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Posts Tagged ‘budgeting’

I used to think that only young college grads made the mistake of underestimating how much it costs to live in the real world.

After working as a Money Coach, however, and talking to countless individuals about their monthly finances, I’ve since discovered that people of all ages, incomes, and education levels fall into this trap.

It’s very common for me to talk with 30- and 40-year-old professionals about the “average costs” of their living expenses, and have them give me figures that I know are way off the mark.

For example, a 35-year-old trying to save for retirement might think that having $1 million in the bank 20 years from now will be sufficient during her golden years. The truth is, she may live to be 90 or even 95.

If she wants to have an early retirement, at age 55, she needs to make sure she has enough savings to last 40 years in retirement—and $1 million probably won’t cut it.

Beyond the dream of a comfortable retirement, everybody in this country wants something—from the mundane to the extraordinary. More often than not, there’s a price tag attached to the things we want to buy, do, have, or
achieve.

For example, getting an education is a costly endeavor, as you well know.

It’s not just about performing academically or being willing to spend years in school studying and taking tests. You must also come up with the financing for a higher education—these days, anywhere from $20,000 to $30,000 or even far more for a four-year degree.

Think about virtually any goal you’d like to accomplish: whether it’s buying a home, traveling around the world, taking a photography class, or just being able to paint on the beach whenever you’d like. All of these things come at a price.

Money Myths That Lead to Money Mistakes

Unfortunately, most people vastly underestimate the true cost of reaching their goals.

And even when people put an accurate price tag on the cost of having or experiencing the things that they want, they overestimate their own financial resources and their ability to pay for those items.

Never overestimate your projected or future income. That’s a financial catastrophe waiting to happen.

Likewise, if you’re currently a student or are presently job-hunting, don’t expect to land a high-paying job that’s far above the national average. Doing so could lead you to making costly mistakes – like taking out an excessive amount of student loans on the mistaken assumption that “I’ll earn a lot of money when I graduate.” (Read these tips on how to pay off student loans fast).

Along those same lines, you also should avoid a common mistake made by many recent college grads. Simply put: don’t equate your gross income with your ability to pay various bills.

Just because you’re making $40,000 a year doesn’t mean you’ll be netting, or bringing home, $40,000 annually. And it certainly doesn’t mean you should go out and buy a $40,000 car!

The truth of the matter is that if you’re grossing $40,000, you’re in the 25 percent tax bracket, and so your net income—that is, your salary after federal, state, and social security taxes—will be about $30,000.

Translation: Every two weeks, your paycheck will be roughly $1,154; every month you’ll be taking home $2,308.

In some areas, that $2,308 can go a long way, but in many parts of the country, you’ll be pinched for cash—especially if you have a family.

It’s Not What You Make – It’s What You Keep! 

For those of you into charts, look at those figures – and a bit more data – another way:

Notice that your $40,000 income produces an after-tax, or net monthly, salary of $2,308. But you’d have to actually earn a gross salary of $53,333 in order to net $40,000 annually, which leaves you with a take-home pay of $3,077.

With these numbers in mind, take a look at this classic example of what happens with the typical college graduate who is fresh out of school.

Assume this college grad is named Nadine Naïve. Nadine thinks that because she landed a $40,000 a year job, she’ll be able handle her bills with no problem. What Nadine hasn’t counted on, though, is that the apartment in the city in which she wants to live costs $1,000 a month—twice as much as she’d planned on spending for housing.

Nadine’s new job as a marketing specialist requires her to meet with clients and take part in high-level meetings with senior executives. So needless to say, Nadine wants to “look the part.” There goes $300 a month on clothes to get the wardrobe started.

She has to get to work, of course, so Nadine has a used vehicle too, with a modest $200 a month payment.

Since Nadine is now on her own and no longer living with her parents, car insurance is a new expense she also must tackle. That’s a $150 a month hit to her wallet.

Throw in another $100 a month for gas, tolls, and commuting expenses, along with maintenance costs for automobile oil changes and the like.

Did I mention that Nadine has student loans? Those are $150 a month.

Credit card bills from debts she ran up in school are another $200 each month. (Read the free, online version of my book, Zero Debt, to eliminate credit card debt).

