Money Management 2: Refining Your Budget and Building Financial Stability

Money Management 2 Participant’s Guide

Table of Contents • Welcome • Pre-Test • Review of Budgeting • Evaluating Your Budget • Zero Dollar Budget • The Right Budget System for You • Financial Pitfalls • Budgeting with Variable Income • Making Adjustments • Net Worth • Savings • Everyday Ways to Save • Dealing with Debt • Post-Test • Glossary • Appendix

Welcome Welcome to the Money Management 2 module! Taking charge of our financial futures begins with getting our monthly cash flow under control. This month, we will refine our basic budget and learn some ways we can accelerate our plans to increase savings and reduce debt. Objectives After completing this module, you will be able to: • Understand how to evaluate your spending plan • Avoid financial pitfalls that hinder our budgeting • Plan for irregular income • Compare budget to actual and guideline • Understand how current choices impact net worth • Prioritize savings • Break the debt cycle Participant Materials This Money Management 2 Participant Guide contains: • Information to help you learn the material • Tools and instructions to evaluate and adjust your budget • A glossary of the terms used in this module • Appendix of reference materials

Pre-TestTest your knowledge about financial management • Net Worth considers: • Income • Savings • Car Payment • Interest • What are conditions that may cause your budget to fail? Select all that apply. • Spending leaks due to giving into temptation • Not accounting for all spending • Not accounting for periodic expenses • All of the above 3. Which is NOT a way to save on utilities? • Cut services you do not need • Bundle services together • Keep the temperature constant • Turn off appliances and lights not in use 4. When adjusting your budget, you should: • Use savings first • Eliminate “needs” from spending plan • Assess what expenses are controllable and which are not controllable • Use your credit card rather than paying with cash/debit card • Which is NOT a method of tracking spending? • Character Method • Envelope Method • Receipts Method • Register Method

Budgeting Process Tracking and Organizing: Last time we got together, we discussed the budgeting process and particularly focused on how all the data we have gathered can be integrated into your budget. We discussed how to take the tracking we had done and organize it into budget categories. Periodic: We also discussed periodic spending and how much we need to save for those expenses that do not happen monthly. Goals: We learned how to put more meat to our written goals by making a number of S.M.A.R.T. goals and calculating how much we would need to save each month to see those goals accomplished. Build your budget: With all the data we collected on our current expenses, periodic needs and goals, we were challenged to build a budget. It isn’t uncommon if your spending plan doesn’t equal out the first try. It usually takes a bit of adjustment to get your budget refined to a place that addresses everything and is also something you can live with. Evaluate and Adjust the Plan: In this lesson, we will give you the tools you need to evaluate your spending plan and strategies for adjusting your plan.

Evaluating Your Budget Your budget developed last month probably fell into one of three categories. Depending on where your budget landed, we may learn something about what is going on. • Same Income and Expenses: If you have the same income and expenses, congratulations! You have a balanced budget. You have spent only the money that you had and hopefully included the savings needed for emergencies, periodic expenses and goals. You are in great shape if the plan reflects your ACTUAL spending. Many people develop a balanced budget and then put the piece of paper in a drawer and walk away. A budget only works for you if it gives direction to your actual spending choices. • More Income than Expenses: If you had more income than expenses, you are not alone. Many people start with a budget that may not capture all the needs and wants. • Occasionally, people forget to remove taxes and other withholdings from income which makes their budget appear to have more than they really do. • Alternatively, they may have underestimated some expenses or forgot to include something. That is why the detailed tracking over a period of time really does help us to capture more expenses in our monthly budget. • Don’t worry. If you are in this category of people, we have some strategies you can use to tweak your plan this month and bring it closer to reality. • More Expenses than Income: Isn’t that true for a lot of us? We don’t have spare money at the end of the month because we have too many obligations. There are a couple of possibilities here. • We may have actually underestimated income or had less income than we planned. This may be true if you have had some hours cut or have lost work because of illness or some other hardship. • More often, the expenses are greater than income; and we have been spending a lot of time robbing Peter, paying Paul and trying to manipulate the timing of transactions to keep things afloat. • If you are in this category, we have good news: there is hope! You can develop a plan to meet your needs. It may require some creative planning, but we have some strategies to help you get there.

