Personal Finance in Paradise – Debt Elimination Series: Part 3 – 5 Step Plan of Attack toward Debt

Wailua Falls. Kaua'i

Photo by: thisworldexists

In this final step of the process. This is where you plan your month before you start it. This is like an architect who begins the process of building a house. You start with blueprints and then you begin the building process with raw materials to start the foundation. Your budget and debt snowball is the blueprint and the building of the house are the actions you take to get out of debt (budgeting).

You can do this on Microsoft excel or a notepad.

Step 1 Income: Start your month with your first paycheck and have this at the top of your sheet.

Subtract your fixed expenses first. This will let you know how much get to spend for the rest of the month. Then subtract the amount you may need for variable expenses. This will give you the remainder that you can spend on anything that may come up.

At this point, every time you make a purchase subtracted from your paycheck amount. This is going to keep a running tally of how much you can spend for the month. This will keep you from going over budget

Step 2 Fixed Expenses:  Find out what your monthly recurring expenses are.  They are typically savings, cell phone, subscriptions, donations, student loan payment, car payments, health and life insurances. It’s best to know theses expenses before you get caught in a crisis. You will probably end up having to use your credit card to pay for these expenses, and then get further into debt.

Savings is first on the list because your goal will be to live the remaining money. Trust me, you will be able to make better judgments throughout the month with the rest. You can start saving with 1% of your income. Get your feet wet, and over the months, you can increase the amount you save by 1 more percent.

My car insurance is paid every six months, so I take the total amount and divide it by six. It helps me to break down the payment into smaller manageable amounts instead of having to come up with $360 in one month.

For instance, if you have a car insurance to in January for $360 you would take $360 divided by six to get $60 dollars which would you will put away in either a savings account or leave in your checking until it becomes due in January.

Step 3 Variable Expenses: Like I said in the previous post, we are bad at estimating our true expenses. What we want to do here is get a general idea of what we may be spending in each category of non reoccurring expenses and then add 25%. It’s better to overestimate than underestimate your expenses.

These are things like groceries, gas, and other miscellaneous expenses that you may come up with over the month.

Remember for the categories, like groceries, make sure to add what you spent as an expense, and then subtract from what you had set aside for groceries for the month.

Step 4 Tracking: Take your notepad and and pen, and every time you use your debit card, credit card for use cash, will write down the expense. What you are doing is keeping a register of the expenses you have during the month.

The act of writing your expenses will keep you accountable to yourself. It also makes you think about what you’re buying. For instance, will I need this extra water bottle? Will this handbag be worth it in the future?

Step 5 Make Adjustments: If this is the first time you’re making a budget, you will make mistakes and overestimate expenses. This it took me a few months to get a handle of what I could pay for variable expenses. It’s a learning process and the more you track, the more practice will get by doing it.

Let me know your thoughts and if you have any better ideas please let me know.

See you soon

Personal Finance in Paradise – Debt Elimination Series: Part 2 – 5 Steps to get a handle on your debt

Hanauma Bay

Image by propst7pl

This is part two of the personal finance in paradise debt elimination series. The focus of today is to set a step-by-step process of getting your credit card debt down, and to be able to set up plan to follow so there is no wiggle room..

The major thing that holds people from investing and building wealth is credit card debt. If you are getting charged anywhere from 12.99% to 24.99% on credit card debt, it is going to be an uphill battle to building wealth if you’re losing money by paying interest.

This is a simple detailed plan of what to do and how to get out of debt so you can begin building wealth.

1. Find out where you are: in scientific studies, it has been found that people are really bad estimators. When it comes to managing their time or estimating the amount of debt that they owe, people tend to underestimate the amount of debt they really do have in their accounts. For instance, a person may think that they have $10,000 worth of debt, when in reality it can be anywhere between $12,000-$15,000.

There are online websites such as CreditKarma.com, credit.com, and mint.com that’s are good resources which I have used in the past. These resources can access your account information and give you an overall picture of the types of debt that you have.

CreditKarma.com and Credit.com both have access updating your FICO scores as well. These may not be completely accurate at the time, but it gives you a good idea of where you currently stand.

Think of it as your adult report card. It gives you a snapshot of how well you are doing. If you have a negative net worth you can be doing better, and if you have a positive net worth, what can you do to invest more.

2. Negotiate Interest Rates: one of the ways to pay less on your credit cards is to lower your interest rate. It’s pretty easy to do, all you need to do is call your credit card company to ask for a lower interest rate. Give them a compelling reason, like you been paying on time, you have been a longtime customer with the company, and or you have also been struggling with payments. It may not work the first time or with the first person that you speak with, continue to call and ask for manager if necessary.

I personally have called the credit card companies when I have missed the payment, and my interest rate shot up from 9.99% to 24.99%. They were very lenient and they had told me that I needed to pay on time for six months or my interest rate would shoot back up to 24.99% if I miss another payment. It’s worth a try, you may get shot down, continue until you are able to get that credit card breakdown.

3. Stop getting credit card offers: when I began college, I got stacks upon stacks of mailers from credit card companies to sign up for their cards. To prevent being enticed by the credit card companies stop the credit card offers from coming to you.

One way to stop credit card offers is to contact one of the three U.S. credit bureaus three credit bureaus, Equifax, Experian, and Transunion, and have them remove you from all pre-screened credit lists. When you contact one of the credit bureaus they must contact the other two to let them know that you do not want to receive any offers from credit card companies.