As tight as things are, we don’t think Nadine will starve herself, so we’ll assume she’s eating some food; groceries and eating out costs $300 a month. You may have noticed by now that Nadine Naïve is actually spending more than she makes. On these “basics” alone, she’s spending $2,400 a month – and she’s only bringing home $2,308 each month!

We haven’t even talked about how Nadine will furnish her apartment or pay for utilities like gas, water, and electric service, her cell phone bill, Internet service, or cable TV—let alone indulge in a few luxuries like trips to the nail and hair salon.

Again, take a quick look at a chart view of Nadine’s basic budget:

Basic Budget for Nadine Naïve

Does this look like your budget, in terms of your expenses exceeding your income?

If so, the lesson here is that almost everyone underestimates the true cost of living—not to mention the price tag associated with achieving future goals.

Without a true handle on your actual or expected living costs – and without creating a proper budget – you’ll always be spending more than you make and you’ll never get ahead financially.

Related Questions:

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As a Money Coach and a proponent of financial education, I’m always on the lookout for ways to inspire people to manage their finances well.

One way to do that, I believe, is to share our personal stories of triumph over economic adversity. It’s encouraging for those who are struggling financially to realize that they can have a positive financial afterlife – no matter what kind of crisis they’re currently confronting.

That’s one reason I’ve been open about discussing my own past financial mistakes, including getting myself into – and out of – $100,000
worth of credit card debt.

But now I want to share with you the true story of one of my favorite financial literacy educators in the country. Her name is Marlene Ware and she does tremendously valuable work at the non-profit National Foundation for Debt Management, along with her volunteer activities throughout the Tampa-St. Petersburg, Florida area.

Best of all, Marlene truly cares about people and has a heart for helping those in financial need.

Here is Marlene’s story, in her own words:

From birth to 18, a girl needs good parents. From 18 to 35, she needs good looks, from 35 to 55, good personality. From 55 on, she
needs good cash. I’m saving my money. ~ Sophie Tucker

Well, I better start saving my money. I’m too old to get help from my parents and I am beyond the threshold for good looks and personality. It happens in a flash – one day your entire future is in front of you and the next your toes are on the doorstep of retirement! Sophie Tucker knew what she was talking about!

So, you “plan” to save money (someday) – but how do you begin? Start with recognizing your Achilles’ heel when it comes to spending.

If you will indulge me, I want to tell you a little bit about my spending history. It truly did not serve me well.

I am single mother with three daughters – all grown up now with children of their own. I was very lucky to earn a comfortable income as a teacher, but with three daughters I still found myself moonlighting as a caterer/ convenience store clerk/ yearbook editor/ summer employee at the jail/ produce stand cashier, etc. And when my income didn’t cover my “needs,” I would supplement with credit cards. You know what I mean? It was often much easier for me to use my credit cards than it was to part with my cash. The cash in my pocket gave me a sense of
security. My credit cards (eight open accounts!) gave me the feeling that the financial playing field was equal. I was able to buy prom
dresses and shoes just like all of those dual income married-moms.

Eight credit cards and thousands of dollars later I finally had all of my daughters in college. It was time for me to look at my financial mess. There are so many reasons that people spend every cent they earn (and more). For me it was guilt – that was my Achilles heel.

I could not provide a two-parent family for my daughters and didn’t want them to feel “different” from the other kids. I truly believed that if I made sure they had everything the other kids had (and more!) maybe it wouldn’t matter that their father was not around. I was wrong on so many levels.

My guilt was diluted by the steady stream of temptation in my mailbox every day – catalogs, advertisements, coupons, and invitations to
grand opening events, and especially credit card offers. I would climb over snow banks and wade through raging water to get to my mailbox. My mailbox was the vehicle I used to push back my guilt. It helped to build my beaten-down self-esteem and gave me the option to become something that I wasn’t (rich!).

The credit card bills in my mailbox created a whole new level of guilt. I spent many hours working odd jobs at night and on weekends just to keep my financial head above water. I was working to support my credit cards instead of spending precious time with my daughters. Trust me when I tell you that I have great regret.

My daughters do not remember the “stuff” I bought them – they also don’t have wonderful memories of the times we spent together. So, my
guilt was not effective. I didn’t give my daughters what they really wanted: my time. I know because they told me.

