Sunday, December 26, 2010

My Ally in Paying Off Debts

After getting my first credit card from BDO, I just noticed that I can't stop myself from using it. Whenever I see the word SALE, I automatically checked the place and come out with a purchase. Comes November where Starbucks releases their planner my credit card debt goes up. It seems that I really can't stop myself from using my card.

After getting my bill from BDO I got so anxious, my debt is more than my monthly income. Never really see this coming. There's even a night that I can't sleep thinking about my credit card debt. That's when I decided to control my credit card usage, but I still owned overwhelming debt.

Got a book by Calayco and it suggest that I should first pay the debt with the one that have a high interest rate. I tried this approach for 3 months but it seems that I'm going nowhere. My debt is still in the same level because some of my low interest bearing debts are compounding.

This keeps on going over. I try to pay the balance by I keep on surging down.

Then I read about the Debt Snowball Method. The Debt Snowball advices to pay off high-interest rate debts first, then you pay off low-balance debts first. Why? Because you’ll get the psychological lift of pinging debts off in rapid succession. And if you’re like me, this makes all the difference. The Debt Snowball approach is:

1. Order all the debts you have from the lowest balance to the highest.

2. Allocate minimum payment for all debts.

3. Allocate more money for the one that have the smallest balance.

4. Once you are able to eliminate the one that have the smallest balance, keep on paying the minimum on all other debts then use the minimum payment that you have on the second lowest balance plus the amount that you used to pay off the lowest balance that you have.

I was amazed that after a few months of doing the snowball method I was able to pay off some off my debts though I still face my debt that have a higher interest as it was the one that have a higher balance. Today I only have one debt that I'm trying to pay off and as long as I have extra cash I automatically allocate it to debt payment.

Hopefully I will be able to declare myself debt free by the first quarter of 2011.

If you are a bit skeptical about the snowball method you can always use the method that Colayco advises. 

Do what you think is best for you.

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Tuesday, December 7, 2010

How to Make A Budget ( The End )

Staying On Track
For some people, an independent professional, such as a financial advisor may be the best bet for keeping you in line without picking a side. On the other hand, you don't want to go too far in the other direction and pick someone who will give you no flack whatsoever if you aren't achieving your goals. Pick someone who has been supportive in the past and wants to see you succeed.

If you can't afford a financial advisor but seek the neutrality and confidentiality of a third party, you may be able to find a local government agency or nonprofit organization that offers credit counseling, debt management or money management assistance. Though you may have to provide documentation proving that you qualify for their assistance, services designed to help the low-income or deeply indebted will most likely be free - beware of those wanting to charge you a fee.

Maintaining Your Budget
A budget should evolve as your circumstances change. Don't expect the budget you made at 25 to still work for you at 35, or even 27. Your income and expenses will change over time, often annually. You might also face a financial emergency or receive a windfall, such as an inheritance. Whether you experience a major financial event or a smaller one like getting a raise, you'll want to update your budget accordingly. In this section, we'll discuss some common changes to your life and how you might want to adjust your budget as a result.

1. Getting a Raise
When you get a raise, you should consciously choose how you will spend the extra money. First, keep in mind that if you get a raise of Php1000 a month, it won't be nearly that much after taxes. Just like you've done with the rest of your money, decide what the best use of your new income will be. Do you want to save it? Improve your cable lineup? Go out to eat more? If you don't decide what you want to do with the money, it might evaporate without you knowing where it went.

2. Losing Your Job
If you lose your job, you'll almost certainly need to scale back your spending.

Examine your budget to see where you can cut back. You may be able to cut out a particular category entirely, like going out to eat. Or you may be better off making smaller cuts in several categories, like decreasing your grocery bill by Php500 a month. You may not be able to reduce your expenses enough to fit the reduced amount of money you have to spend, but because you've been budgeting, you should have at least some money stashed away for emergencies. This is the time to use it if you need it.