The Zero Dollar Budget You may have heard of a zero dollar budget but are not sure what that means. A zero dollar budget means that you spend every dollar on paper before the month begins. This way, you have assigned an amount to each of your expenses. Once you have reached the limit, you stop spending in that category. This budget works well with the envelope method. It is important to realize that you can adjust the amounts that you spend during the month. For example, if your entire family ends up with strep throat, you may overspend in the medical category. To cover the added expenses, you can pull money out of the entertainment category or grocery category; but the amount at the bottom of the page should always equal zero. It should never go into the negative. For a zero dollar budget to work well for you, you need to sit down each month and plan out the expenses for the next month. It is also important to have quick checks during the month to make sure that you are not overspending in a certain category. You may want to rollover extra money from month to month as well. This can help you to build up your medical expenses or car repair expenses categories. It is also important to include savings in a zero dollar budget. You should pay yourself at the beginning of the month and transfer that savings into a separate account. This will stop any extra spending that may be taking away from the amount you want to be saving each month. The saying, “Out of sight, out of mind,” really applies in this case. If you receive extra money, it is important to take the time to reassign it as well. You may decide that any extra money should be applied directly to your debt or to savings. You may also decide that you use part of that money for a special treat for you or the family. Regardless of the purpose, you still need to decide ahead of time where the money is going, or you and your spouse may spend it in different areas. Then, you may end up overspending. A zero dollar budget is merely a map for your future spending. When money comes in, all you have to do is follow the map.

The Right Tracking System for You There are many ways to create a budget, and the best method is the one that works for you. Pages 27 and 28 in your Guide detail several different methods that you can try. Envelope Method ~ Label a stack of envelopes based on your budget categories (e.g., groceries, dining out, gas). After you get paid, fill each envelope with the money allotted for it in your budget. For example, if you allow $100 for clothing, put $100 in cash in your clothing envelope for the month. Once you've spent all the money in a given envelope, you're done spending for that category. You must budget down to the last dime if you're going to successfully implement the envelope method. Calendar Method ~ List on a calendar when your bills are due and mark them off once they are paid. Be sure to note the dates and payment amounts. Register Method ~ Write down all your spending in a notebook that you carry with you at all times, just like you record checks in your checkbook register. You can create a notebook with different columns for your budget categories, so you can quickly see how you’ve spent in that category. Receipts Method ~ Keep receipts for everything you buy and write on the receipt what budget category it goes to. At the end of the day (or week), add up all the receipts in each category and compare totals against your budget. Budget Spreadsheets and Personal Finance Software ~ If you have access to a personal computer, you can create your own spreadsheet with columns for your income, date it is received, expenses, their due dates, and the date you paid the bill. Include space under the income and expense columns to total each. Use the help function of your spreadsheet software for instructions, if needed. Personal finance programs are also available for less than $75. Using a computer to manage your finances is relatively simple. Updating information is quick and easy. It is important to enter transactions frequently to truly understand your financial position. NOTE: Bank On Virginia Beach Blog has an interactive Excel sheet you may want to use as well. http://bankonvb.blogspot.com Any budget you develop must be livable if it is to be workable.

Financial Pitfalls Identifying Your Biggest Weakness The biggest reason for budget failure is that you did not take the time to address your greatest financial weakness. You need to identify what that is, and then come up with strategies on how to deal with it. Maybe, it’s eating out or electronics. It may be massages or beauty treatments. It may be a new wardrobe for every season. The list can go on and on. It is important that you sit down, look at your spending and decide what your greatest weakness is. Tracking your spending (step one in the budget process) truly helps with this. If you are married, your spouse will need to determine his or hers as well. Once you have identified it, you will need to determine the best way to control it. The first step is to switch to cash only for those purchases. It is important to realize that when you look at your financial weakness and change it, you need to do so gradually. It is similar to a diet. You are more successful if you know you can "cheat" or have permission to eat sweets on certain days or at certain times. It is also important to limit how much you can spend and stick to that amount. You may need to be accountable to someone. If you are married, your spouse is the perfect person to hold you accountable. If you both share the same weakness, you may need to find another source that you can report your spending habits to. This will help you to maintain the goals that you have set. You do not need to quit spending money on your financial weakness; you just need to limit how much each month. If you find that you are compulsive spender, you may need to get help and avoid stores all together. However, most people do not have this problem. It is usually just a matter of disciplining yourself. After you’ve allocated money to cover bills and expenses, try to include a little spending money for the adults and older children in the family. This spending allowance can be used for both needs and wants and should be broken into weekly amounts. That makes it easier for people to make wise spending choices by forcing them to ask, “How can I make myself happy with this amount of money for the next seven days?” This helps people to separate what they truly must have and what they can live without. Planning for Periodic Expenses It may seem costly to add an additional amount to save for periodic expenses, but the cost of not preparing for these expenses can be more costly and impact your spending plan much longer. For instance, if you need to use a credit card to cover a $1,000 expense and repay only the minimum payment at 24% interest, you will end up stretching this cost out for more than six years: • Monthly payment: $40 • Number of months in debt: 83 months (6 years and 11 months) • Total payments: $1,775 • Interest paid: $775 If we go the route of making minimum payments, we stretch out the repayment to make it more affordable, but we remain in debt for much longer. The interest can be almost as much as the principal we are repaying! If we don’t break the cycle, we may find ourselves in that credit card trap for year after year. Credit cards can be a way to easily work through a shortfall because they are readily available, but the long term implications can be painful. If you charged $1,000 per year in periodic expenses over 3 years and repaid only the minimum, you would need 10 years and 6 months to repay the balance and would repay more than $1,575 in interest.