I believe it is even more difficult for single moms now. Internet shopping, Facebook, cable TV, and junk mail all create a sense that we must buy, buy, buy each new thing. It looks like everyone else is doing it! Someone has to stand up and tell the truth! None of us can afford to keep up with the hype!

Take a lesson from me: memories mean more than stuff. Ask your kids to tell you what their favorite gift was Christmas before last. You are probably still paying off the credit card you put it on – and the kids may not even remember what was under the tree two years ago.

You can stop the cycle and reduce the spending temptation in three easy steps:

First, OPT OUT of credit card offers. You can go to www.optoutofprescreen.com or you can call 1-888-5-OPT-OUT (1-888-567-8688). This will stop the credit reporting agencies from selling your credit information. Selling your personal information is wrong on so many levels, but it is as common as rain. (Read these 5 reasons to opt out of credit card offers, along with more information about how to opt out).

Second, stop telephone marketing by going to the National Do Not Call Registry at www.donotcall.gov, or you can call 1-888-382-1222 to stop those irritating phone calls. You can stop the marketing to both your home phone and cell phone.

Finally, stop the junk mail. I don’t miss the barrage of holiday catalogs that used to entice me with beautiful glossy pictures of items I never knew existed – but couldn’t imagine living without! Go to www.dmachoice.org/consumerassistance.php and select the type of advertising you want in your mailbox.

And now my final words: Pay Yourself First. Saving money is critical to your secure future. Your kids will grow up and you will
grow older – this I know. If you don’t begin saving TODAY your retirement future is at risk. I started late, but I am on track and
may be able to retire by the time I am 75. Not what I expected for sure. I had visions of travel and adventure! Take a lesson from me!

You have the power to take control of your own financial future. Think about your spending triggers and eliminate them. Have a portion
of your paycheck automatically deposited into a savings account (one without an ATM card!). Even $5.00 is a start. Teach your children the same lesson.

You can turn your financial future around – one dollar at a time!

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In my book, Zero Debt, I explain how I got into debt (mainly via overspending), and also what it took to get me out of debt. To pay off my credit card bills, I used the exact same strategies I outlined in my book – getting a budget together, cutting back on frivolous spending (like vacations & dinners out), refinancing my auto loan, negotiating with my creditors for lower interest rates, doubling and tripling up on the minimum payments I was making, and using “windfalls” or “extra” money, like income tax checks and year-end bonuses from my job to pay off debt, etc.

Making Tough Choices

I also made some tough choices, like taking my two older kids out of private school and putting them in a less expensive private school. (They’re actually now in public school, and doing just great). After nearly 3 years of all this, I’d paid off $70,000 in credit card debt. Then in early 2004, my ex-husband and I sold some land we owned and used $30,000 to pay off the last $30,000 of credit card debt we owed.

In your question, you mentioned joining a debt management plan and taking on a second job. I know those were tough steps for you to take. But congratulations for doing so, because they will definitely help you become debt free faster. Lastly, I don’t know if you have a copy of Zero Debt. (The original version came out in late 2004; the updated, second edition of the book came out in 2009). In any event, in Day 25/Chapter 25 of Zero Debt, I also explained three different debt pay-off strategies that you can use to knock out credit card debt. (In my case, I used Strategy #2). Good luck in eliminating those credit card bills!

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Q: I am a Single Woman Sharing a Mortgage with my Mother. I Purchased the House From her in 2004 to Prevent Her from Filing Bankruptcy and Losing her Home. We’ve Refinanced Twice and Now the Loan is Twice the Amount of What the House is Worth. My Credit is Not Great. I’m in Debt Minus the Loan on the House of About $15,000. The Bulk of That is a $10,000 Loan I Applied for an got (Surprisingly) While I was Unemployed. Isn’t That Called Predatory Lending. I Would Love to Leave Here and Find My Own Place But I Need to Get My Credit in Order. Some of My Debts are 5 Years Old. I Don’t Want to Pay These If I Really Shouldn’t. What’s the Best Thing to do? Also, Re: the $10,000 Loan, I Know I Should Not Have Applied for the Money But I was Desperate As Our Mortgage Was 3 Months In Arrears and In Danger of Being Foreclosed On. Is There a Way That I Could Get This Debt Removed as it was a Predatory Situation?

