On Friday about 40 people gathered at the Cardston Civic Center for the live Internet broadcast of Dave Ramsey's Entreleadership seminar. Attendees were mostly from the Cardston area, but since we were the only host location in Western Canada, we had people from as far away as Edmonton and Calgary. By all accounts it was a great success. A few commented that if they knew how good it was going to be, they would have brought their entire team from work.
The five and a half hours of instruction were a fire hose of profound business and leadership principles with a lot of laughs mixed in. I thought I would share some of the things we learned. I was impressed by the opening discussion about Entreleadership in general. Entreleadership is a word Dave Ramsey made up to describe principles of entrepreneurship and leadership, which go hand in hand for those running a business.
He defines a leader as a person who rules, guides, or inspires others, an entrepreneur as a person who organizes, operates, and assumes risk for a venture, and entreleadership as the process of leading to cause a venture to grow and prosper. He makes the point that organizations are never limited by their opportunities or their team. Rather, they are limited by their leader's capacity, intelligence, education, character, ability, and vision. John Maxwell in his book "21 Irrefutable Laws of Leadership" (a book I highly recommend) calls this the "leadership lid."
Leaders must continually improve themselves in these areas if they want their organization to grow and prosper. The seminar was geared toward business, but the principles apply to any kind of leader, including parents.
I've archived all of my past columns in a blog at http://dollarsandsense-dave.blogspot.com/. You may also join the "Dave Ramsey Fans of Southern Alberta" Facebook group by searching for the group name. If you have any comments or questions you can contact me directly at david.r.olsen@gmail.com.
Monday, November 8, 2010
Thursday, November 4, 2010
Announcing Financial Peace University in Cardston!
We have just finalized dates for Dave Ramsey's Financial Peace University (FPU) in Cardston.
Free class preview: Thursday, January 13 from 7:30-8:00 pm at the Cardston Elementary School "Pit"
Dates and time: Once per week on Thursdays from January 27 through April 21 at 7:30 to 9:30 pm (13 classes)
Free class preview: Thursday, January 13 from 7:30-8:00 pm at the Cardston Elementary School "Pit"
Dates and time: Once per week on Thursdays from January 27 through April 21 at 7:30 to 9:30 pm (13 classes)
Location: Cardston Elementary School "Pit"
Contact: Dave Olsen, david.r.olsen@gmail.com
Format: 1 hour of DVD instruction and 1 hour of class discussion
Cost: $125 per family (includes kids living at home) to Dave Olsen by January 14 (facilitator is volunteer position - cost includes audio CD's, book, and lifetime FPU membership)
Contact: Dave Olsen, david.r.olsen@gmail.com
Format: 1 hour of DVD instruction and 1 hour of class discussion
Cost: $125 per family (includes kids living at home) to Dave Olsen by January 14 (facilitator is volunteer position - cost includes audio CD's, book, and lifetime FPU membership)
Benefits: Over 750,000 families have taken the class in North America, and the average family pays off $5,300 in debt and saves $2,700 in the first 91 days.
More information: www.daveramsey.
More information: www.daveramsey.
Wednesday, October 13, 2010
Entreleadership
I'm back after an extra-long summer hiatus. I appreciate the positive comments I've heard in person and by email over the last few months. I've even been able to address some readers' questions directly by email, which I've enjoyed.
This week I'd like to step away from personal finance and discuss small business finance instead. Of course, I will still be referring to Dave Ramsey's principles. He not only addresses personal finance, but he also teaches principles for business finance and leadership with his Entreleadership seminar (http://www.daveramsey.com/entreleadership/home/). He normally gives these seminars only in person. I went with some team members from Kodiak Mountain Stone to this seminar in Portland about a year ago, and the things we learned were well worth the travel and ticket cost. I keep my note-filled workbook on my desk, and we still refer regularly to it as we make plans for our business.
On November 5, for the first time, he will be broadcasting this seminar live to various host locations across North America. We will be hosting the event at the Cardston Civic Center from 9 am to 3:30 pm. Tickets are $40 each (including lunch) and can be purchased at Sims Olsen Chartered Accountants (66 3rd Avenue W, 403-653-3509). The topics covered will include EntreLeadership defined (combining entrepreneurship and leadership); dreams, visions and goal setting; business financial principles; hiring and firing; and making major decisions.
People often ask me how business and personal financial principles differ, and the answer is that there isn't much difference. Businesses should still have an emergency fund of three to six months of expenses. Businesses who have emergency funds are the ones who survive downturns like this. The best way to operate a business is without debt, and those in debt should develop a plan for getting out of it over time.
One thing Dave Ramsey emphasizes in the Entreleadership seminar is that debt amplifies risk. Most businesses prosper because of a few good decisions that outweigh many more dumb decisions. Business owners often become so confident that a new idea will work that they load up on debt to implement it. Chances are that any given decision will be a dumb one, and the debt associated with that idea can kill the business.
So how can you implement an idea without debt? The best option is to use cash, which will cause you to cautiously test an idea until you know if it's a good one or not. It's much easier to spend the bank's money than your own hard-earned cash. If the idea requires equipment that you don't have the cash for, try renting until the idea proves itself. When the idea does prove itself, buy used equipment. Instead of over-hiring, start by outsourcing or using contractors. There are many ways to build a business without debt, but it requires hard work, creativity, and sacrifice. Sounds a lot like how to succeed in personal finance, doesn't it?
If you have any questions or topics you want me to address, please email me!
Tuesday, October 12, 2010
Welcome to my Personal Finance Blog!
Welcome to my new blog! I have been writing a personal finance column called "Dollars and Sense" for several months for the local paper, and I realized that I could take advantage of technology and broadcast my column to the world! I started this blog to keep an archive of my newspaper columns and also make other personal finance-related comments.
Thursday, July 8, 2010
How Much House Can You Afford?
In my last column I wrote about Step Five of Dave Ramsey's Seven Baby Steps, Funding Kids' College (see http://www.daveramsey.com/new/baby-steps/). Before addressing Baby Step Six, which is paying off your home mortgage early, let's back up and consider guidelines for taking on a reasonable home mortgage. A home mortgage can easily become a drain on your income that makes moving through the Baby Steps difficult or impossible. Not only does a higher-priced home come with higher mortgage payments, but as a bonus it usually includes higher costs for property tax, utilities, and maintenance.