Variable Income If you have a variable income, it can be tricky to set up a budget. You may have difficulty knowing what you can afford each month. If you work solely on commission, it can be even more difficult to plan a budget. Here are some basic tips to get you started. • If you receive a base salary plus commission, construct your budget entirely on your base salary. This should cover your basic necessities (mortgage/rent, utilities and food). From there, you can prioritize your other obligations. • If you have a paycheck that varies from week to week according to the hours you work, then you should base your budget on the lowest paycheck amount and go from there. This will give you breathing room if you do have a tough month with low hours. • After you have determined what you need to cover the basics, you should prioritize the other expenses that you have. This includes your car payment, car insurance, medical expenses and other debts. You should also put a certain amount into savings each month to cover yourself if you have month where you do not make enough to cover your living expenses. • It is important to remember that your fun money should come at the end of the list of your priorities. You need to meet your obligations first. This can be difficult to do, but it is important. • One way that you can help yourself to succeed on a variable income budget is to follow the suggestions above and then slowly save up enough to cover an entire month's budget. Once you do this, you can simply transfer that money into your account at the beginning of the month. Then you will put your paychecks into your savings account, ready to transfer at the beginning of the next month. This way you will know how much you need to cut back when you are having a lean month.

Adjusting Income Let’s face it, sometimes we just need more money to make our budget work. Here are some ideas to help you get started. Short-Term: These are things that can be implemented more quickly like picking up some extra hours at work or finding a part-time supplemental job. You may not need to keep these in place long-term, but use them to get you over a hump to eliminate a debt or establish savings. If you consistently receive a large refund at tax time, you may want to consider increasing your exemptions to increase your take home pay each month. By having that income monthly, you can address your regular expenses rather than blowing it when the refund windfall comes. Selling assets can help you de-clutter your spaces and get rid of some of the items that are hanging around unused. A good old fashioned yard sale may generate enough income to get a debt paid off or to pay for some special expense. Selling assets really is a short-term emergency type of solution. You only have so many assets you can sell; and once they are gone, they can no longer generate income or be used for your purposes. Developing hobbies may bring in some short-term income and might even lead to a small business at some point. Do you have a special talent or craft? Are you a closet musician waiting to come out or a crafter who can sell homemade items or teach others how to make them? Get creative. Long-Term: You will want to develop your career options through education and skills development. Extend yourself at work to take on some harder tasks and show them what you are made of or finish your certificate or degree to qualify you for more employment options. Consider career options with your own employer. Are there opportunities for advancement or transfer? How can you get yourself noticed as a viable candidate for advancement? What skills are needed? What networking opportunities do you have? The career coach at the Central Library would be a good place to start to explore career development.