If you haven't started to budget yet, and you've lost your job, then picking up a part-time job can go a long way towards helping cover bills as you hack and slash your spending.

One exception would be if you've been at a company so long that you receive a generous severance package with which you can maintain your same quality of living for an extended time. Barring that, a smaller severance package or state unemployment insurance can help tide you over, but neither will provide you with the kind of income or financial stability you're probably used to.

3. Having a Financial Emergency
Losing your job could certainly count as a financial emergency, but it's not the only one you might encounter. Your beloved 1988 Honda might suddenly sputter its last breath - or at least the last breath it's willing to take unless you want to pay for some costly replacement parts. If you don't have good public transportation where you live or a friend, relative or coworker who can take you to work, you'll need to find a new vehicle fast, and probably rent one in the meantime. Again, your emergency fund is a good place to look for the money for a new car. If you don't have an emergency fund, you'll have to find the money elsewhere in your budget. Even if you do have an emergency fund, you'll need to adjust your budget so you can replenish it over the upcoming months.

4. Making A Big Purchase
Adjusting your budget so you can afford a major purchase, like a new car or a wedding, is similar to adjusting it for when you lose your job or have a financial emergency. You'll need to find significant ways to cut back in one or more spending categories and perhaps a way to increase your income as well. The difference is that since you're cutting back for something you chose, it won't be as painful.

5. Incurring a Major New Expense
If you buy a house, have a child, send a child to college or the like, you'll need to adjust your budget permanently (for quite a few years at least). This may require you to rethink every aspect of your earning and spending. For example, is there a way you can make more money? Do you really need cable TV?

To prepare yourself for the change and make sure you can afford it, adjust your budget several months in advance and pretend as if you already have the new expense. This way, if you find out you can't meet all your obligations, you won't incur any real damage and you'll have time to fix things before the real expense kicks in.

6. Overhauling Your Social Life
If you go from being a homebody to party animal, your financial situation will change too. Also, if you start dating someone new, this can shift your finances for better or for worse, depending on which side of the spending equation you're on and the tastes of the person you're dating.

7. Changing Your Habits
Any time you change your habits, you will see a corresponding change in your finances - sometimes giving you more money, and sometimes less. Sometimes being a healthier person doesn't equate to healthier finances though. For example, if you decide to trade in your steady diet of pizza and cheeseburgers for one that includes foods like fish and fresh produce, you may see your grocery bill increase. If starting a new exercise routine is also part of this lifestyle change, you may need to factor a gym membership into your monthly budget, or at least a new pair of tennis shoes. But if you rid yourself of a habit like smoking, not only will you immediately reduce the unhealthy pull on your budget, you'll also reduce the unhealthy pull on your cardiovascular system.

8. Getting Rid of a Major Expense
If you've finally finished putting all your children through college and they've all moved out and acquired jobs, not only will you no longer have tuition expenses, you'll be free of paying for someone else's food, clothing and other costs. Paying off your mortgage is another time in your life when your expenses will significantly decrease. What will you do with all this extra money? Your budget's goals can guide you. Maybe you'd like to work less and enjoy life more, take a major vacation or ramp up your retirement savings.

As you can see, multiple factors can change your financial situation from month to month and year to year. It's important to be flexible and adjust your budget to reflect these changes so that you'll be able to continue making the best possible use of your money.

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How to Make A Budget ( Part 6 )

Uh-oh! Mistake to Avoid
Everyone makes financial mistakes from time to time - that's just part of life. However, knowing about common mistakes beforehand can reduce your odds of making them. Let's take a look at some of these common budgeting mistakes:

Mistake #1 - Forgetting to Write Down Expenses

It's impossible to stick to your budget if you don't know where your money is going. Ideally, you need to keep track of every single purchase, whether it's something small like a parking garage fee or something bigger like a new television. The best way to remember everything you buy is to update your budget each night before you go to bed while your purchases are still fresh in your head. You could also carry around a small notebook so you can jot down your purchases throughout the day as you make them, or make all your purchases with the same debit or credit card (effectively having someone else create the spending list for you).