So the questions are, how much house can you afford, and when are you ready to buy a house? Of course, the 100% down plan is always the best option. What a head start you would have financially if you pay cash for a house! Unfortunately, this option is not feasible for most families, so we'll discuss the next best option - a reasonable mortgage. Dave Ramsey suggests at least a 10% down payment and a monthly payment of no more than 25% of your take-home pay (after tax) on a 15-year amortization. For example, if you make $60,000/year, your monthly take-home might be about $4000/month. 25% of that would be a payment of $1000/month. At 5% interest this would be a $126,000 mortgage, and if you put 10% down, you could buy a $140,000 house.
I know, this sounds very low, especially with current Cardston home prices. There are things you can do to pay more for a home while still following these guidelines. You could increase your income. For example, with a $75,000 income, you could pay about $175,000. You could save for a higher down payment, or you could sell stuff, such as a vehicle you don't need.
You know you're ready to buy a house when you are on Baby Step 4. You have paid off all of your other debts and you have 3 to 6 months of emergency savings in addition to your down payment. Normal people don't have the patience to get to this point before buying a house, but doing well financially isn't about being normal.
I'm not going to predict your financial demise if you don't follow these guidelines perfectly. However, it is important that you understand how all of the costs of home ownership fit into your budget. Be sure to include mortgage payment, property tax, utilities, other living costs, 15% of income for retirement savings, and enough breathing room to save for things like vehicle replacement and replenishing your emergency fund when (not if) life happens.
The dream of a nice home can quickly become a nightmare if you are struggling to make ends meet for 15 to 25 years of mortgage payments. If you're already in a home that you can't afford, have the courage to get out. If you follow the Baby Steps and other sound financial principles, it won't be long before you'll be able to afford your dream home.
If you have any questions or topics you want me to address, please email me!
So the questions are, how much house can you afford, and when are you ready to buy a house? Of course, the 100% down plan is always the best option. What a head start you would have financially if you pay cash for a house! Unfortunately, this option is not feasible for most families, so we'll discuss the next best option - a reasonable mortgage. Dave Ramsey suggests at least a 10% down payment and a monthly payment of no more than 25% of your take-home pay (after tax) on a 15-year amortization. For example, if you make $60,000/year, your monthly take-home might be about $4000/month. 25% of that would be a payment of $1000/month. At 5% interest this would be a $126,000 mortgage, and if you put 10% down, you could buy a $140,000 house.
I know, this sounds very low, especially with current Cardston home prices. There are things you can do to pay more for a home while still following these guidelines. You could increase your income. For example, with a $75,000 income, you could pay about $175,000. You could save for a higher down payment, or you could sell stuff, such as a vehicle you don't need.
You know you're ready to buy a house when you are on Baby Step 4. You have paid off all of your other debts and you have 3 to 6 months of emergency savings in addition to your down payment. Normal people don't have the patience to get to this point before buying a house, but doing well financially isn't about being normal.
I'm not going to predict your financial demise if you don't follow these guidelines perfectly. However, it is important that you understand how all of the costs of home ownership fit into your budget. Be sure to include mortgage payment, property tax, utilities, other living costs, 15% of income for retirement savings, and enough breathing room to save for things like vehicle replacement and replenishing your emergency fund when (not if) life happens.
The dream of a nice home can quickly become a nightmare if you are struggling to make ends meet for 15 to 25 years of mortgage payments. If you're already in a home that you can't afford, have the courage to get out. If you follow the Baby Steps and other sound financial principles, it won't be long before you'll be able to afford your dream home.
If you have any questions or topics you want me to address, please email me!
Thursday, June 24, 2010
Baby Step 5 - Funding Kids' College
In previous columns I have written about Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). I know that Dave Ramsey is not the only legitimate source of personal finance information out there; however, his methods for teaching personal finance are the best I have found after several years of learning from many different sources. He doesn't necessarily teach anything new, but he packages the information in a way that makes it very easy to understand and follow. The Baby Steps in particular are a great road map for moving effectively through our financial lives.
With that explanation for why I spend so much time talking about Dave Ramsey, I would like to move beyond Baby Step 4, which is when it gets really fun. Getting out of debt, building an emergency fund, and socking away 15% of income for retirement is kind of like exercising for most people. It's well worth the effort, but it's not always the most fun at the time. It requires sacrifice and intensity to get the results you would like. But after you have built the foundation of the first 4 Baby Steps, which only takes 18-24 months for the average family, you can afford to relax a little and be more flexible in your priorities.
Baby Step 5, which is funding kids' college, and Baby Step 6, paying off your home mortgage early, if they both apply to do, can be done at the same time. Different people might place different priorities on these steps. Maybe I will feel more generous toward my kids as they get older, but my priority is to pay off my home before I help my kids with college. Even though it was painful at times, I put myself through university, and I feel like I'm much better off for it. After I pay off my home, I would like to figure out a way to help them without creating a disincentive to work hard for scholarships and in part-time jobs. Please email me if you have figured out a good system for helping kids with college.
In Canada, the Registered Education Saving Plan (RESP) is a great tool for saving for kids' college. The rules can get a bit complicated depending on your situation, so I won't try to cover every scenario in this column. You can learn more on the CRA web site (http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/menu-eng.html) or by talking to an investment broker. Basically, the government will match at least 20% of your contributions up to $2500 per year per child. If you contribute $2500, the government will chip in $500. More assistance is available for low-income families.
This benefit is also retroactive back to the child's birth, and each year you can catch up on one year. For example, if you don't start saving until your child is 8, for the next 8 years you can contribute $5000 each year with a $1000 bonus from the government (numbers may vary at little depending on the year). There is a penalty for withdrawing the money and not using it for valid college expenses, but it is only intended to recover the government contributions.
If you have any questions or topics you want me to address, please email me
With that explanation for why I spend so much time talking about Dave Ramsey, I would like to move beyond Baby Step 4, which is when it gets really fun. Getting out of debt, building an emergency fund, and socking away 15% of income for retirement is kind of like exercising for most people. It's well worth the effort, but it's not always the most fun at the time. It requires sacrifice and intensity to get the results you would like. But after you have built the foundation of the first 4 Baby Steps, which only takes 18-24 months for the average family, you can afford to relax a little and be more flexible in your priorities.
