The first step: $1,000 in the bank

What can $1,000 do?  In a world where the average family has more than $8,000 in credit card debt, $1,000 doesn’t seem like much.  Don’t get me wrong, it is still a lot of money but $1,000 just doesn’t go very far these days.

Why is our first recommendation when beginning a Total Money Makeover to save $1,000?  Why not pay off some debt instead?  That is the point, isn’t it?   In a way, having a small pile of cash in a simple savings account (or even in your sock drawer) is a form of insurance.  Yes, I said insurance.  Think of it this way:

Option A: You decide to get out of debt.  You have $1,000 in your pocket and decide to pay off a $200 medical bill and put the rest towards paying extra on your credit card debt.  You mail an $800 check to the credit card company and on the way home from paying the $200 bill at the doctor’s office you get a flat tire.  What is your next step?  You might be taking a BUNCH of steps – to and from work since you no longer borrow money, no longer use credit cards, and don’t have $150 to replace the tire.

Or you can do it this way:

Option B: You decide to get out of debt and have $1,000 in your pocket.  You don’t send any to the doctor or credit card this payday but put the $1,000 in a simple savings account at the bank.  On the way home you get a flat tire.  Your next step?  Replace the flat tire with $150 from the savings account and continue on with your life.  The credit card and doctor can wait 2 more weeks until your next paycheck, right now you have to go to work to earn some money.

You will continue to work and pay down debt from your next paycheck.  It’s OK.  Payday isn’t that far off.  In two weeks you will take $150 from your paycheck and put it in the savings account, bringing the emergency fund back up to $1,000, and any extra money will be put towards paying off those debts.

So we can say that “Baby Step 1 – $1,000 baby emergency fund” is like insurance.  In this example you held off paying down on debt for 2 weeks and stayed on track.  That’s better than your previous plan of incurring more debts and/or maintaining a balance on credit.

The cushion of having a little bit of money in cash will help even-out some of the bumps in your road to financial freedom!

You need an EXIT PLAN

 

It can be said with 100% certainty that none of us will get out of here alive.  It’s not a pleasant topic, but one that everyone will need to address at some time before it’s too late.  There are a few simple documents everyone should have: A Will, a Living Will, and a Power of Attorney.

• Will:  Who gets what after you kick the bucket?  The old record collection, the diamonds, the Van Gogh, the house?  Oh yes, and the KIDS.  Don’t let the state decide what your wishes are, put it in your WILL or Miles and Maizy will have to permanently move in with Uncle Buck.
• Living Will (also known as an advance healthcare directive):  Do you remember the Terri Schaivo case?  All the world watched for a number of years as family members fought for what was best for Terri, but neither side knew what really was best.  Would your family members know your wishes if you became incapacitated?  Would anyone disagree and cause you to live on a feeding tube for several years like Terri Schaivo?  What a mess, get at Living Will.
• Power of Attorney:  This document allows someone to act on your behalf in legal or business matters.  How would you deposit checks if you became bed ridden?  Select someone you trust can act on your behalf in such matters. 

US Legal Forms is a company that offers many legal documents at a very reasonable price.   Sell a car?  You need a Bill of Sale.  Getting married and need to change your name?  You need a Name Change form.  And Dave Ramsey has a special deal with US Legal Forms that can get you a Will, Living Will, and a Power of Attorney package for $29.00 (limited time only offer).  You download the blank forms, fill them out, then get a Notary Public to authorize the documents.  The only thing left to do is get a copy to your lawyer/attorney, safety-deposit box, financial advisor, trusted family member, or other important person so the documents can be presented when a need arises.

Download the "Combo Pack" at DaveRamsey.com/store

Are you prepared for a tax bill or refund?

Earlier this week I spent a few minutes estimating my family’s taxes for last year.  It was a rough estimate, a VERY rough one since I used excel and have not received any of my year-ending statements such as W-2s, mortgage and real estate tax reports, investment interest statements, etc…   The reason for this excercise was not to see how much of a refund to expect but to be prepared in case we DIDN’T.  In other words it is a good idea to know a tax bill is coming so that we would have time to save up for it. 

Over the past several years I have been able to calculate our tax withholdings fairly accurately, usually within $500.  I was relieved since this year a new wrench was thrown into the mix – the “Making Work Pay” tax credit.  While the credit allowed us to keep more of our money, it had an unintended consequence.  The credit was divided equally through payroll deductions and most of us saw about $10 – $15 less taken out of each payroll check.  The problem is that those of us with more than one job or multiple household incomes may have brought home more money from all jobs and could have ended up owing instead of getting a refund.  If you would like to hear more information in a short podcast then I would recommend MoneyGirl’s episode #127 “Making Work Pay Confusion Could Cost You“.

My “wet finger in the air” calculation shows that we will get a refund this year.  I decided to get a second opinion (yes, I actually like running calculations and spreadsheets).  This time I headed to DinkyTown.com and used their “1040 Tax Calculator“.   It came within $80 of my estimate, so I am confident that I won’t be sending any more money to the IRS for last year.   Here’s a link, go knock yourself out!  http://www.dinkytown.net/java/Tax1040.html

Note: The amounts above were changed to protect the innocent

Reminder: Review your Credit Report

A few months ago I showed how to check your credit file disclosure, most commonly known as a credit report without a score (click here for that post).