Another way of doing this is to go to optoutprescren.com and click on the bottom link that says “Click Here to Opt-in or Opt-Out”, and fill out the the form and mail it in. I sent in the information, and I do not receive any other offers.

4. Choose Your Strategy: Use the debt snowball strategy, popularized by Dave Ramsey, which lists your debts in order from smallest to largest. You start to paying off the smallest debt with all the extra money you have while paying the minimums on the rest of your debts. Once the first debt has been paid off, take the money you are putting to the smallest debt and use that money to pay down the next debt on your list. Continue doing this until you you are done paying off your debts.

5. Track Your Progress: Make sure to log your progress. It’s easier to keep going if you know how well you have been doing.  You want to be able to create good tracking habits so that you can focus on the rest of your life.

One good habit is to put reminders on your phone calendar every month to update your accounts, or piggy back a habit on something that occurs regularly.

Personally, I track my information on Quicken and I forecasts my expenses for the month on an Excel sheet. I get paid on the 15th and the last day of the month. I update my accounts and prepare for the next month on payday.

it doesn’t matter how you track, just find a system that works for you.

 

Money Moves October 2015

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Welcome to Money Moves for October. This is the section for review and to reflect on the things I have done and what could have been done better for the month. I hope you find it interesting. Hopefully it will help you make better decisions for yourself.

Let’s begin with what the end of the month with my my financial report card. It looks something like this:

Net Income from Work  $2652.99
Expenses $2652.99

Reoccurring Monthly Expenses:
Rent: $1045 1 bedroom 1 bath. It’s Hawaii, rent is expensive
Car Payment: $316.97
Student Loan $202.05
Life Insurance $187.51
Extra to debt 130.98

Assets:

Cash value in 2 life insurance policies $16,276.48
SEP IRA $11,630.85
Total: $27,907.33

Liabilities

student loan $20,023.06
Car loan $10,015.61
Chase credit card $3448.54
miscellaneous loan $6312.88
Total: ($39,800.09)

Current Net Worth: (11,892.76)

A few things to note, I had my credit card paid off, but  I had an idea a few months ago that  I could do a balance transfer and continue to use my credit card without paying interest due to the CARD Act. I wanted to continue using my credit card to take advantage of the 1% cash back, and it would benefit me as long as I continued to pay my balance off in full. I confirmed it with a representative, and he confirmed that I could use my credit card and not be charged interest.

When I got the statement the next month, I found saw that I was charged interest. I had to talk to two different managers to find out that the initial guy was wrong. I have nothing against with balance transfers, if you have a plan to pay it off and get the right information. To say the least, the idea bombed, and I get to have a nice conversation with my credit card company to reverse the interest charge.

 Another thing you might notice is that my expenses are exactly what I make in a month. I pay for all of my purchases in the same month that I charge them, and I am paying more toward the principal balance of the loan. Essentially, I am using the debt snowball method of paying down my debts.

My checking account is attached to a personal loan account where an overdraft amount is taken out to cover any charges that I make beyond what is in the account. There is no fee charged if I use the overdraft amount, which is really nice, and I am able to pay down my balances on my debts a little bit faster.

Using the debt snowball method and using all of the money in my checking account; I save a little bit on interest charged daily.

I have cash value in my whole life insurance policy (actually it’s 2 policies) that I use as a bank. Cash value life insurance has many living benefits, and being able to use the money in your policy as a “banking system” gives a person a lot of flexibility when purchasing something and being able to grow and get dividends on the amount in the policy as well.

The last thing to note is that I received income from my employelr in a retirement fund. As you can see above income, from the SEP IRA, has been into the 70% stocks and 30% into bonds. Using Fidelity as the brokerage firm, the money is invested into a few stocks of Netflix, a total stock index fund from Vanguard, and a total bond index from Vanguard. I did that so that I would have the ability to have growth in the stock market and pay the least amount of fees possible. I’ll talk about fees and how it hurts the growth of your investment in the future.

Plans for the Next Month

I’ve finalized how I am going to pay off the debt in the most efficient way. I’m going to pay off the remainder of my credit card balance with cash that is in my whole life policy. That way I won’t have to pay any interest on my credit card, and I no longer have to call my credit card company to reverse the interest charges.

Paying myself back for the loan balance I have taken out at my insurance company. The policies do not accrue interest on a daily rate like credit cards, and interest is only charged to me when my premium is due. That means that I pay my premiums in in July and October, and if there is an outstanding balance, I pay interest then. Also, I’ve got it set up where I don’t have to pay interest at all on the loan by filling up my policies before the billing statements come out.

Setting up this website and making it look presentable. I’m doing my best at getting this website started with a little mishap of setting up the domain and host of the site. As this site begins to grow, I hope that I can add more to it in the future.

Welcome to Personal Finance in Paradise – What This Site is About

Welcome to part two of my financial adventure. I’ve been wanting to heart a blog and put my thoughts out into the world so that people can learn from what I have been learning. I feel that people can learn from my mistakes and also from my victories along the journey.

I hope you get to share some thoughts with me along the way, and that we are able to learn from each other.

I’m excited to be able to go on this journey with you, and that we are able to be driven to grow your net worth, destroyed debt, be able to construct good habits around money, and change your mindset along the way to become prosperous during the journey.

I look forward to hearing from you. Thanks for joining me