Baby Step 5, which is funding kids' college, and Baby Step 6, paying off your home mortgage early, if they both apply to do, can be done at the same time. Different people might place different priorities on these steps. Maybe I will feel more generous toward my kids as they get older, but my priority is to pay off my home before I help my kids with college. Even though it was painful at times, I put myself through university, and I feel like I'm much better off for it. After I pay off my home, I would like to figure out a way to help them without creating a disincentive to work hard for scholarships and in part-time jobs. Please email me if you have figured out a good system for helping kids with college.
In Canada, the Registered Education Saving Plan (RESP) is a great tool for saving for kids' college. The rules can get a bit complicated depending on your situation, so I won't try to cover every scenario in this column. You can learn more on the CRA web site (http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/menu-eng.html) or by talking to an investment broker. Basically, the government will match at least 20% of your contributions up to $2500 per year per child. If you contribute $2500, the government will chip in $500. More assistance is available for low-income families.
This benefit is also retroactive back to the child's birth, and each year you can catch up on one year. For example, if you don't start saving until your child is 8, for the next 8 years you can contribute $5000 each year with a $1000 bonus from the government (numbers may vary at little depending on the year). There is a penalty for withdrawing the money and not using it for valid college expenses, but it is only intended to recover the government contributions.
If you have any questions or topics you want me to address, please email me
Thursday, May 27, 2010
Baby Step 4 - Retirement Savings
In my last few columns I have discussed step 2 of Dave Ramsey's 7 Baby Steps (see http://www.daveramsey.com/new/baby-steps/). I love talking about getting out of and avoiding debt because it is an essential prerequisite for financial success. Now I think it's time to move on to other topics that cover what should happen after getting out of debt. Baby Step 3 is to build 3 to 6 months of expenses in savings, but I have discussed this step in previous columns.
In this column I will address 3 questions regarding Baby Step 4, which is to save 15% of income toward retirement.
Why should I wait until I'm out of debt with an emergency fund before saving for retirement? The answer is simple: FOCUS! You're not going to gain traction if you try to do too much at once. It is true that saving for retirement is very important, and the earlier you start the better, but I am only recommending that you put off retirement savings temporarily. With focus and discipline, the average family takes 18 to 24 months to complete Baby Steps 1 through 3. Once you are free from income-eating debt payments and have an emergency fund to prevent you from going back into debt, you will be in a great position to contribute to retirement.
Why 15%? 15% is not a magic number, but it's enough to make good progress toward retirement but not so much that it's a huge burden. Some of you will want to save less, but I encourage you to stretch yourself to reach this goal. Some of you will want to save more, but I encourage you to dial back unless you have a lot of extra money. Take anything extra you have above 15% and apply it to the next baby steps - fund kids' college, pay off your house early, build wealth in other ways (i.e. real estate), give money away, and yes, even spend some of it!
Where should I put the money? Definitely use a Registered Retirement Savings Plan (RRSP) and/or a Tax-Free Savings Account (TFSA). Both of these provide significant tax advantages. An RRSP allows you to invest pre-tax dollars (what you contribute is a tax deduction) but you are taxed on any withdrawals. A TFSA allows you to invest after-tax dollars (no tax deduction), but the withdrawals in retirement are tax free. If you have the same tax rate now as in retirement, the end result is exactly the same. Of course, we have no idea what our tax rate will be in retirement, so it's best to talk through your options with an advisor. You can think of an RRSP or TFSA as a blanket that protects your investments from taxes, but they are not the investments themselves. Even if you use an investment advisor, such as at a bank, make sure you understand what your RRSP or TFSA is invested in.
There is much to talk about on the subject of retirement planning, but I will leave it at that for this column. If you have any questions or topics you want me to address, please email me
In this column I will address 3 questions regarding Baby Step 4, which is to save 15% of income toward retirement.
Why should I wait until I'm out of debt with an emergency fund before saving for retirement? The answer is simple: FOCUS! You're not going to gain traction if you try to do too much at once. It is true that saving for retirement is very important, and the earlier you start the better, but I am only recommending that you put off retirement savings temporarily. With focus and discipline, the average family takes 18 to 24 months to complete Baby Steps 1 through 3. Once you are free from income-eating debt payments and have an emergency fund to prevent you from going back into debt, you will be in a great position to contribute to retirement.
Why 15%? 15% is not a magic number, but it's enough to make good progress toward retirement but not so much that it's a huge burden. Some of you will want to save less, but I encourage you to stretch yourself to reach this goal. Some of you will want to save more, but I encourage you to dial back unless you have a lot of extra money. Take anything extra you have above 15% and apply it to the next baby steps - fund kids' college, pay off your house early, build wealth in other ways (i.e. real estate), give money away, and yes, even spend some of it!
Where should I put the money? Definitely use a Registered Retirement Savings Plan (RRSP) and/or a Tax-Free Savings Account (TFSA). Both of these provide significant tax advantages. An RRSP allows you to invest pre-tax dollars (what you contribute is a tax deduction) but you are taxed on any withdrawals. A TFSA allows you to invest after-tax dollars (no tax deduction), but the withdrawals in retirement are tax free. If you have the same tax rate now as in retirement, the end result is exactly the same. Of course, we have no idea what our tax rate will be in retirement, so it's best to talk through your options with an advisor. You can think of an RRSP or TFSA as a blanket that protects your investments from taxes, but they are not the investments themselves. Even if you use an investment advisor, such as at a bank, make sure you understand what your RRSP or TFSA is invested in.
There is much to talk about on the subject of retirement planning, but I will leave it at that for this column. If you have any questions or topics you want me to address, please email me
Thursday, May 13, 2010
Baby Step 2 - School Without Student Loans (Part 2)
In my last few columns I have discussed step 2 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/), and last time I made the case that it's actually possibly to get through school without student loans. This week I will continue on that theme in answer to the question, “what's wrong with student loans?” Two principles I would like to discuss are (1) student loans, like any debt, can take the place of creativity and sacrifice, and (2) students loans for most people are NOT easy to pay off.
Simply put, students loans make it too easy. That may not sound like a bad thing, but it is bad when you're trading short-term ease for long-term pain (refer to principle number 2). There's nothing wrong with being a starving student living in a small apartment getting around in an old car. In fact, learning financial discipline and sacrifice as a student will prepare your character to handle prosperity in the future.
For some people the only possible way to get an education might be to take out a minimal loan and use it for the bare necessities. However, few of us have that kind of discipline. If you need $5000 to cover the bare necessities, why not take out $5500 and eat out a little more often? Why not take out $7500 and live in a little nicer apartment? Why not take out $10,000 and buy a big-screen TV and nice couch? Someone I talked to recently admitted that he spent more student loan money on CD's and stereo equipment (you can tell he went to school a few years ago) than he did on his education.