The website: www.AnnualCreditReport.com , sponsored by the three credit aggregate companies (Experian, Equifax, and TransUnion) offer a free peak at your file.  Of course, this was not in their business plan as they are in the business of selling you the report with the score and other “credit monitoring” services and such, but a recommendation by the Federal Trade Commission persuaded them to offer the report for free once a year.

Since you have the opportunity to review each companies file once a year (and they are pretty much the same) then I recommend you review one company’s report every 4 months.   Here is how you get your free report from Experian:

1) Go to www.AnnualCreditReport.com and select your State in the box titled "Start Here"

2) Begin the process by opening an account and enter your information.

3) Chose a report from the three possible companies

4) Confirm your information by entering the last 4 digits of your Social Security number. You will be transferred the company's website for the free report.

5) You will be offered other services. Click on the gray "Annual Credit Report" button unless you want the other paid services.

6) Agree to the terms and conditions and verify you have ordered your credit report at no charge.

7) Answer credit-specific security questions

These questions are multiple choice and pertain to accounts in your file, so it might be a good idea to have your mortgage, car loan, and other financial account information nearby.   No one will be able to review your report without answering these questions correctly.

At this point you will be able to review, print, and find information on how to dispute any inaccuracies.  Make sure any old accounts show as “closed” and that all the current accounts are actually yours.

Final Debt Payoff on YouTube

A married couple paid off their last debt and announced it on Twitter (follow @Tschrister) today.  They also recorded the last payment and posted the video on YouTube (http://www.youtube.com/watch?v=L7uqe0drrJw).  They paid off $35,000 in 23 months because they were focused and worked together.  That’s $1,500 a month!

Watching the video made me think that the true celebration of paying off that much debt will come next month when they don’t have anymore payments.  What will they do?  ANYTHING THEY WANT!

The Debt Snowball

One big huge snowball!

One of the most effective ways to pay off debt is by using a process called the “Debt Snowball”.  The concept is very simple: Pay minimums on all your non-mortgage debt and take any extra money you can squeeze out of your budget and apply it to the debt with the smallest balance.  Doing this will allow you to knock one of your debts off the list very quickly.  The next step is to take the amount of money you were paying on that smallest debt (the minimum and any extra) and apply that to the next smallest debt (along with that debts minimum) until you knock that one off.  Everytime you pay off a debt, your next payment gets larger – it picks up more snow.

If you have questions on how this can work in YOUR life, feel free to contact me through my website: http://www.moneyplansos.com and click on Contact.  I offer free 30-minute consultations to anyone who mentions this site.

Is your credit card safer?

The common opinion about credit cards is that they are safer than a debit card.   But a debit card is just as safe when used in the credit function (not using the PIN number), as stated on Visa’s own website:  http://usa.visa.com/personal/using_visa/personal_finance/debit.html

Benefits of a Visa Debit card:
* Convenience – The Visa Debit card frees cardholders from having to carry bulky checkbooks, multiple identification cards and large amounts of cash.
* Security – Visa offers debit cardholders Zero Liability in cases of card fraud, theft or unauthorized card purchases for signature-based transactions, provided cardholders promptly notify their issuer of such fraud, theft, or unauthorized purchase.

I have been living without a credit card for a number of years.  There are so many other benefits that Visa does not post on their site about debit cards:

• The lowest interest rate in town!  The interest rate on my debit card is the lowest you can get – ZERO PERCENT!
• I spend less: Dunn and Bradstreet did a study reporting that on average you will spend 12-18% more when making a purchase with a credit card as opposed to cash.  While a debit card is still a swipe instead of spending cash I find that I make different, smarter choices when making purchases.
• No annual fee or account fees.
• No “gotcha fees”.  There are no late payment fees, over the limit fees (although there would be an overdraft on a debit card, see next point).
• No pay-off or pre-pay fees for paying the balance in full (keep an eye out for many credit card companies to charge a fee for this soon).
• More attention to spending: I’m spending my own money and I can’t spend what I don’t have in the account.  This creates a healthy habit of paying attention to my accounts, upcoming expenses, and my credit bureau – which I should be doing ANYWAY.
• No difference with retailers: If you run your debit card through the machine like a credit card then the transaction is handled exactly like a credit card – same processes and protections apply.

If my debit card is stolen then I would have to change my account, but my bank will handle that for me.  Otherwise they will not get my business and I will find one that does – and right now BANKS REALLY WANT MY BUSINESS.  Credit card companies want my business, but only to the extent that I pay them interest or fees.

So which is safer?  Given the benefits of paying attention to my spending and financial accounts, I vote for the debit card over the possibility of over-charging, over-spending, and miss-management of the Credit Card.

 

The Challange – TAKE 2

It’s ON!  I have revived my personal challenge! (To read the full post of the original challenge go to http://moneyplansos.wordpress.com/2009/08/17/the-next-challenge/).

