A NO NONSENSE GUIDE TO IMPROVING FINANCES AND CREDIT HOW TO REDUCE YOUR DEBT AND STICK TO A BUDGET.

Transcription

1 A NO NONSENSE GUIDE TO IMPROVING FINANCES AND CREDIT HOW TO REDUCE YOUR DEBT AND STICK TO A BUDGET. 1

2 As you plan your financial future, I encourage you to speak with your insurance agent or an SBLI representative about how SBLI can help you secure the life insurance you need to protect your loved ones. JONATHAN POND JONATHAN POND is one of America s most trusted and knowledgeable financial experts and a pioneer in bringing low-cost, personalized money guidance to American households. His work in educating the public on financial matters has been far-reaching and widely recognized. His 16 prime-time public television specials and 21 books have been critically acclaimed for their effectiveness in providing useful and understandable financial guidance to people of all financial circumstances. The comments and opinions expressed herein are solely those of the author and do not reflect the assent of SBLI or its officers, agents, or employees. SBLI and The No Nonsense Life Insurance Company are registered trademarks of The Savings Bank Life Insurance Company of Massachusetts. NAIC # The Savings Bank Life Insurance Company of Massachusetts, Woburn, MA. All rights reserved. 2

3 SUMMARIZING YOUR CURRENT DEBT Before devising a plan to deal with your current debt challenges and exploring strategies to improve your creditworthiness and achieve a more secure financial future, it s helpful to summarize your current debt and payment obligations for reference. Enter your current loan balances and monthly repayment amounts below: UNPAID BALANCE CURRENT MONTHLY PAYMENT NONESSENTIAL DEBT Credit cards $ $ Retail charge cards $ $ Student loans $ $ OPTIONAL DEBT Car loans $ $ Other loans $ $ TOTAL $ $ 3

4 PREPARING A HOUSEHOLD BUDGET Preparing a budget may not be pleasant, but it s one of the most important steps to achieving personal financial security. A household budget can help you: Uncover possible problems in the way you spend money. Identify opportunities to reduce spending. Come up with a realistic plan for balancing your spending and reducing your debt. The steps below will guide you through the process of developing a useful, userfriendly budget. 1. Establish reasonable financial goals. The first step in setting up a useful budget is defining your financial goals. While reducing debt may be your most immediate challenge, keep your other (realistic) goals in mind as you prepare your budget. My top three financial goals are: Select or design a budget form that 2. Select suits your or design needs. a budget form that suits your needs. Budget worksheets come in a variety of formats and styles. The easiest thing to do is to use or customize one of the dozens of budget worksheets or templates available online or in software applications like Excel, or see the end of this guide for your sample budget worksheet (Worksheet A). 3. Forecast your income. Be realistic in estimating your income, particularly when it comes to income that may be uncertain (a yearly bonus, for example). It s better to err on the low side when projecting your income. 4. Summarize your past expenses. Before you can estimate your future expenses, you should summarize your past expenses. The more accurate you can be, the better your budget will work. Looking at your canceled checks and credit card bills will help you see where your money is going each month. And here s a tip for getting a handle on how you spend your pocket cash: periodically carry a small notepad with you, or keep a note file on your smartphone, and record each item paid for in cash. You ll probably be amazed at how sizable your cash expenses are. (Those cash expenses are often among the easiest to reduce.) 3. 4

5 5. Estimate future expenses. Now that you ve forecasted your income and estimated your past expenses, estimate your future expenses over whatever period you are budgeting a month, a quarter, or a year (the middle column of Worksheet A). Your objective is to budget your expenses, including loan payments, so that, at a minimum, they don t exceed your income. You should strive, of course, to reduce your spending even more a subject covered in the next section of this guide. Irregular expenses those that are paid less frequently than monthly present a special problem....periodically carry a small notepad with you, or keep a note file on your smartphone, and record each item paid for in cash. You ll probably be amazed at how sizable your cash expenses are. These include insurance payments (unless you pay the premiums monthly), vacations, and car repairs. They will need to be summarized separately, and money should be set aside for them as part of your budgeting to avoid periodic cash crises caused by large bills. 6. Compare your actual and estimated 6. Compare income and your expenses. actual and estimated income and expenses. At the end of the period you budgeted, you should compare the amount of income you actually received and the expenses you actually paid against your budget. Once you have a few budgets under your belt, you ll be able to identify areas where you can further reduce your expenses. Personal budgeting isn t fun, but it is necessary. The fun part comes when you can confidently predict where the money will come from and where it will go. And the even better part comes later, maybe after you ve whittled away some of your debt, when a good portion of your money is going into savings, retirement, and college accounts. A PLAN FOR REDUCING YOUR DEBT There s no easy way out of debt problems, but you should first try to dig out of debt yourself before taking more drastic action. One way or another, you can and will emerge from your debt problem. In fact, many people who escape their debt emerge with much improved money habits and a bright financial future. 5