The second principle is that student loans are NOT easy to pay off. The average university student graduates with around $20,000 in debt. Starting salaries vary widely by profession and location, but somewhere around $45,000 is probably somewhere in the middle of the range for a bachelor degree. That might sound like decent money, but a typical one-income family will have trouble finding extra money for student loan payments after taxes and the many other expenses of life.
If the average student loan is $20,000, and a typical interest rate is around 6%, here are some examples of how long it would take to pay it off. $150/month: 18 years. $250/month: 8 years. $750/month: 2.5 years. $1000/month: almost 2 years. You might think that 2 years doesn't sound too bad, but even if you could spare $1000/month right out of college (not very likely), think of what else you could do with that $1000/month.
You could save for a $24,000 down payment on a house, you could buy a nice vehicle, or my personal favorite, you could invest it for 2 years. If you invested at a 10% return (if you starting investing a year ago, your return would have been more like 50-80%), it would become $26,500 in 2 years. If you just left that $26,500 in investments at 10%/year (the average stock market return over a long period of time) and did no other investing for the rest of your life, you would be a millionaire when you retire in 40 years ($1.2 million to be exact).
Are those extra comforts while attending school worth $1.2 million? I'll leave that up to you to decide.
If you have any questions or topics you want me to address, please email me!
Simply put, students loans make it too easy. That may not sound like a bad thing, but it is bad when you're trading short-term ease for long-term pain (refer to principle number 2). There's nothing wrong with being a starving student living in a small apartment getting around in an old car. In fact, learning financial discipline and sacrifice as a student will prepare your character to handle prosperity in the future.
For some people the only possible way to get an education might be to take out a minimal loan and use it for the bare necessities. However, few of us have that kind of discipline. If you need $5000 to cover the bare necessities, why not take out $5500 and eat out a little more often? Why not take out $7500 and live in a little nicer apartment? Why not take out $10,000 and buy a big-screen TV and nice couch? Someone I talked to recently admitted that he spent more student loan money on CD's and stereo equipment (you can tell he went to school a few years ago) than he did on his education.
The second principle is that student loans are NOT easy to pay off. The average university student graduates with around $20,000 in debt. Starting salaries vary widely by profession and location, but somewhere around $45,000 is probably somewhere in the middle of the range for a bachelor degree. That might sound like decent money, but a typical one-income family will have trouble finding extra money for student loan payments after taxes and the many other expenses of life.
If the average student loan is $20,000, and a typical interest rate is around 6%, here are some examples of how long it would take to pay it off. $150/month: 18 years. $250/month: 8 years. $750/month: 2.5 years. $1000/month: almost 2 years. You might think that 2 years doesn't sound too bad, but even if you could spare $1000/month right out of college (not very likely), think of what else you could do with that $1000/month.
You could save for a $24,000 down payment on a house, you could buy a nice vehicle, or my personal favorite, you could invest it for 2 years. If you invested at a 10% return (if you starting investing a year ago, your return would have been more like 50-80%), it would become $26,500 in 2 years. If you just left that $26,500 in investments at 10%/year (the average stock market return over a long period of time) and did no other investing for the rest of your life, you would be a millionaire when you retire in 40 years ($1.2 million to be exact).
Are those extra comforts while attending school worth $1.2 million? I'll leave that up to you to decide.
If you have any questions or topics you want me to address, please email me!
Tuesday, May 4, 2010
Canada-US Differences
An FPU class member requested a summary of main differences between Canada and the US as covered in FPU. I thought this was a great idea, so I am sending it to everyone who is taking or has taken the class.
All of the underlying financial principles are the same, but there are some differences in applying these principles. I'm not an expert in any of these areas, so please correct me if anything I've mentioned is not accurate.
Dumping Debt
- Visa and Mastercard debit cards are not offered by every Canadian bank. 1st Choice Savings Credit Union is the only bank in Cardston that offers one (Global Payment Mastercard)
Credit Bureaus
- It's not quite as easy to get a free annual credit report from credit bureaus in Canada, but it is possible by following instructions on the credit bureau websites (www.Transunion.ca and www.Experian.ca)
- Unlike the federal Fair Debt Collections Practices Act in the US, debt collection practices are governed by each province in Canada. Information about Alberta can be found here: http://www.
Retirement Planning
- IRA, SEPP, 401(k), 403(b), 457 (US) = RRSP (much simpler in Canada!)
- No penalty for withdrawing from an RRSP (10% penalty on most US plans) unless the underlying investment has a withdrawal penalty (such as a GIC), but withdrawal is taxed as income
- One spouse can contribute to the others RRSP and still get the tax break (spousal RRSP)
- Roth IRA, Roth 401(k) (US) = Tax-free Savings Account (TFSA) (Canada)
College Savings
- ESA, UTMA, 529 (US) = RESP (Canada)
- Unlike ESA's, RESP's are not tax free, but the government does match 20% of contributions up to $2500 per year (contribute $2500, get $500 for free)
Real Estate and Mortgages
- Mortgage interest is not tax deductible in Canada
- No limit on tax-free gain on sale of primary residence in Canada
- Mortgage insurance in US is normally paid monthly and can be dropped when equity is more than 20%. Mortgage insurance in Canada (CMHC) is normally paid in full up front, either in cash or added to mortgage principal.
- We don't have the different types of mortgages - FNMA, HUD, VA
- Mortgage amortization periods and other options are far different in Canada, but there are too many options to list here. The biggest difference is that the common 30-year, fixed-rate, no prepayment penalty mortgage is not available in Canada.
Thursday, April 29, 2010
Baby Step 2 - School Without Student Loans (Part 1)
In my last few columns I have discussed step 2 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). This week I will answer the question, “how it is possible to get an education without student loans?” Believe it or not, it is possible to get a good education without student loans. For some, student loans are avoidable because of parents or full-ride scholarships. For the rest of us, they can be avoided through hard work, discipline, and sacrifice.
One of the best ways to pay for an education is to work part-time while going to school and full-time during the summer. Studies have shown that students who work up to 20 hours per week while going to school full-time actually get better grades than those who don't work. If you have a part-time job, you will be forced to make your study time focused and effective. If you have all day to study, it's easy to put off studying and find more fun ways to fill your time.