The most simple budget-tracking tool is the cash envelope method. This involves taking several envelopes, writing the name of the budget category on the outside (like "groceries" or "fun money"), putting the amount of cash you are allowed to spend each month in them, and then making sure you don't run out of that cash before the month is over. This method will prevent you from overspending, but you won't reap the benefits of knowing exactly where your money goes unless you can remember to replace the money you take out with the receipts of each item you bought.

Mistake #2 - Intentionally Not Writing Down Purchases
One of the ugly truths about budgeting is that when you keep track of your expenses, it's painfully clear when you've gone off track. That's the whole point, though, and every day is a fresh chance to make better decisions. Go ahead and write it down when you've gone over your budget, because that negativity you feel will help prevent you from overspending more or doing it again. Just think of this step as damage control - don't skip writing down expenses just because they don't match up. Own up to your purchases and then move on.

Mistake #3 - Buying On Impulse 
If you buy a pack of gum in the checkout lane every time you go to the grocery store and you go to the grocery store twice a week, that seemingly inconsequential purchase is costing money. Add a few impulse buys at a few other stores over the course of a month and no matter how inexpensive they are individually, they will add up. There's nothing wrong with buying gum, but if you notice by reviewing your budget that you're buying it at a rate of 52 packs a year, you can plan to buy your gum in bulk at a big box store for a third of the price and save money. Writing down even those minor  purchases every time can help you spend more wisely in the long run.

Mistake #4 - Becoming the Victim of Budget Busters
Sometimes you go out to do something or buy something expecting it to cost a certain amount of money - an amount you've budgeted for - but when you get home you've spent much more. How does this happen?

Perhaps you decide to go out with some friends on a Saturday night and you think you're just going to a bar, but once you get there the group decides to go out to eat. You're already along for the ride, so it's easier to give in to the pressure to join in on the food rather than be the odd one out. In that same scenario, after you've had a couple drinks, money may not seem like such a big deal and you may buy everyone a round against your normally better judgment. 

These things happen, and you won't always be emotionally strong enough to prevent them. However, if you know that you have a tendency to buy more than just one thing when you go to the store, or if you know that your friends have a tendency to change their plans at the last minute, either avoid these activities or create a bigger budget for them ahead of time.

Mistake #5 - Being so Frugal it Makes You Miserable
Budgeting is like dieting: If you try to deprive yourself too much, you'll just binge later and throw all your hard work out the window. A spending binge can set you back far more than treating yourself occasionally, so go for the occasional minor splurge. Buy that bottle of wine or those new flowers for your yard. Let yourself take a vacation. Just keep your treats within your spending limits and you'll be fine.

Mistake #6 - Ignoring the Time Value of Money
Sometimes the cheapest way isn't the best way. If milk, bread and eggs are cheaper at one grocery store and chicken, butter and cereal are cheaper at another, you shouldn't go to both stores every week to get the best possible deal on each and every item. Besides, unless you have incredible self control, you'll probably be tempted to buy something at the second store that wasn't on your list, thus defeating your whole purpose.

Correcting Your Mistakes
Correcting your budget mess-ups isn't hard, it just takes a few moments to realign your thinking patterns:
  • Think about your spending not only in terms of money but also in terms of time, aggravation and sanity. When you have limited time, determine where your money-saving efforts are best spent. For example, would you come out further ahead by using that time to switch over to a checking account that doesn't charge a monthly maintenance fee and a low balance fee?
  • Everyone will go off his or her budget occasionally no matter how much money is available. It's human nature to be imperfect. Accept it as a certainty that will happen. While it shouldn't be an excuse for poor choices, the best way to correct your mistakes is not to beat yourself up for them. Take what actions you can to correct the mistake - maybe you can return something you purchased, or make up for the extra spending by selling something you own on Maybe there's nothing you can do except vow to do better next time. Then, forgive yourself and start fresh.
  • If you need help staying on track, ask someone to hold you accountable. This could be a friend, relative, significant other, spouse or even a financial advisor. Pick someone with whom you feel comfortable discussing money. This doesn't mean you have to share with them the details of how much you spend and make, but you should at least be willing to speak honestly with this person about what your goals are, what steps you are taking to achieve them and whether you are staying on track. It's important to pick someone who won't be judgmental if you slip up or set a goal they don't necessarily agree with.
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How to Make A Budget ( Part 5 )