6 Here are seven a lucky seven steps you can take to resolve your financial problems. There are no quick fixes. But working through these problems yourself or with the help of a credit counselor is far more preferable than the alternatives, like filing for personal bankruptcy. 1. Find out where you stand. First, summarize all of your debts, including the total amount due, the amount overdue, and the minimum monthly payment requirements. Be sure to make any changes in the event of inaccuracies or new debt. 2. Prepare a household budget. You should summarize your living expenses and prepare a realistic budget that will allow you to reduce your debt at more than the minimum level. After rent and food, debt payments should be the most important item on your budget. (See the previous section for tips on preparing a budget.) 3. Look for ways to reduce your expenses and/or increase your income. Once you ve prepared a budget, look for ways to reduce your living expenses or perhaps increase your income. Don t ever convince yourself that there s no way you can cut back, because there are always ways to cut back on your expenses at least a bit. 4. Reduce the number of credit cards. If credit cards caused the problem as is the case for most people in serious debt take the scissors to all but one credit card. 5. Prioritize your debt repayments. If you have multiple debts from different sources, work out a plan for paying the most important bills first and for avoiding late charges. If you re unable to make all of the minimum payments, figure out just how costly not paying the minimum amount due on each bill is, figuring in interest, late charges, and the possible effects on your credit rating. Then prioritize. Missing an important bill might result in your car being repossessed or your electricity being shut off. If you have the funds to go beyond minimum payments, pay off the bills with the highest interest rates (like credit cards) first. Then pay any money you can spare toward other debts. (For example, don t reduce an 11 percent car loan before reducing 19 percent credit cards.) 6. Speak with your creditors, if necessary. If you are ever unable to make a loan payment on time, contact the lender (before they contact you) to explain your circumstances and work out a payment plan. They may agree to grant you a temporary reduction or delay in payments, or they may waive your late 6

7 charges. Don t expect them to work miracles, but if you keep the lenders informed of your circumstances, many will be more accommodating. Also, don t avoid calls or letters from creditors under any circumstances. Creditors would rather know that you are trying to work things out than fear that you are trying to evade your debt. 7. Be wary of debt consolidation. The idea behind debt consolidation is that you take out one loan to cover all your debts. Paying only one loan in low monthly installments sounds like a good idea. But lower monthly payments usually mean the loan is extended over a longer period of time. True, some people can consolidate their high-interest bills into a lower-interest loan. But generally if your financial situation is iffy, any debt consolidation loan you ll be able to get will charge high interest and may require you to pledge assets, like your car, as security. Moreover, consolidating loans can lead to the temptation to pile on even more debt, because you regain access to your credit cards. If you have no choice but to arrive at a lower monthly payment, discuss loan consolidation with a responsible financial institution. You Don t Want To Be Paying Off Your Loans Forever. There s always some comfort in making the minimum required payments on your loan: you pay just a little bit on the loan and the lender is perfectly content. But paying the minimum means it could take you over 20 years to pay off the loan assuming you don t add to it somewhere along the line. Paying extra each month and avoiding the temptation to take on more debt can significantly decrease the amount of time it takes to pay off your debt. The following table shows you approximately how long it will take you to pay off $15,000 of debt at various monthly repayment levels. If you can pay the amount listed below toward your loan balances... Don t Become A Debt Recidivist. Once you repair your credit yourself, you ll be back on firmer financial footing. At this point, many people lapse back into their free-spending ways. It s the equivalent of successful dieters subsequently regaining all their lost weight....you can pay off $15,000 of debt in about: $300 per month 7 1/2 years $500 per month 3 years $400 per month 4 1/2 years $600 per month 2 1/2 years 7