There are many side benefits to working while going to school, such as learning good time management skills and gaining real world experience. I strongly suggest finding work related to your area of study. Those who work during school will find it much easier to find a job after graduating because employers will look for experience in addition to education.
It is also important to work hard for scholarships, which involves getting good grades and applying for every possible scholarship. Getting good grades has a lot to do with hard work and little to do with natural brains. Many schools give full tuition scholarships based mainly on grades, and depending on the school, this could save you $15,000 to $30,000 or more over 4 years.
Do you want to earn several hundred dollars per hour? There is a good chance that the time you spend searching, applying, and writing essays for scholarships will pay off that much. There are many scholarships based on criteria other than grades, and many scholarships even go to those who don't quite meet the criteria because they are the only ones who apply! For two years I received $750 each semester because I found an obscure scholarship for those working for entrepreneurial companies. No one else applied, so I got it every time!
In addition to earning money through work and scholarships, it is also important to conserve money by following a strict budget. The danger of student loans, like any debt, is that they can take the place of creativity and sacrifice. There's nothing wrong with the character-building process of being a starving student. Figure out a budget for the bare minimum you need to survive, and stick to it. If you work hard and sacrifice, chances are you will be able to get through school without student loans. The reward of graduating debt-free will be well worth the effort!
If you have any questions you want me to address in my next column about avoiding student loans or about any personal finance topic, please email me!
One of the best ways to pay for an education is to work part-time while going to school and full-time during the summer. Studies have shown that students who work up to 20 hours per week while going to school full-time actually get better grades than those who don't work. If you have a part-time job, you will be forced to make your study time focused and effective. If you have all day to study, it's easy to put off studying and find more fun ways to fill your time.
There are many side benefits to working while going to school, such as learning good time management skills and gaining real world experience. I strongly suggest finding work related to your area of study. Those who work during school will find it much easier to find a job after graduating because employers will look for experience in addition to education.
It is also important to work hard for scholarships, which involves getting good grades and applying for every possible scholarship. Getting good grades has a lot to do with hard work and little to do with natural brains. Many schools give full tuition scholarships based mainly on grades, and depending on the school, this could save you $15,000 to $30,000 or more over 4 years.
Do you want to earn several hundred dollars per hour? There is a good chance that the time you spend searching, applying, and writing essays for scholarships will pay off that much. There are many scholarships based on criteria other than grades, and many scholarships even go to those who don't quite meet the criteria because they are the only ones who apply! For two years I received $750 each semester because I found an obscure scholarship for those working for entrepreneurial companies. No one else applied, so I got it every time!
In addition to earning money through work and scholarships, it is also important to conserve money by following a strict budget. The danger of student loans, like any debt, is that they can take the place of creativity and sacrifice. There's nothing wrong with the character-building process of being a starving student. Figure out a budget for the bare minimum you need to survive, and stick to it. If you work hard and sacrifice, chances are you will be able to get through school without student loans. The reward of graduating debt-free will be well worth the effort!
If you have any questions you want me to address in my next column about avoiding student loans or about any personal finance topic, please email me!
Thursday, April 15, 2010
Baby Step 2 - Living Without Auto Loans
In my last few columns I have discussed step 2 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). The baby steps are as follows: (1) save $1000 to start an emergency fund, (2) pay off all debt using the debt snowball (besides your home), (3) 3 to 6 months of expenses in savings, (4) invest 15% of household income into RRSPs, (5) college funding for children, (6) pay off home early, and (7) build wealth and give.
I will continue on my anti-debt soapbox this week because I love to hate debt so much. I promise - I will eventually move on to other topics. The question this week is, "how do I get a car without a loan?" Believe it or not, it is possible to live without a car payment. The key here is distinguishing between wants and needs. You might want a car that turns heads on Main Street, but you probably just need a car that will start in the morning and get you to work safely.
If you are really starting from scratch (and most of you aren't, so it will be even easier than this scenario), you can find a car that runs for $1000 or less, which most people could come up with fairly quickly. I'm not suggesting you drive a $1000 beater forever. The average car payment is around $500/month. Let's say that instead of having a debt payment, which includes a lot of interest, you put $500/month into a savings account. Within a year you could pay $6000 cash plus proceeds from the beater for quite a respectable car. Another year would give you $12,000, and so on until within five years (the average length of a car loan) you could pay almost $30,000 cash for a car that would turn heads.
5 years of $500/month payments at an 8% interest rate could purchase a $24,659.22 car, which means having a car payment cost you over $5000 in interest during that time. Furthermore, the average person will finance another car for another 5 years at the end of the loan term, thus continuing a lifetime cycle of car payments. If you put that $1000/year toward retirement savings at 10%/year instead of interest to the bank, you would have almost $500,000 extra after 40 years. Why not sacrifice for a short time and save your family from a lifetime of car payments that eat away at your ability to build wealth?
If you have any questions or comments, please email me!
I will continue on my anti-debt soapbox this week because I love to hate debt so much. I promise - I will eventually move on to other topics. The question this week is, "how do I get a car without a loan?" Believe it or not, it is possible to live without a car payment. The key here is distinguishing between wants and needs. You might want a car that turns heads on Main Street, but you probably just need a car that will start in the morning and get you to work safely.
If you are really starting from scratch (and most of you aren't, so it will be even easier than this scenario), you can find a car that runs for $1000 or less, which most people could come up with fairly quickly. I'm not suggesting you drive a $1000 beater forever. The average car payment is around $500/month. Let's say that instead of having a debt payment, which includes a lot of interest, you put $500/month into a savings account. Within a year you could pay $6000 cash plus proceeds from the beater for quite a respectable car. Another year would give you $12,000, and so on until within five years (the average length of a car loan) you could pay almost $30,000 cash for a car that would turn heads.
5 years of $500/month payments at an 8% interest rate could purchase a $24,659.22 car, which means having a car payment cost you over $5000 in interest during that time. Furthermore, the average person will finance another car for another 5 years at the end of the loan term, thus continuing a lifetime cycle of car payments. If you put that $1000/year toward retirement savings at 10%/year instead of interest to the bank, you would have almost $500,000 extra after 40 years. Why not sacrifice for a short time and save your family from a lifetime of car payments that eat away at your ability to build wealth?
If you have any questions or comments, please email me!
Thursday, April 1, 2010
Baby Step 2 - What's Wrong With Debt?