Ready, Set, Goal!

An important part of effective budgeting is setting goals and using your budget to help you achieve them. Your goal might be as simple as saving up enough money for tickets to a basketball game or as lofty as retiring by 50. Or it might be both! Budgeting makes it easy to establish both short- and long-term goals and track your progress toward them. 

The following are some ideas for how to use your budget to help you meet your goals:

Get Beyond the Next-Paycheck Mindset
When you're always thinking about the arrival of your next paycheck, that probably means you're burning up your current paycheck and spending the next one (whether by mentally accounting for where it will all go or by putting purchases on credit cards) before you even get it. If this situation describes you, it's likely that you're living beyond your means. Since no job is truly guaranteed, and thus neither is your next paycheck, making it a goal to fit your expenses into your current income is an important one. This way, even if you lose your job tomorrow, at worst you'll be starting at zero - you won't already be in a hole.

Substitute for the Short-Term
For a short-term goal, such as being able to afford tickets to a basketball game next month, you may simply be able to substitute one expenditure for another. If you normally go out to eat, maybe you can trade a meal for a game. If your budget is tighter than that, you may have to take a more drastic measure like cutting your grocery bill by eating lots of pasta- and rice-based dishes and cutting back on more expensive items like meat and cheese.

Calculate Your Long-Term Needs

For a long-term goal, such as retiring by a certain age, find  an online retirement calculator that allows you to enter variables, such as your age, amount currently saved, expected rate of return on your investment and age you want to retire by to find out how much you need to save per month to reach your goal. Note that online calculators can produce varied results, so it's best to try several and get a general sense for the amount you need to save. Then, start considering this savings amount as a non-negotiable monthly "expense" and adjust your other spending as needed to make room for the new amount.

Start a Rainy Day Fund
To make sure that unforeseen expenses don't cause your goals to careen off track, build up some cash reserves. Three to six months' worth of expenses is a good cushion. This will help protect you from a sudden loss of income, an unexpected car repair bill or the like.

Save for Fun Things, Too
If all your savings are going toward dreary activities like paying off debt and saving for unexpected car repairs and medical bills, your only incentive to save might be the fear of what will happen if you don't. Fear is a great motivator, but it's not very fun. So even if you're in debt up to your eyeballs and are committed to getting out as quickly as possible, it's a good idea to plan some rewards into your savings program. You may think that a Php 20,000 vacation is setting you back, but consider what would happen if you didn't take that vacation. You might go on a spending binge one day to compensate for how deprived you've been feeling under an avalanche of bills, and not only might it cost more than the vacation would have, but you won't get the several days of relaxation that a vacation could have brought.

Pay Off High-Interest Debt
Any debt that costs more than you can earn from your investments after taxes should be paid off as quickly as possible. As a general rule, the only low-interest debt is student loans and mortgage debt. This is considered "good debt" since your money can earn more for you if you invest it than what you'd save by paying off the loan. If your mortgage interest rate is 6%, your credit card rate is 20% and your investment return rate is 10%, pay off your credit card first, then invest anything remaining.

Save Automatically
Use automatic withdrawals to stick to your savings goals. By having money automatically deducted from your paycheck and put it into your insurance or by setting up your own automatic monthly transfer from checking to savings, your money will be out of sight and out of mind. For long-term savings, put the money somewhere illiquid so you won't be tempted to steal from your future self.