Comparing Actual to Budget Example: Jerry compares his actual spending for a month to the budget he developed. Review actual and budget category by category to determine if adjustments to the budget need to be made or if current spending can be adjusted. In looking at Jerry’s budget, he has not allocated all of his income to the various expenses. He will want to reconsider his budget to adjust categories so that all income has a direction of where to go—thereby creating a zero dollar budget. Remember, if you adjust the budget category, another category must also be adjusted to offset the change. Income: He had an exact estimate. Savings: He incurred periodic expenses for the month with a graduation party. The budget amount may still be realistic. Jerry can monitor actual savings for a couple of months and get the budget back on track. Housing: He forgot to include his landline. As Jerry evaluates the budget, he may decide to eliminate the landline and only depend on his cell phone, or he may choose to adjust his budget. Auto: Gas prices were lower this month and resulted in lower fuel costs. He should keep the budget the same to accommodate for increases in gas prices in other months. Debt: He paid extra on his credit card to pay off debt. Since Jerry has the extra money to pay, he came out OK; but he might have put himself in a real bind if he had allocated all of his income. In the coming months, he will develop a debt reduction plan and stick to it. Groceries: He bought food for the graduation party (periodic expense) but also found himself going back to the store mid-month for additional purchases. He may need to adjust the groceries budget upward to accommodate or find ways to save on grocery costs. Entertainment: Jerry didn’t budget anything for entertainment. That may not be realistic. He went out to dinner with a friend. He should plan for the costs of eating out periodically and other entertainment. Medical: He incurred one copay plus a small pharmacy cost. Medical costs did not include the medical premiums deducted from his paycheck. Misc.: He purchased graduation gifts, postage, haircut and allowance. NOTE: Your spending plan will not mirror someone else’s because it reflects your personal priorities and values. Your choices are yours to make. Together with your coach, you will make decisions related to your budget and develop strategies for controlling costs that work for you. On page 34 of your Passport, there is a worksheet you can use.

Using a Guideline Budget Determining whether our spending plan is realistic may need more than just a sampling of our actual expenses for a month. Guideline budgets are based on national averages and can be a real help as we determine if we need to make an adjustment to our budget or to our spending habits. With that said, guideline budgets are not meant to dictate how you should spend your money, but they can help you identify categories of the budget that may not be realistic. Guideline budgets can be found at the back of your participant guide starting on page 29. Notice how there are guidelines for Single, Head of Household, Couple and Family of Four. Our family structure will impact how we allocate money. In the example on this slide, Jerry compared the category spending with the guideline budget for Head of Household. Lets look at this example: Savings: Actual savings is much less than the guideline budget. We know that we are trying to build savings, so perhaps he should plan to increase savings over time to get closer to the guideline. His budgeted savings is about 3% of his budget which is lower than the guideline but much closer than his actual amount for the month.

Using a Guideline Budget Cont’d Housing: Good news! Actual spending was not that far off from the guideline; but remember, he overspent his budget so something will need to adjust. Auto: While he underspent his budget for automobile, both the budget and actual spending for auto are more than the guideline budget would suggest. It is OK if Jerry determines that he needs to spend extra on auto because of his individual circumstances, but it will mean that he will need to take that allocation from another budget category. Debt: It may be a good thing that his debt category is less than national averages. That means he can use that money for other priorities. Just because debt is lower than average doesn’t mean that he should increase debt. Groceries: He overspent the budget, but still underspent according to the guideline. This may mean that his budget may not be realistic long-term, or it may mean that he is able to save some in the grocery category to fund other categories. Jerry should monitor the grocery spending for a couple of months and see if he can really live within his estimate or if he needs to adjust. Entertainment: Jerry didn’t budget anything for entertainment. That may not be realistic, but he may be able to squeeze some savings in the entertainment category to spend less than the guideline of 5%. How will he know? He should budget some money for entertainment and monitor his actual spending over the next few months to see if he can live within the estimate. Medical: Jerry’s budget probably doesn’t account for the monthly premiums being taken out of his paycheck; so if he is merely budgeting on net income, his budget is probably more realistic than the guideline that only deducts taxes before the category spending. He will have to choose whether he adapts the budget or decides to do things differently because budgeting on net is easier. In either case, he knows why there is a difference. Misc.: We already know that he had a large month for Miscellaneous spending, but his budget would suggest that he should spend less than 4% on Miscellaneous. Is that OK? He will need to monitor that category over the next couple of months and see if he can stay within his estimated budget regularly. Adjusting Your Budget: If you have allocated all of your income to various categories and your budget is adjusted, it will mean that not just one category changes, but perhaps several. You cannot spend more than your income. Making adjustments can take some thought and some time. Your coach can help you through the decision making process.

