Taking Control of Your Finances A Plan to Reduce Debt and Build Savings
From Credit to Debt A Slippery Slope Purchasing on credit reflects confidence in our ability to pay We often use credit to buy what we can t afford Easy access to credit makes it easier to fall into the debt trap
Digging Out of Debt Try not to buy on the fly Put limits on spending
Today We Will Analyze your personal balance sheet Discuss the right ways to use debt Review your spending habits Create a budget that lets you save for the future Take steps to reduce debt and avoid trouble in the future
Create Your Own Balance Sheet Tally up your debt Review your resources
Your Balance Sheet Add up your assets Subtract 3 months of living expenses Subtract major anticipated expenses Add up your liabilities List debts starting with those that have the highest interest rates
The Right Way to Use Debt Home mortgages and lines of credit Automobile financing Student loans Small-business loans
Maybe Plastic Isn t Fantastic Interest rates vary dramatically Why pay annual fees? How many cards are enough?
Cut Balances Down to Size Credit card companies have raised the minimum balances they charge consumers that s good news! Low minimum payments work against you
Why Minimum Payments Cost More Original Balance Total Payments with Interest Months to Pay Credit card $2,000 $2,811 89 Installment loan $2,000 $2,394 24 Examples assume 18% annual percentage rate, and are for illustrative purposes only.
Put Your Debt in Perspective The average U.S. household owes $15,355 in credit card debt.* Calculate your debt-to-income ratio: monthly debt payments 100 = gross monthly income % debt-to-income ratio *Source: Nerdwallet.com, 2015 American Household Credit Card Debt Survey, based on analysis of Federal Reserve statistics and other government data. Data current as of Q3 2015. Represents average balance of households that carry debt.
Review Your Spending Habits Fixed monthly expenses Mortgage/rent Insurance Variable monthly expenses Entertainment Gifts Travel
Create a Budget That Lets You Save for the Future Can you allocate more for debt payments? Establish a monthly budget
Monthly Budget Plan for the future; do not simply repeat the past
Yearly Budget Create a 12-month spending plan Include new savings and debt-reduction figures Compare planned vs. actual expenditures
Take Steps to Reduce Debt Paying off debt is an investment in the future Dip into savings if necessary
Pay Debt Now, Save Later A. Hold on to savings earning 1.25% interest while paying 18% on your credit card: Balance Interest Credit card -$1,000 -$180 Savings account +$1,000 $0 Net B. Use savings to pay debt: Balance Interest Credit card +$1,000 -$0 +$1.00 Savings account -$1,000 +$0 -$179 Net $0 $0 Note: This is a hypothetical situation and is not representative of any specific situation. Your results will vary.
More Tips for Paying Down Debt Pay set amount each month Start with highest interest rate Realistic payment schedule Readjust if needed; don t give up Add monthly payments to next card
When Will You Be Relieved of Your Debt Burden? example What are your monthly payments? (A) $200 What is your current balance? (B) $8,000 Divide A by B. $200/$8,000 =.025 What is your annual percentage rate (APR)? 12% In the chart for Worksheet 6, find number of years until the debt is paid off. 4 years
Avoid the Debt Dilemma in the Future Carry two credit cards at most Keep tabs on expenditures Use one card for emergencies only Pay off and cancel high-interest-rate cards Leave cards at home when you can
Make Saving Simple and Automatic Establish a savings account Deposit budgeted amount into checking, the rest in savings Automatic monthly transfers from checking into savings or investment accounts
Be a Smart Shopper Reflect on purchases Consider priorities Explain need for purchases Use cash or debit cards
Consider Other Ways to Save Fixed Variable Cancel unnecessary insurance Cut pleasure spending Sell underused assets Make a list before shopping Be conservative with utilities Buy in bulk
No Better Time Than the Present