8 The smarter thing to do is to start saving. If your finances catch the flu again, you ll be able to recover a lot faster. But remember, until you get into the habit of spending less than you earn living beneath your means you won t save a penny. SENSIBLE BORROWING The Pros and Cons of Borrowing Right now, you may think that eventually eliminating all of your debt is the best course of action. But when used wisely, borrowing can be very useful. On the other hand, it is easy to overuse credit, which can lead to lasting financial problems. Here are the advantages and disadvantages of credit: The Advantages of Credit Access to credit allows you to make major purchases a car or a home, for example that you otherwise might not be able to afford. Credit provides security by allowing you to deal promptly with financial emergencies. Credit is convenient for shopping. Credit cards and charge accounts eliminate the need to carry large sums of cash and provide monthly, itemized statements that allow you to monitor your spending. The Disadvantages of Credit It s easy to overspend when credit is freely available. At best, too much debt will tie up a sizable portion of your future income as you pay down your loans. Overborrowing can lead to a negative credit rating or, worse, repossession or personal bankruptcy. All these will jeopardize your ability to borrow money in the future and may even impair future employment opportunities. So don t shy away from debt that is used for beneficial purposes. Good debt is debt that will benefit you for many years to come. CREDIT REPORTS & CREDIT COUNSELING Credit Reports Credit reports are used by lenders to gauge your creditworthiness but they re only one measure of your financial status and responsibility. A credit report reflects your past borrowing habits. It s a detailed summary of credit accounts opened in your name, including credit cards, bank credit lines, department store charge cards, and other bills and loans. This information is used to calculate your overall credit score. Most credit rating agencies use what is called the FICO score. 8

9 If you have never obtained a copy of your credit report, we recommend that you do so for a couple of reasons. First, it will give you an idea of how much, if at all, your indebtedness has affected your credit record, particularly if there have been problems in the past. Information can remain in your report for seven years (up to 10 years in the event of personal bankruptcy). Second, you might find errors on your credit report. The credit rating agency is required by law to correct any errors. Common mistakes on credit reports include old addresses and closed accounts shown as open. You are entitled under federal law to receive a free annual credit report from each of the three credit bureaus. You can request their reports online at or by calling All three credit reports can be ordered at one time or at different times throughout the year. You may have adverse credit information on your report, but it s not the end of the world. The best way to move forward is to prove that you re now financially responsible, by paying all of your bills when they re due. Credit Counseling You may be a candidate for credit counseling, particularly if making the minimum payments on your credit cards is becoming difficult. In many cases, working with a credit counselor is a good idea. Consumer credit counseling may be able to work with your creditors to eliminate late fees, extend payment terms, and lower the interest rate. Be sure to select a nonprofit credit counseling service carefully. Some firms can do more harm than good to your credit. Expect fees to set up your account with the agency, as well as monthly fees for a debt management program. Once you have set up your account, you simply pay the credit counseling service a lump sum every month, and the agency distributes it to your creditors. Many people avoid credit counseling because they fear it will adversely affect their credit ratings: use of credit counseling usually appears on credit reports. While some lenders may view credit counseling as a negative, others view it as a positive indication that you have taken steps to do something about your debt. Moreover, changes have recently been made to the credit scoring process most lenders use, so while credit counseling may still appear on your credit report, it most likely won t lead to deductions from your credit score. 9

10 PREPARING IN ADVANCE FOR LARGE BILLS If you re like most people, you may have a hard time coming up with the money you need when a big bill comes along, like an insurance premium or car repair. With some advance preparation, large bills expected and unexpected can be dealt with more easily. Use Worksheet D, included toward the back of this guide, to note anticipated large bills. Then, combine the totals for those known bills with an estimate of the bills you can t predict but that always seem to arise, like car repairs, to determine an annual total. Then begin setting aside each month an amount sufficient to pay these bills when they come due. You can use the table below to determine approximately how much you should be setting aside: MINIMIZING MONEY SQUABBLES While the vast majority of couples agree on important, long-term financial goals, like owning a home or being able to provide children with a college education, disagreements over smaller, day-to-day financial matters are inevitable. Debt increases the tension, but as you begin to work toward reducing the debt and putting some money away for the future, the tension will probably ease. In the meantime, here are a few concrete things you can do: 1. Set aside an annual date to review your financial status together and make plans for the next year a financial day of reckoning. Estimated annual total Example Anticipated large bills (from Worksheet D) Unanticipated large bills (car repairs, etc.) $ $ 2, $ $ Total $ $ 3, Monthly savings necessary to meet large bills = Estimated annual savings 12 Example = $ 3, = $ 250 Your monthly savings = $ 12 = $ 10