Everyday Ways to Save Making simple changes in your life can often cut your spending by significant amounts in several key categories. Food • Save eating out for special occasions and make your own meals at home. • Plan your grocery purchases by using a list. • Clip coupons. • Join grocery store "membership clubs" that qualify you for automatic discounts. • Buy generic brands. • Shop at discount stores. • Buy items in bulk if you typically use large quantities. • Carry your lunch to work at least some of the time. This is easier if you make enough dinner to set aside a portion to carry to work the next day. • When eating out, skip the soda and opt for a free glass of water to save as much as one-fourth on your total bill. Clothing • Look for sales instead of paying full price. • Shop at consignment and thrift shops. • Sell usable clothing you no longer want or wear at consignment stores or rummage sales to recapture some of its cost. • Save receipts so you can return clothing or shoes that have flaws or fall apart after being worn just one or two times. • Make clothing last longer by learning to perform simple repairs with hand sewing, such as mending small rips or replacing buttons. Supplies for a simple repair typically cost less than $2. Transportation • Determine how many vehicles your family really needs. • Ride your bike when weather allows. Inexpensive bikes are often available at garage sales or moving sales. • Share rides within your family or with coworkers to reduce gasoline costs. • Combine your trips when you run errands. • Use public transportation if it's available in your community. • Perform timely car maintenance to reduce repair costs. Shelter • Consider the size and type of home that best meets your needs, which can include an apartment, condo, duplex or single-family home. Many families have a bigger house than they need. • Buy or rent the home you need rather than the biggest house or your “dream house.” • Consider sharing your home to reduce expenses. If an older member of your family is looking for company or your home is too large for your needs, you may be the perfect match. • Learn to make basic repairs and renovations yourself. Barring medical disability, almost anyone can paint or paper a room, for example.

Everyday Ways to Save con’t Use it up, wear it out, make it do or do without. New England proverb Utilities • Decide whether you really need both a cell phone and a landline. Ponder whether you can pick one and eliminate the other. • Review services from telephone, cable, Internet, and wireless companies. You may be paying for services you don't need. • Look for telephone, cable, cell and Internet bundles that offer considerable savings for using multiple services from a single vendor. • Consider the power usage of small appliances before making a purchase. A heated foot mat typically consumes far less power than a space heater, for example, at a comparable purchase price. • Look for the "Energy Star" symbol when buying appliances or light bulbs to spend less on electricity and qualify for rebates from many power companies. Figure the payback period of appliance purchases to determine whether you truly achieve savings. • Turn off anything that isn't in use, ranging from the air conditioner to overhead lights. • Buy a drying rack or put up a clothesline rather than using the dryer for some laundry, especially items that dry quickly, such as lightweight athletic shorts or lingerie. • Run the washing machine or dishwasher with full loads whenever possible. • Use a programmable thermostat to automatically adjust the temperature when you're not at home and when you're asleep. Even when you're up and about, try setting it a few degrees colder when the furnace is running and a few degrees warmer when the air conditioner is on. Entertainment • Borrow books, CDs and DVDs from the library instead of buying them. • Visit rummage sales to find low-cost reading materials, movies and recreational items ranging from baseball gloves to knitting needles. (One family found a $20 ping pong table with paddles and a net that generated roughly 200 hours of fun during a single summer.) • Read magazines and newspapers at the library and cancel your subscriptions. Another option is sharing books, magazines and newspapers with coworkers or family to reduce subscription costs. • Pare down or cancel your internet, smart phone, cable or satellite television bill. • Meet friends for weekly walks or low-cost craft sessions instead of shopping or lunch. • Share spending tips with friends. Chances are, they have their own ways to save. • Turn hobbies into gifts for friends. • Substitute local vacations for faraway travels. Explore regional tourist sites, take advantage of amusement parks nearby or visit family.

Financial Decision Tree With the information that we uncover in our budget evaluation and comparisons with actual spending and guidelines, we are ready to make some decisions about what we can adjust. In your Passport on page 35, there is a Financial Decision Tree. The things you write down will be aspects of YOUR budget you can control and can’t control. As you look through the categories of your budget, are there things that you could gain greater control over to cut spending and increase savings? Why is this important? Because often, the uncontrollable costs are dominant and demanding. But if we can’t control them, it does not make sense to invest a lot of energy worrying about them. We take the actions we CAN take in the controllable side of the equation. Over time, we will see that as we control what we CAN control, we get a better handle on the other pieces of the spending plan as well. In our classroom example, we evaluated housing expenses and determined that utility expenses could be controlled and we could choose to eliminate our landline. Rent cannot be controlled in the short-term because of the lease agreement.