For short-term savings, you'll need to keep the money accessible, but don't make it too accessible. For example, if your checking and savings accounts are at the same bank, it's all too easy to rapidly transfer money from your savings into your checking account. If you have these accounts at two different institutions, the transfer will take time, and that time delay may be enough to cause you to rethink your decision if you're trying to spend your savings on something you shouldn't.

Reduce Spending in a Particular Category
Remember how we said that budgeting isn't about deprivation, it's about putting your money to its highest and best purpose? One of your new budgeting goals might be to reduce your spending in a particular category, now that you know where your money is going, so you can put that money toward something that is a higher priority for you.

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How to Make A Budget ( Part 4 )

Tips Tips Tips

When you're getting used to budgeting for the first time, it's helpful to know how to manage and stay within your budget.

  • First and most importantly, allow yourself to be flexible. If you want to spend more on groceries one month because you're having a party or craving something gourmet, there's nothing wrong with that. Just spend less in another area to compensate. Don't expect to always stick within the amounts that you set for yourself as guidelines when you first created your budget.
  • Next, make sure to leave room in your budget for some fun things. Maybe your budget is so tight that the most fun you can afford are the ingredients to make some chocolate chip cookies, but at least allow yourself that. Or maybe you're in a better situation financially and the choice is between saving 12% for retirement one month or buying a concert ticket and still saving 10%. You should reward yourself. For most people, lifestyle tends to inflate when income goes up. This isn't inherently a bad thing as long as you are still meeting your financial goals and obligations. If you don't reward yourself, it will be emotionally difficult to stick to your budget in the long run. 
  • Always make sure, however, to keep spending below your income. Special events like Christmas should also fit into your income. Rather than pile the gift purchases onto your credit card in December, buy gifts throughout the year or save a little each month to make the holiday affordable.
  • Don't go into debt for things that are not long-term investments (long-term investments being a house or an education that you can reasonably afford). Consumer debt will strike a major blow to your finances. When you finance a car, for example, not only does the asset depreciate every year, cost money to maintain and eventually become obsolete, you're also losing money on interest every month. 
  • Likewise, if your employer offers direct depositb you may be able to deposit a portion of your paycheck directly into a savings account. If you already have sufficient cash reserves, you could also improve your savings rate by increasing the amount of your paycheck that goes directly into your retirement account. Again, these options will put a portion of your money automatically out of sight and out of mind.

Additional Tips

  • Rent: You don't have to wait until the first of the month to pay your rent. If you comfortably have the money in your account earlier and think you might spend it, just send in your check early.
  • Mortgage: If you're a homeowner, making an extra payment toward your principal when you can afford it will shorten the life of your loan and the amount of interest you'll ultimately pay. This tactic may not be terribly rewarding in the short-term, but you'll thank yourself for it down the road.
  • Utilities: Switching to compact fluorescent bulbs, especially in the lights you use most, will dramatically reduce the lighting component of your electric bill. Keeping your thermostat slightly lower in the winter and slightly higher in the summer than what you'd optimally like will reduce your heating and cooling costs, and you'll probably get used to it after a few days. Using ceiling fans and wearing more or less clothing are a lot less expensive than using more energy.
  • Clothing: The deepest discounts are generally available at end-of-season sales. The rest of the time, you can save money by getting a credit card that offers cash back rewards or coupons (make sure to pay off the card in full and on time every month or you won't come out ahead), signing up for store email lists to get special coupons, and buying gift cards at a discount.
  •  Groceries: Many of us have stockpiles of food in the freezer and pantry that we've seen so many times, we've forgotten they're there. Determine how to incorporate these items into your meals and you'll get a break on the cost of groceries while you clean out your closet.
  • Transportation: Plan errands so that you don't make multiple trips. Go to the grocery store on the way home from work, or do all your errands for the week on Saturday morning. As an added bonus, you'll save time in addition to money and gas.