In my last couple of columns I have discussed step 2 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). The baby steps are as follows: (1) save $1000 to start an emergency fund, (2) pay off all debt using the debt snowball (besides your home), (3) 3 to 6 months of expenses in savings, (4) invest 15% of household income into RRSPs, (5) college funding for children, (6) pay off home early, and (7) build wealth and give.
Step 2, getting out of debt, gives me so much to talk about that I would like to continue on the subject in answer to the question, "why is debt so bad?" I don't profess to have all the answers or that my opinion is the only correct one. However, I do hope you at least take a step back and consider the impact debt is having (if you are in debt) or will have (if you're considering going into debt) on your life. Especially consider how debt adds risk (and stress) to your life.
Consider how many financial risks we face in life that we can't always avoid, such as serious injury or illness and job loss. Such unfortunate events can cause us serious hardship if don't have debt, but those hardships are compounded when debt is in the picture. In addition to worrying about the essentials of life, such as food, clothing, transportation, and shelter, what if we also had to figure out how to pay that $700/month car payment, $400/month minimum credit card payment, an $200/month furniture payment? In that moment we would gladly take back our hand-me-down furniture and reliable but not-so-flashy, 10-year-old car. When we are having trouble putting food on the table, we would regret that great vacation we charged to our credit card.
Don't get me wrong - I'm not saying that we should live in paranoia of something bad happening and not enjoy life. However, I am saying that we should distinguish between our needs and our wants and enjoy our wants when we are financially ready to enjoy them. It is my opinion and experience that the first 4 baby steps should come before expensive wants: start with $1000, get out of debt, get 3-6 months of expenses in savings, and contribute 15% of your income to RRSP's. After that you can balance extra money to fund kids college, pay off your house early, build wealth, give, and save to pay cash for your wants. Take a nice vacation. Buy a nice car. There's nothing wrong with that - if you have the cash and you've taken care of more important things first. This is one of my favorite Dave Ramsey quotes: "Children do what feels good. Adults devise a plan and stick to it."
If you have any questions or comments, please email me
Consider how many financial risks we face in life that we can't always avoid, such as serious injury or illness and job loss. Such unfortunate events can cause us serious hardship if don't have debt, but those hardships are compounded when debt is in the picture. In addition to worrying about the essentials of life, such as food, clothing, transportation, and shelter, what if we also had to figure out how to pay that $700/month car payment, $400/month minimum credit card payment, an $200/month furniture payment? In that moment we would gladly take back our hand-me-down furniture and reliable but not-so-flashy, 10-year-old car. When we are having trouble putting food on the table, we would regret that great vacation we charged to our credit card.
Don't get me wrong - I'm not saying that we should live in paranoia of something bad happening and not enjoy life. However, I am saying that we should distinguish between our needs and our wants and enjoy our wants when we are financially ready to enjoy them. It is my opinion and experience that the first 4 baby steps should come before expensive wants: start with $1000, get out of debt, get 3-6 months of expenses in savings, and contribute 15% of your income to RRSP's. After that you can balance extra money to fund kids college, pay off your house early, build wealth, give, and save to pay cash for your wants. Take a nice vacation. Buy a nice car. There's nothing wrong with that - if you have the cash and you've taken care of more important things first. This is one of my favorite Dave Ramsey quotes: "Children do what feels good. Adults devise a plan and stick to it."
If you have any questions or comments, please email me
Thursday, March 18, 2010
Baby Step 2 - Getting out of Debt (again)
In my last column I discussed step 2 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). The baby steps are as follows: (1) save $1000 to start an emergency fund, (2) pay off all debt using the debt snowball (besides your home), (3) 3 to 6 months of expenses in savings, (4) invest 15% of household income into RRSPs, (5) college funding for children, (6) pay off home early, and (7) build wealth and give.
I would like to continue discussing debt in answer to the question, "how is it possible to live without debt?" I would argue not only that it's possible to live without debt but that it's the best way to live (with the exception of a minimal home mortgage after a healthy down payment). I would even strongly recommend living without access to credit cards or lines of credit. Gasp! No credit cards?!
But what about emergencies?! That's what baby step 1 is for - $1000 to hold you over while you get rid of debt. Once you are rid of all your debt, work hard to complete baby step 3 by saving 3-6 months of expenses, which should be plenty for almost any emergency. Then you won't compound the emergency with years of payments on high-interest debt. Not having access to debt also forces you to be creative and resourceful with how you handle emergencies rather than simply handing over the plastic.
But how do I book hotels or buy stuff online?! Following the lead of US banks, more and more Canadian banks are offering Visa or Mastercard cards that are identical to a credit card except the funds are deducted directly from your checking account, like a debit card, rather than building a debt balance. I have the Global Mastercard from 1st Choice Savings, and I have never missed my credit card!
But I need to build my credit score! Why? So you can go into even more debt? Did you know that you can get a home mortgage without a credit score? If you have a good employment record and a history of paying rent, utilities, etc on time, you won't have trouble getting a mortgage. If a lender won't consider you because you don't have a credit score, take your business somewhere else.
As you can tell, I feel strongly about the pitfalls of debt, and it's not because I have always been smart about steering clear of debt. I have made my share of stupid decisions fueled by debt, and I never want to be caught in those traps again!
If you have any questions or comments, please email me!
I would like to continue discussing debt in answer to the question, "how is it possible to live without debt?" I would argue not only that it's possible to live without debt but that it's the best way to live (with the exception of a minimal home mortgage after a healthy down payment). I would even strongly recommend living without access to credit cards or lines of credit. Gasp! No credit cards?!
But what about emergencies?! That's what baby step 1 is for - $1000 to hold you over while you get rid of debt. Once you are rid of all your debt, work hard to complete baby step 3 by saving 3-6 months of expenses, which should be plenty for almost any emergency. Then you won't compound the emergency with years of payments on high-interest debt. Not having access to debt also forces you to be creative and resourceful with how you handle emergencies rather than simply handing over the plastic.
But how do I book hotels or buy stuff online?! Following the lead of US banks, more and more Canadian banks are offering Visa or Mastercard cards that are identical to a credit card except the funds are deducted directly from your checking account, like a debit card, rather than building a debt balance. I have the Global Mastercard from 1st Choice Savings, and I have never missed my credit card!
But I need to build my credit score! Why? So you can go into even more debt? Did you know that you can get a home mortgage without a credit score? If you have a good employment record and a history of paying rent, utilities, etc on time, you won't have trouble getting a mortgage. If a lender won't consider you because you don't have a credit score, take your business somewhere else.