Net Worth Net Worth (or Balance Sheet) is an assessment of all that you own and all that you owe. You created a basic net worth statement when you completed your Financial Assessment at the beginning of the Passport. The basic formula for net worth is: Total Assets – Total Liabilities = Net Worth Net worth is a longer term measure of financial condition. It is taken as a snapshot in time. For instance, the value of my assets can either appreciate or depreciate over time. Liabilities are decreasing as we pay off debt and increasing as we add new debt. Each month, our spending choices impact net worth. Weak Months – On months where income is less than your total expenses, net worth can be impacted one of two ways: Reduced Assets: You can sell an asset to pay for added costs, or you can deplete the savings you have established. Increased Liabilities: You can get a loan or add to your credit card. Strong Months – Months where your income exceeds your total expenses, net worth can be impacted one of two ways: Increased Assets: You can buy an asset, or you can increase the savings you have established. Reduced Liabilities: You can pay down a loan or credit card. Periodic review of your net worth gives you clear indication of the financial improvements you are making. Positive net worth suggests that your assets are greater than your liabilities. In theory, you could sell what you own to pay off all that you owe. Negative net worth suggests that your liabilities are greater than your assets. This may not be a crisis if you are able to regularly pay your payments with the income each month, but it may be an indicator that debt needs to be reduced and savings needs to be built up. STRATEGY: If you need to borrow from savings or use your credit card for regular monthly purchases because of an unexpected expense, make a plan to pay off the expense and rebuild your savings as soon as possible. With savings, you can be your own payday lender. Pay yourself a fee and increase your financial cushion! Your net worth depends on the success of your monthly budget – they need each other. Consider whether assets or liabilities are affected under the following examples: • I overspend my budget for the month. A. What is the impact on my net worth? 2. I have savings directly deposited. A. What is the impact on my net worth? 3. I pay off a credit card. A. What is the impact on my net worth? So you can see how your monthly spending choices impact your long term financial security as measured by net worth. The more we gain control over the smaller decisions monthly, the more impact we can have on our longer term goals.

Priorities for Spending The money we spend each month is divided between the past, the present and the future. We usually don’t think about it in those terms, but the truth is retailers try to focus us on payments rather than the total cost of ownership of items we purchase. This is particularly true for larger items. They prey on our desire for instant gratification but leave us with a stream of payments that linger long into the future. Past: When we take money from current spending to pay for purchases we made in the past, we are incurring fees and interest for the use of that money. These decisions may be wise if they secure our sources of income and provide for our basic needs. Borrowing money to have a car so you can get to work may be a wise choice, particularly if the car payment is affordable and your transportation is reliable. We run into danger when past spending impacts our ability to meet our current needs and to establish savings for the future. When we use credit to purchase “wants” and to avoid controlling an issue with our monthly spending plan, we run the risk of having our past dominate our future. Do you see the past constraining your ability to move your spending plan forward? Working together with your coach, you will be developing a plan to get out of debt and to be free of the debt monkey on your back. By reducing the amounts we pay for past purchases, we free up money for present and future needs. Present: We spend for present needs when we pay for our housing, utilities, food, childcare, etc. Taxes come out of current spending as does any of our charitable giving. Present needs will take the largest portion of our monthly budget. Future: By building a plan for the future, you give your budget a forward looking plan. The problem with this chart is that past choices dictate how we move forward. By reversing the order and controlling expenses, you can take control of the past and the future at the same time. You are advancing yourself toward your goals by first establishing emergency savings, then goal savings and investing for longer term retirement and education savings for children.