11 2. Work together to achieve the financial goals you ve both agreed on. Decide what each of you will do over the next year to move you closer to your goals. For example, you could agree on how much each of you will pay toward your credit card debt. 3. If you haven t already done so, try to get on the same page when it comes to managing the family s day-to-day finances. Make sure you agree on who is responsible for what and on how much is acceptable to spend on various expenses. 4. Most important, make sure you both understand the family finances. While it s not uncommon for one spouse to take charge, the other spouse shouldn t be left in the dark. You re in this together. A PLAN FOR A BETTER FINANCIAL FUTURE If you follow the suggestions we ve outlined in this guide for paying down your debt and taking control of your budget, it s only a matter of time before your financial outlook will change completely for the better. In fact, any money you manage to pay against loans each month is proof already that you re a good saver. Imagine being able to put that money to use for vastly more worthwhile purposes. Once you re on firmer financial footing, it will be time to start preparing for a more secure financial future, leading to a comfortable retirement. Here is an illustration of how a modest level of savings can amass over time. Assumptions: 1. Once you have paid off all or most of your debt, you begin a regular savings/ investment program. 2. Each year, you increase the amount you save by 5%. For example, if you save $200 per month in the first year, you would increase that amount by 5%, to $210 per month for the second year, and so on. 3. The money you set aside will also grow by 5% per year. Here s how much you will accumulate by following this program: Monthly savings in the first year Your total in 10 years Your total in 20 years $200 $38,000 $194,000 $400 $76,000 $388,000 $600 $114,000 $582,000 11

12 A Final Suggestion If you have a big debt hurdle to surmount, the more you can pay off each month, the better. But while scrimping and saving to pay down debt are a reality, it s a lot more uplifting to set money aside for your future for example, a fund to meet financial emergencies or a contribution to a retirement account. So here s a suggestion: once you re at a point where you can stay current with all of your loan repayments and you have enough extra money to pay more than the minimum due each month, take a small portion of that extra money (perhaps one-third of the extra) and put it in a savings or investment account. While this may slow down your debt repayment schedule a bit, being able to put money away for the future even a small amount will be a real psychological boost....being able to put money away for the future even a small amount will be a real psychological boost. As you take steps to improve your finances and credit standing, keep in mind that having sufficient life insurance coverage to protect those who are or may be dependent on you is an important part of achieving lifelong financial security. I encourage you to speak with an SBLI representative about how SBLI can meet your life insurance needs. You can reach an SBLI representative at or online at SBLI.com. Jonathan Pond NNG-Savings813 12

13 WORKSHEET A: PERSONAL BUDGET PLANNER This worksheet can be used to record your past income and expenses and/or to budget future income and expenses. Use the first column to record your past income and expenses; the second column to list your budget over the next month, quarter, or year; and the third column to compare your actual income and expenses against your budget in the second column. If you budget over a period of less than one year, be sure to take into consideration those expenses that you pay less frequently than monthly (for example, insurance and vacation). You should strive to set aside an amount each month that will eventually be used to cover those large bills. Budget prepared over: Month Quarter Year PAST INCOME AND EXPENSES BUDGETED AMOUNTS ACTUAL INCOME AND EXPENSES CASH INCOME Wages (take-home pay) $ $ $ Interest from savings $ $ $ Alimony/child support received $ $ $ Income from outside jobs $ $ $ Other $ $ $ $ $ $ $ $ $ TOTAL CASH INCOME $ $ $ CASH EXPENSES Rent or mortgage $ $ $ Food $ $ $ Household maintenance $ $ $ Property taxes $ $ $ Utilities and telephone $ $ $ Clothing $ $ $ Medical and dental care $ $ $ Automobile/transportation $ $ $ Child-care expenses $ $ $ Education expenses $ $ $ Entertainment $ $ $ Vacation(s) $ $ $ Gifts $ $ $ Charitable contributions $ $ $ Insurance $ $ $ Out-of-pocket expenses $ $ $

14 WORKSHEET A: PERSONAL BUDGET PLANNER (CONTINUED) PAST INCOME AND EXPENSES BUDGETED AMOUNTS ACTUAL INCOME AND EXPENSES CASH EXPENSES (continued) Credit card payments $ $ $ Other loan payments $ $ $ Alimony/child support payments $ $ $ Additions to savings $ $ $ Other $ $ $ $ $ $ $ $ $ TOTAL CASH EXPENSES $ $ $ EXCESS (SHORTFALL) OF CASH INCOME OVER CASH EXPENSES $ $ $

15 WORKSHEET B: DEBT SUMMARY This summary will help you get a handle on your current debt situation and will serve as the basis for planning your debt reduction program. NAME OF ISSUER OR LENDER INTEREST RATE CURRENT AMOUNT OWED MINIMUM PAYMENT AMOUNT MAXIMUM PAYMENT AMOUNT LOAN PAYMENT PAST DUE? CREDIT CARDS YES NO % $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ RETAIL CHARGE CARDS % $ $ $ $ $ $ $ $ $ $ $ $ LOAN MATURITY RATE AUTO LOANS % $ $ $ $ $ $ OTHER DEBTS % $ $ $ $ $ $ TOTAL $ $ $