As you can tell, I feel strongly about the pitfalls of debt, and it's not because I have always been smart about steering clear of debt. I have made my share of stupid decisions fueled by debt, and I never want to be caught in those traps again!
If you have any questions or comments, please email me!
Thursday, March 4, 2010
Baby Step 2 - Getting out of Debt
In my last column I discussed step 1 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). The baby steps are as follows: (1) save $1000 to start an emergency fund, (2) pay off all debt using the debt snowball (besides your home), (3) 3 to 6 months of expenses in savings, (4) invest 15% of household income into RRSPs, (5) college funding for children, (6) pay off home early, and (7) build wealth and give.
This week I will discuss getting out of debt (besides your home). Some people are deep in debt with no readily apparent way out. Some have debt but plenty of assets that could be used to pay off debt. Many are somewhere in between, but it's these two scenarios that I would like to discuss.
First, to those who have debt and the means to pay it off, I would say write a check today and get rid of it, even if you have to sell assets. If you think you can borrow money at a low rate and invest at a higher rate, you’re probably forgetting about risk and taxes. For most people taxes alone will eat up at least one-third of gains. Risk can be a topic for another column, but suffice to say that, in general, the difference in return between different investments is due to a difference in risk (the higher the return, the greater the risk).
Second, to those who are deeply in debt and see little hope, I would say the key to gaining hope is having a plan. The snowball method for getting out of debt is simple and effective. The plan is to put all of your extra money toward your smallest debt, pay it off, and then work your way to your largest debt. In most cases ignore interest rates because the psychological effect of gaining momentum as you pay off debts is more important than saving a little bit of interest.
The key to this step is FOCUS and INTENSITY. Take care of your most basic needs of food, shelter, clothing, and transportation, and then pour everything else into your debts. Sell stuff, take an extra job, stay away from restaurants, cancel cable, eat inexpensive food, and take inexpensive vacations, if any at all. It will be tough, but the sacrifice will be worth it when you can pay cash for things without any associated stress. Once you sit down and write out your plan you will be very surprised at how quickly you can get out of debt. A family with an average amount of debt and average income can be completely debt free within 18-24 months!
If you have any questions about debt or anything else related to personal finance, please email me
This week I will discuss getting out of debt (besides your home). Some people are deep in debt with no readily apparent way out. Some have debt but plenty of assets that could be used to pay off debt. Many are somewhere in between, but it's these two scenarios that I would like to discuss.
First, to those who have debt and the means to pay it off, I would say write a check today and get rid of it, even if you have to sell assets. If you think you can borrow money at a low rate and invest at a higher rate, you’re probably forgetting about risk and taxes. For most people taxes alone will eat up at least one-third of gains. Risk can be a topic for another column, but suffice to say that, in general, the difference in return between different investments is due to a difference in risk (the higher the return, the greater the risk).
Second, to those who are deeply in debt and see little hope, I would say the key to gaining hope is having a plan. The snowball method for getting out of debt is simple and effective. The plan is to put all of your extra money toward your smallest debt, pay it off, and then work your way to your largest debt. In most cases ignore interest rates because the psychological effect of gaining momentum as you pay off debts is more important than saving a little bit of interest.
The key to this step is FOCUS and INTENSITY. Take care of your most basic needs of food, shelter, clothing, and transportation, and then pour everything else into your debts. Sell stuff, take an extra job, stay away from restaurants, cancel cable, eat inexpensive food, and take inexpensive vacations, if any at all. It will be tough, but the sacrifice will be worth it when you can pay cash for things without any associated stress. Once you sit down and write out your plan you will be very surprised at how quickly you can get out of debt. A family with an average amount of debt and average income can be completely debt free within 18-24 months!
If you have any questions about debt or anything else related to personal finance, please email me
Thursday, February 18, 2010
Baby Step 1 - Starter Emergency Fund
In my last column I introduced Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). The baby steps are as follows: (1) save $1000 to start an emergency fund, (2) pay off all debt using the debt snowball (besides your home), (3) 3 to 6 months of expenses in savings, (4) invest 15% of household income into RRSPs, (5) college funding for children, (6) pay off home early, and (7) build wealth and give.
I promised I would embellish on these steps in future columns in answer to specific questions. This week I will address a reader's question about the first step: "Why should I save $1000 for an Emergency Fund before I pay off my debts? Couldn't that money be better used to pay down debt?"
There are several reasons for starting with this $1000 safety net, but I believe the most important reason is psychological. Remember in my first column when I mentioned that personal finance is 80% behavior and only 20% knowledge or math? Mathematically, you would probably save a little bit of interest by putting every dime toward debt. However, if we all analyzed our decisions mathematically, we wouldn't have financed that big-screen TV in the the first place!
It's the behavior, not the math, that matters. You will behave differently with a $1000 cushion that you would if you were just scraping by. With $1000 you are prepared to make a full commitment to get your finances in order. With $1000, you can seriously commit to never using debt again. There will be no more living paycheck to paycheck, spending every dime earned, and going into debt when cash runs short.
If you blow a tire with $1000 in the bank, you won't lose any traction (pardon the pun) as you pay cash for a new tire and build back to $1000 as quickly as possible. Going further into debt when you've made a commitment not to use debt is a psychological blow that could completely derail you, even if mathematically you might be paying slightly more interest. I know, $1000 won't cover a new transmission or furnace, but in most circumstances $1000 is enough to provide cushion against unexpected expenses but not so much that it is difficult to get started.
If you have any personal finance related questions, please email me!
Thursday, February 4, 2010
Underlying Financial Principles
Thanks for your responses to my column two weeks ago. In that column I explained that the dreaded "B-word" (budget) must be the starting point for improving your life financially. If you don't have control over your money by knowing where it is coming from and where it is going, your money will have control over you!
Some of you asked for more information about the Seven Baby Steps I referred to in my last column. This week I'll answer the question, "How do I create a plan for getting out of debt and improving my family's financial situation?"
There are many ideas out there about how to put together a financial plan. The best program I have found is Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). The baby steps are as follows: (1) save $1000 to start an emergency fund, (2) pay off all debt using the debt snowball (besides your home), (3) 3 to 6 months of expenses in savings, (4) invest 15% of household income into RRSPs, (5) college funding for children, (6) pay off home early, and (7) build wealth and give.