Savings Emergency Savings: Saving for emergencies makes it possible to cope when the unthinkable occurs. Emergency savings should never be tapped when the car breaks down or the roof needs repair. Instead, emergency savings are reserved for truly dire occurrences: your job ends and there is no hope of obtaining another in the near future; you have a serious accident that makes it impossible to earn income for months; or you or a family member suffers an injury or illness that brings sudden, overwhelming expenses and reduces your earnings. Typically speaking, you should set a goal of saving enough money to replace income and/or cover ongoing expenses for at least one month. Periodic Savings: Savings in a set-aside fund helps you budget for large expenses that are outside of your day-to-day spending. This is where you save for life's smaller upsets and unforeseen demands: the car breaks down, the refrigerator finally dies or your youngest needs braces. Periodic savings are different from emergency savings because the situation is far less dire. Your world will not stop turning because the refrigerator is broken; but unless you can find funds to repair it, daily life may become inconvenient. Periodic savings should anticipate the need for money to cover both predictable and unpredictable expenses. Predictable expenses include annual or quarterly expenditures, such as tax bills or vehicle maintenance. Totaling the estimated expenses and dividing them by the number of months you have to save will determine the amount that must be deposited in periodic savings each month. In essence, you are prepaying to cover these expenses. This same calculation also can be used to budget for your S.M.A.R.T. goals or other happy expenses like holiday spending, holding a graduation party or taking a vacation. Retirement Savings: Even if you are covered by a pension plan or 401(k), you'll probably need or want discretionary retirement savings. This is money you control that's beyond your pension or other retirement income. The need for additional retirement savings becomes apparent when you consider the number of companies that have slashed or even eliminated pension plans through bankruptcy or restructuring. In many cases, you may have to live on your retirement savings while waiting for initial pension or Social Security payments. Many pension plans don't issue a payment until two to three months or even longer after you retire. Social Security may take up to two months before the first check arrives after you become eligible. One other thing to consider is life span. Many people underestimate how long they’ll need to make their retirement savings stretch. According to the National Center for Health Statistics, the average woman will have to make her retirement savings last for an additional 20 years, while men will need to stretch their savings for 17.1 years. Goal Savings: Making lifestyle changes iseasier when we know what we’re working towards. Some of us want to take a vacation, others may want a new car. Once we have that vision, we may need to start setting money aside in order to achieve it. That’s where goal savings come into the picture. Let’s say you want to take a vacation to Disney in three years and have determined it will cost you $5,000. That means you’ll need to save $139 each month for 36 months in order to achieve your goal. Treat savings as bill that must be paid to yourself.

Dealing with Debt Debt has a major impact on the amount of money available to pay bills, save for the future and spend on weekly needs. With a plan for debt repayment, you can build your credit, gain control of your day-to-day cash flow and create long-term financial stability. These steps, summarized below, provide a basic overview to the debt repayment process. • The first and most important step in debt reduction is to stop creating debt. • Analyze your debt. List everything you owe to everyone. Include information about who loaned to you, the total cost, why you borrowed and when the borrowing occurred. • Sell something. • Refinance and/or consolidate debt. This can be a solid strategy, but you must be committed to not creating more debt. • Use credit wisely. You will never outgrow your need for credit. You might need a credit card to book travel, a hotel or some other purchase. The goal is wise use of credit. • Develop a plan. The plan is your roadmap of how you will repay your debts. Which debts you’ll pay first, how much you’ll allocate towards debt, etc. • Set goals. The goal might be to payoff credit card debt in three years, be debt-free in five years, improve your credit score or become a homeowner. • Implement and monitor the plan. Get started, adjust as needed and monitor progress. Completing the list of outstanding debts will show you how much is required for total monthly payments.

Accelerating Debt Reduction Two methods are commonly used for accelerating debt reduction. Both rely on the assumption that you are willing to commit to a "no new debt" rule until you have repaid all your existing obligations. Method One: Paying More on the Principal The first option requires increasing the monthly payment beyond the minimum required by the credit card issuer or another borrower. When you make additional payments, it's applied to the principal because the interest is a percentage of what's owed. Every extra dime paid reduces the principal balance. Without these additional payments, the amount of interest paid on a credit card loan can be staggering. If the outstanding balance on a credit card is $2,500 with an APR of 18.5 percent and you pay only 2% of the balance each month, the total cost of interest will be $6,650! Method Two: Rolling Up Debt Also known as the snowball method, this is when you allocate a specific amount to paying off debt. Then, as debts are repaid, the same amount is reallocated among existing debts. With the snowball method, you have two options: paying off the smallest debt first or paying off the highest interest rate first. Paying off the smallest debt first allows you to see the progress you’re making as you eliminate small debts and reduce the total number of payments you must make each month. Paying off the highest interest rate first allows to you tackle to debt that’s costing you the most and, hopefully, save you more money in the long run. Which method is the best? The one that allows you to stick to your debt repayment plan. PowerPay.org, created by the Utah State University Extension Service, illustrates how changes in payment amounts can accelerate or lengthen debt repayment, as well as how much interest can be saved. The latest version of PowerPay includes spending calculators and other tools. The easy-to-use program helps you visualize how long you must commit additional funds to debt repayment to get out of debt. In 2009, $18.1 billon was paid in penalty fees to credit card companies. This figure accounts for approximately half of the industry's $40.7 billion in profits. Source: Don't Get Clobbered by Credit," www.parade.com