Why “Take 2″?  The “prize” is back on the table again.  Here’s the short version: My wife and I worked together and lost a decent amount of weight in early 2007.  There was a prize for hitting our goal – a family vacation to our favorite quiet beach in Florida.  We reached our goal and enjoyed the prize!  There were some other goals to made with the “carrot” being enough motivation to keep working towards the finish line.   But the “Next Challenge” was different.  I set a new weight-loss goal and my wife agreed to join me in celebrating the new milestone by going to the first and only Total Money Makeover Simulcast.  Shortly after setting the goal our plans changed and we had to go out-of-state instead of attending the simulcast.  Without the prize my motivation vanished.  Yes, there has to be a prize besides the “better health” and “clothes fit better” things.

Last week I was encouraged to find out that the only TMMO Simulcast wasn’t a once-in-a-lifetime thing and Dave will be broadcasting to select locations once again on March 13th (click here for details)!  The calendar is clear and we don’t forsee anymore “surprise” birthday parties getting in the way.  So, let it be known that I am BACK baby – on the path to lose 15 lbs by February 26th.  This will truly be a challenge as there are multiple holidays, anniversaries, birthdays to contend with and winter-weather days that will keep me from exercising outside (walking the dog).  But it must be done.  Wish me luck in my endeavor to resist Halloween candy and my Mom’s AWESOME Christmas Chex Party Mix.

More inspiration: Joe Leavitt, Syndication Strategist for the Dave Ramsey Show, also announced his new challenge beginning this week.  He also posted it on his blog: http://epicgoal.wordpress.com , and he has a goal with a prize (he calls it a “reward”). 

Check in on both of us as we go along.  Comments are welcome, encouraging words needed (please!).

Estimating a refund

We are only a few weeks away from 2010 and a new tax year.  Are you planning on getting a refund from your 2009 withholdings?  Do you have any idea how much it will be?  Do you want to change your withholding so you can keep more of your money during the year instead of giving it to the government interest free until April 15th?

H&R Block has a free “2009 Tax Estimator” which can be very simple or very involved.  It even calculates itemized deductions (such as mortgage interest and charitable donations) to give you a ball-park figure on how much you can expect to get back or how much you may owe.  I ran a quick down-and-dirty example on myself and it looks like I may owe $500.00.  If that is true then I am really glad I know now so I can save up the money to pay the taxes I would owe.  Here is how I estimated my tax liability for 2009 while there are still 2 months left:

1. Gather the big documents: This is just an estimate, so you don’t want to pull out the shoebox of receipts quite yet.  But to be somewhat accurate you will need: Most recent paystubs (for both you and your spouse), the most recent mortgage statement, and your budget or expense tracking software to help identify certain once-a-year expenses like property taxes, home owner’s insurance, or any business income or expenses from 2009.
2. Figure out how many more paydays there are left in the year.  For example, my wife and I have 5 paydays left each.
3. From the most recent paystubs: Figure out how much is withheld in federal and state income taxes each payday, multiply that by the number of paydays left in the year, and add that to the amount of taxes that have already been withheld this year (also on your paystub).  For example:  Each paycheck I have $151 in federal income tax withheld on average.  I have 5 paydays left, which means I should have an additional $755 to be withheld this year.  Add $755 to the $3,540 already withheld through October 14th for a grand total of $4,295.  Do this for your state taxes and mortgage interest too.
4. Go to H&R Block’s website (the direct link is http://www.hrblock.com/taxes/tax_calculators/index.html) and start answering the questions.  It’s easy.

There is no membership or log-on needed.  Remember, this is an estimate so the final result will not be the actual amount you will file.  I now have time to either change my W-4 (the form you fill out to tell your company how many dependents and how much you want to have withheld from your paychecks) or save the money if I truly do owe this year.

What would you do with $1,000,000.00

 

What could you do if you had a MILLION dollars?  Would you purchase a house and travel the world?  Would you save it for retirement?  Would you give it away to your local church or charity?  Take a moment and think about it……

 There are only three things you can do with money:

• SPEND money

• SAVE money

• GIVE money

It would be easy to do all three if you had a million, so what if you only had one thousand?  If you are out of debt then you should also do All of the above.  Enjoy the money you get by spending some of it on yourself, but don’t blow it all or you may be calling on the Social Security Office at retirement age because you need the SSI check.  And don’t save every bit of it or you could grow up to be stingy and no fun. 

There is one sure-fire way to get money – WORK.    Work is a sure-fire money-making scheme, and you have to WORK at saving, spending, and giving too:

• WORK on controlling your SPENDING (so you have money left to do the other two things)

• WORK on SAVING or you will be caught short when an unexpected event happens – and you can expect an unexpected event will happen to you at some point in your life.

• WORK on GIVING your money away.  Giving isn’t a natural human characteristic, but it is an acquired character trait.   You don’t believe me?  Get out of debt, save some money, then give a bunch of it away.  Believe it or not, you will feel GREAT!

Now stop reading this blog and get to WORK!