16 WORKSHEET C: EXPENSE REDUCTION PLANNER This worksheet can help you think about ways to reduce your expenses so that you can pay off your debt sooner and set aside some money to meet financial emergencies. Reducing expenses is not easy, but it s not too difficult either. Saving even a little bit of money each week can add up over time. Here s a table that shows how far your money will go when you find ways to reduce your living expenses. (Current monthly expense amounts can be taken from Worksheet B.) IF YOU CAN REDUCE MONTHLY SPENDING BY: YOU CAN PAY THIS MUCH PRINCIPAL AND INTEREST TOWARD YOUR DEBT IN: 1 YEAR 2 YEARS 3 YEARS $ $1, $2, $3, $ $2, $4, $7, $ $3, $7, $10, $ $4, $9, $14, CURRENT MONTHLY EXPENSE YOU CAN REDUCE THIS EXPENSE BY THIS MUCH EACH MONTH ESSENTIAL EXPENSES (difficult but not impossible to reduce) Rent/mortgage $ $ Medical and dental $ $ Insurance $ $ Car loan payment $ $ Credit card payments $ $ Student loan payments $ $ Other loan payments $ $ NECESSARY EXPENSES (can be reduced) Food $ $ Household maintenance $ $ Utilities and telephone $ $ Clothing $ $ Personal care $ $ Automobile/transportation $ $ Child-care expenses $ $ Misc. out-of-pocket $ $ OPTIONAL EXPENSES (easy to reduce or temporarily eliminate) Entertainment $ $ Vacation(s) $ $ Gifts $ $ Charitable contributions $ $ Furniture $ $ Additions to savings $ $ TOTAL MONTHLY EXPENSE REDUCTION $

17 WORKSHEET D: PLANNING TO PAY LARGE BILLS Big expenses can be family budget busters. A large bill or unexpected expense can strain the family budget. This worksheet can help you plan in advance those bills and expenses that you can anticipate so that you can plan ahead to have the money when the bill comes due. Simply list all the expenses that arise less frequently than each month. Then you can build these lessthan-monthly expenses into your budget. JAN. FEB. MAR. APR. MAY JUN. JUL. AUG. SEP. OCT. NOV. DEC. Car insurance $ $ $ $ $ $ $ $ $ $ $ $ Renters insurance $ $ $ $ $ $ $ $ $ $ $ $ Life insurance $ $ $ $ $ $ $ $ $ $ $ $ Other insurance $ $ $ $ $ $ $ $ $ $ $ $ Car repairs/maintenance $ $ $ $ $ $ $ $ $ $ $ $ Furniture $ $ $ $ $ $ $ $ $ $ $ $ Vacation(s) and holidays $ $ $ $ $ $ $ $ $ $ $ $ Gifts $ $ $ $ $ $ $ $ $ $ $ $ Charitable contributions $ $ $ $ $ $ $ $ $ $ $ $ Other $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ TOTAL $ $ $ $ $ $ $ $ $ $ $ $

18 YOUR PERSONAL FINANCIAL PLANNING REMINDER CHECKLIST Reducing and better managing your debt are your most important financial challenges right now. As you begin to do these things, keep in mind other financial matters that are also important to your and your family s financial security. The following checklist can serve as a reminder of other important financial planning matters. 1. Make sure you have sufficient insurance coverage to protect you and your loved ones, including: Life insurance Health insurance Disability insurance Renters insurance Automobile insurance NEEDS ATTENTION OKAY 2. Plan ahead for the big-ticket items you are contemplating, including a home and a college education. The sooner you start, the better prepared you will be to meet these expenses. 3. Periodically check on your progress toward saving for retirement. While reducing debt is now your most immediate financial challenge, you ll also need to keep tabs on where you stand on retirement, including Social Security, your own savings, and your eligibility for pension. 4. Prepare and keep up to date important estate planning documents for both you and your spouse, including: Will Durable power of attorney Living will, health care proxy, or advance directive 5. Learn about investing and other personal financial planning matters so you can better control your financial future. 6. Take the steps necessary to advance in your job by improving your job skills and perhaps obtaining additional education. Your career is your most important investment. Call or visit The Savings Bank Life Insurance Company of Massachusetts, Woburn, MA. NAIC #70435 All rights reserved.