A: It sounds like you and your mother can not only not afford your home, but the house itself is also severely underwater. I understand your desire to improve your credit and get your own place, but honestly, you must fix problems A, B, and C before you can move on to issues D and E. In this case, problems A, B and C are: getting realistic about your financial past and present, learning how to create and live with a budget, and dealing with your home dilemma. Until you first do those things, you won’t be able to pay off your debts (issue D) or improve your credit (issue E). Without tackling first things first, you’ll also put yourself at risk of losing another home simply because you’ve neglected to learn certain financial lessons.

So let’s start with the first thing: a reality check. You seem to have attempted to throw your mother a lifeline, only to wind up nearly drowning yourself. Your email said you bought the home from her back in 2004 to help her avert bankruptcy and foreclosure. Despite your best intentions, you also stated that you and her wound up 3 months behind on the mortgage and in danger of being foreclosed upon anyway. That’s what led you to seek out the $10,000 loan you’re not saddled with. What happened to during the time of your unemployment? Your message indicated that you were twice laid off and that you “made some not so smart money decisions?” Whatever those decisions were, you have to truly acknowledge them, and make sure that you don’t repeat them.

It sounds to me as if you had your mother have been stuck in a cycle of making repetitive bad decisions. I hope you don’t think I’m being too harsh on you. Because I’m telling you these things honestly out of care and concern for your situation. I can sense your struggle and I know it’s very hard to be in such a tough predicament. I’m just giving you a bit of “tough love,” however, because I’ve seen cases like this time and time again. The only way people get out of these dilemmas is by actively breaking the cycle and ending the behavior that landed them in hot water.

Now let’s move on to the second issue: having a proper budget. Unfortunately, most of us grow up never having learned to create a realistic budget. This is likely true of your mother, and it’s probably true for you as well. Read this article I’ve written on budgeting and this post too, to get some ideas on how to budget to better manage your finances. Additionally, read this post about budgeting and financial planning when you go thorugh a layoff or have reduced income.

So what about the house? The fact that you’ve both faced foreclosure at least twice, and have even refinanced twice since 2004, yet you have still wound up deep in debt and deeply underwater tells me that you can not truly afford this home. I assume you refinanced in recent years to take advantage of relatively low interest rates. But I also suspect that you took cash out of your home as well. I could be wrong. But that’s certainly what many people did during the heydey of the housing market. How was that money used? Did you pay off debt, set aside any savings, or do something else with it? I recognize, of course, that part of the reason your house is likely under water is because home prices have fallen greatly in many parts of the country. But the fact that you owe twice as much as your home is worth signals that something else was going on.

If I were you, I would investigage the prospects of a short sale or a deed in lieu of foreclosure. I don’t know where you live, but it’s highly doubtful that your home will “come back” in value anytime soon. Unfortunately, short sales and deeds in lieu of foreclosure do have negative ramifications for your credit. But these are short-term hits from which you can recover, if you’re prepared to move on and do the right thing financially in the future.

You asked about the loan you got while you were unemployed. I don’t know of any way to legally get this loand eliminated or removed from your credit reports. Just because someone loaned you money at a time when you weren’t working doesn’t make the loan a “predatory loan.” Unfortunately, scores of lenders all across the country did this — both reputable lenders and not-so-reputable ones. Honestly, I don’t know which camp your lender falls into.

Nevetheless, again, I want you to be willing to take responsibililty for your own actions, and not put the blame elsewhere. You stated to me that you knew you shouldn’t have applied for the loan in the first place but that you were “desperate.” Plus, the reason you applied for the loan was because you were in arrears on your mortgage. That’s certainly not the fault of the lender that gave you the $10,000 loan. So it’s not fair to now accuse them of “predatory” lending. Predatory loans are characterized by unreasonably high interest rates, abusive pre-payment penalties, or excessive loan fees including enormous commissions for lenders or mortgage brokers.

Don’t worry about paying off 5-year-old debts at this point. You’ve got enough on your plate to try to pay your current bills. And trust me: In the long run, you will be far better off if you take my advice and deal first with these issues before you attempt to pay off old debts or improve your credit rating in order to try to get another place to live.

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