Credit Card Payment & Interest Impact The Snowball Method Amy has five creditors. She can afford to allocate $252 to repaying debt each month. In the first month, Amy pays the minimum on every bill and allocates the extra amount remaining, or $32, to the department store bill. By the second month, the department store bill is paid off, and there is an extra $17 to apply to the medical bill. This leaves only $5 left to pay on the medical bill ($132-$55-$55-$17 = $5). For the third month, Amy now can take the $20 minimum payment plus the $32 extra she was paying to the department store every month, as well as the $50 of the $55 she was paying to the medical clinic (since she still needed to pay off the $5), and put that combined $102 on her furniture store bill, along with its minimum payment of $20. She is now paying $122 on her furniture store bill. By the fourth month, she can apply the $20 minimum payment to the department store, the $32 extra amount, the full $55 payment that was going to the medical clinic and the $20 minimum payment to the furniture store until that’s paid off. Then, all of those payments will be combined with the $25 to the online retailer and so on so forth for the credit card. Seven months into her debt repayment plan, she has repaid the furniture store and can begin focusing on the online retailer , paying them $152 a month. Although repayment progress will vary depending on interest rates on Amy's debts, it's reasonable to expect she'll be able to focus solely on paying off her credit card debt approximately one year after she began her debt repayment plan.

Post-Test • A spending plan: Select all that apply. • Is rigid and should not be adjusted • Gives advance direction for your money • Allows you to live within your means • Should be adjusted every month • Helps you achieve your financial goals • A guideline budget should be followed no matter what. • True • False • Which of the following are ways to save on food expenses? Select all that apply. • Coupons • Use a grocery list • Limit eating out • Never shop hungry • All of the above • A zero dollar budget: • Uses no actual cash • Is fictional budgeting • Maps out spending before the beginning of the month • Places all transactions on a credit card through the month • What is an example of a financial pitfall? Select all that apply. • Tracking expenses • Giving into temptations • Back to school purchases • Not planning for periodic expenses

Glossary Calendar Method: Budgeting method to help you pay your bills on time by your recording when they are due and marking them off once they are paid. Envelope Method: Budgeting method that allows you to spend the money in the envelope of a budget category only on an item of that category. For example, the money in the grocery envelope may only be used for groceries. Net Worth: A snapshot of our financial condition. Measures Assets – Liabilities. Monthly spending choices impact net worth. Receipts Method: Budgeting method that lets you track your previous spending by writing your budget category on your receipt and later adding your receipts by category to compare to your budget. Register Method: Budgeting method that encourages you to organize your spending in columns by budget category as you spend it, so you always know how much you have spent at any given time. Snowball Method: Method to pay off debts where the exact same amount of money is constantly allocated to the debt repayment even as some debts are paid off. The minimum payment is made on all debts except for the lowest balance one or the one with the highest interest rate. Once that debt is paid off, the money is put toward the next debt payment to speed up the repayment process. Zero Dollar Budget: Budget where every dollar is spent on paper before the month begins.

Appendix • Living With a Spending Plan • Guideline Budgets • Single Person • Head of Household • Couple ~ Two Adults • Family of Four

Guideline Budgets Everyone’s budget is different based on what’s “normal” for you and your family. Knowing what others typically spend on certain items, though, can help us with our own spending plans. The next four sheets detail national spending averages. How does your household compare? Please note: • Housing - includes rent/mortgage, utilities, maintenance and telephone expenses • Food - includes costs of food prepared at home, eating out included in entertainment • Auto - includes costs of payments, insurance, maintenance and repair (can include costs of mass transit and rides) • Debt - includes consumer debts like credit cards and auto loans (not mortgages) • Entertainment - includes eating out, movies, events, internet and cable • Clothing - includes accessories, undergarments, coats and everyday wear • Savings - includes emergency fund and savings for irregular expenses • Medical - includes medical insurance, co-pays, pharmacy, dental and vision • Miscellaneous - includes gifts, allowances, subscriptions, postage, personal care, etc. • Investments – includes long term savings for retirement, etc. • Education - includes costs of books, tuition and supplies for both adults and children (includes student loans) • Charitable - includes church, workplace giving, support of nonprofit and political organizations • Insurance – includes life and disability coverage

Guideline Budget Single Person Analysis provided with and without a roommate. *Requires reduction of other categories.

Guideline Budget Head of Household *Requires reduction of other categories.

Guideline Budget Couple ~ Two Adults *Requires reduction of other categories.

Guideline Budget Family of Four *Requires reduction of other categories.

Money Management 2: Refining Your Budget and Building Financial Stability

Money Management 2: Refining Your Budget and Building Financial Stability

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