I can discuss these steps further in future columns to answer your specific questions, but I'd like to point out some important principles underlying these steps: intensity, focus, and patience. It's hard to get traction when you try to do too many things at once. Unless you make an unusually high income, you're not going make any meaningful progress if you try to pay off debt, build an emergency fund, save for retirement, put money away for college, pay extra on your home, and make other investments all at the same time. Take one step at a time and put all your effort and extra money into that step. This is especially important for the first three steps. You can't succeed financially if you have debt payments eating up your income or no savings to keep you from going back into debt when emergencies happen.
Patience is important because there's no such thing as get rich quick. Doing well financially takes hard work, discipline, and time, but the resulting peace is well worth the effort. It's takes a typical family two to three years to get through steps one through three and then another seven years to pay off their house. Step seven is where it gets really fun - imagine having no debt, being on track with retirement savings, and having extra money to invest, spend, and give away. If you're a typical family, this will only take 10 years!
If you have questions about the baby steps or anything relating to personal finance, you can email me.
Some of you asked for more information about the Seven Baby Steps I referred to in my last column. This week I'll answer the question, "How do I create a plan for getting out of debt and improving my family's financial situation?"
There are many ideas out there about how to put together a financial plan. The best program I have found is Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). The baby steps are as follows: (1) save $1000 to start an emergency fund, (2) pay off all debt using the debt snowball (besides your home), (3) 3 to 6 months of expenses in savings, (4) invest 15% of household income into RRSPs, (5) college funding for children, (6) pay off home early, and (7) build wealth and give.
I can discuss these steps further in future columns to answer your specific questions, but I'd like to point out some important principles underlying these steps: intensity, focus, and patience. It's hard to get traction when you try to do too many things at once. Unless you make an unusually high income, you're not going make any meaningful progress if you try to pay off debt, build an emergency fund, save for retirement, put money away for college, pay extra on your home, and make other investments all at the same time. Take one step at a time and put all your effort and extra money into that step. This is especially important for the first three steps. You can't succeed financially if you have debt payments eating up your income or no savings to keep you from going back into debt when emergencies happen.
Patience is important because there's no such thing as get rich quick. Doing well financially takes hard work, discipline, and time, but the resulting peace is well worth the effort. It's takes a typical family two to three years to get through steps one through three and then another seven years to pay off their house. Step seven is where it gets really fun - imagine having no debt, being on track with retirement savings, and having extra money to invest, spend, and give away. If you're a typical family, this will only take 10 years!
If you have questions about the baby steps or anything relating to personal finance, you can email me.
Thursday, January 21, 2010
First Column - Budgeting
January is a time for reflecting on the previous year and setting goals to make the coming year even better. Many of us have probably reflected on the past year and realized that we have spent a little more and saved a little less than we should have. Many of us have a little more debt than we should have, and many of us aren’t quite sure how to improve our situation. The good news is that personal financial success has much to do with behavior (commitment and discipline) and little to do with knowledge (some say the ratio is 80/20).
This column is designed with this idea in mind. My goal is to provide basic personal financial principles and real life situations that will give you ideas and motivate you to stick to your plan. Although I don’t know all the answers, I won’t be biased because I don’t make money from selling any financial product. I do facilitate a class locally called Financial Peace University provided by Dave Ramsey (www.daveramsey.com/fpu) starting next month (email me if interested –signup deadline is Jan. 27), but my role is purely voluntary.
The usual format of this column will be question and answer. If you have a question you can email me, and I will do my best to answer it in this column. I will start with a question I have heard often: “I don’t think I make enough to cover my expenses because every month I seem to be going deeper into debt. What do I do?”
The foundation of doing well with money is the “B-word” (budgeting). Even if you have a great income, there is simply no way to be successful financially without knowing where your money is coming from and where it is going. Starting a budget is like giving yourself an immediate and tax-free raise. To get started, take a couple of months and write down every dollar you make and spend. You will figure out where there is waste and what you really need to live on. You have no choice but to spend less than you make – going deeper into debt is not an option.
Once you’ve figured out a reasonable budget, I recommend using the simple but effective cash envelope system. For expenses you can use cash for (i.e. groceries, clothes, even gas), take out enough cash for a month, two weeks, or a week. Put the cash into envelopes for different categories, and when the cash runs out, you’re done spending until it comes time to fund the envelope again.
It is effective for two reasons. First, studies show that people spend significantly less when using cash vs. credit cards and even debit cards. Second, you always have a visual reminder of how much money you have left without the safety net of a credit card. Budgeting takes work and discipline, and it will take several months before you’re comfortable with your budget, but the results will be well worth the effort!
I will discuss these more in future columns, but for what to do next I recommend that you review Dave Ramsey’s baby steps (www.daveramsey.com/new/baby-steps).
This column is designed with this idea in mind. My goal is to provide basic personal financial principles and real life situations that will give you ideas and motivate you to stick to your plan. Although I don’t know all the answers, I won’t be biased because I don’t make money from selling any financial product. I do facilitate a class locally called Financial Peace University provided by Dave Ramsey (www.daveramsey.com/fpu) starting next month (email me if interested –signup deadline is Jan. 27), but my role is purely voluntary.
The usual format of this column will be question and answer. If you have a question you can email me, and I will do my best to answer it in this column. I will start with a question I have heard often: “I don’t think I make enough to cover my expenses because every month I seem to be going deeper into debt. What do I do?”
The foundation of doing well with money is the “B-word” (budgeting). Even if you have a great income, there is simply no way to be successful financially without knowing where your money is coming from and where it is going. Starting a budget is like giving yourself an immediate and tax-free raise. To get started, take a couple of months and write down every dollar you make and spend. You will figure out where there is waste and what you really need to live on. You have no choice but to spend less than you make – going deeper into debt is not an option.
Once you’ve figured out a reasonable budget, I recommend using the simple but effective cash envelope system. For expenses you can use cash for (i.e. groceries, clothes, even gas), take out enough cash for a month, two weeks, or a week. Put the cash into envelopes for different categories, and when the cash runs out, you’re done spending until it comes time to fund the envelope again.
It is effective for two reasons. First, studies show that people spend significantly less when using cash vs. credit cards and even debit cards. Second, you always have a visual reminder of how much money you have left without the safety net of a credit card. Budgeting takes work and discipline, and it will take several months before you’re comfortable with your budget, but the results will be well worth the effort!
I will discuss these more in future columns, but for what to do next I recommend that you review Dave Ramsey’s baby steps (www.daveramsey.com/new/baby-steps).
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