenditure for a week to get a more accurate idea of how much your are spending and where your money is going. Alternatively, use a smartphone app like Expensify or the Billguard’s spending tool to track your spending.

2- Create lists

You need three basic lists to organize your budget: Fixed expenses, such as housing costs, average grocery costs, bills, loans, and other necessities; flexible expenses, such as entertainment expenses, deposits to a savings account, and luxury purchases; and income, which includes all sources of income. These lists will give you an idea of what your cash flow looks like from month to month — and will tell you whether your current income level really is enough to support your lifestyle.

3- Set realistic savings goals

Be honest — completely honest — about how much you can save each month and what types of expenses you can do without. Setting goals within the parameters of your budget may not be easy but you need to have a fairly accurate idea of what’s possible and what you are comfortable working with. Are you saving for a vacation? Do you want to contribute more to a savings account over the next few months? Figure out what motivates you and categorize your savings contributions as a monthly expense in your budget.

4- Set debt payoff goals

If you are in a position to pay down debt, be sure to work those payments into your ‘fixed expense’ column. Setting realistic debt payoff goals and then plotting them into your budget will make it easier to keep track of cash flow each month. Create a separate worksheet to track your debt payoff plan so that you can watch that total go down month after month.

5- Don’t be too restrictive

Just like restrictive diets, overly restrictive budgets are doomed to fail because you will feel the ‘pain’ of not spending what you want and can even end up over-spending to compensate. Be realistic about how much money you need for discretionary expenses and little luxuries so you don’t feel like you’re cutting out everything you enjoy. You can even make a discretionary expense column for your budget and work in a realistic amount for those ‘extras’. This will give you a chance to enjoy your money while staying within budget.