How often have you heard the phrase, “I don’t know where my money goes?”. You may have even said it yourselves!! Most people who say this have never tried to understand where their money goes, and this is where budget planning is an incredibly useful exercise and is the first step in the road to having control over your money. It is a simple, straightforward, effective tool and is designed to hold up a mirror to your finances and clarify the changes you need to make in your financial affairs so that you are able to meet your financial goals.
Why budget plan?
To use an old adage, failing to plan is planning to fail. Although this may sound cliched, it is undeniably true!! Budget planning is about you understanding whether you a living within your means, and if not the changes you can make to improve your financial health. Without budget planning it is tough to understand the changes you need to make. Budget planning is effective for individuals who find themselves in a position where they are short of money, but is also an incredibly useful exercise if you are financially comfortable. It is designed to focus financial thinking and understand where you could use your money in the most effective way possible. Professional financial planners conduct this exercise as a matter of course and is always the first step in ensuring they understand their clients financial situation.
How to Budget plan
The first step is easy, Complete a budget plan. There are a number of online tools, including the FSA Budget Calculator, and complete it fully. Start on the date your main income starts ( for most people this is when they receive their monthly salary ). Be open and honest when you complete it, if you don’t you are only fooling yourself!! Include all sources of income including salaries, self employed income, state benefits, investment income and savings income. The next step is to calculate your expenditure. Include all your expenditure from the larger bills like your mortgage, loans, car insurance, and council tax. Don’t forget to include the smaller amounts of spending like your morning coffee, lunches at work, newspapers, leisure costs and meals out. The smaller amounts tend to be more regular than the larger amounts and can be harder to track, however it’s valuable working these out so that you have a complete understanding of where your money is going.
I’ve done my budget plan, what now?
Once you have completed this you will have a picture of how much money you overspend per month, or alternatively, how much you have spare on a monthly basis. Then you have decisions to make….If your expenditure is more than your income each month, the question you need to ask yourselves is “How can I reduce my expenditure?”, “What can I save money on?” or “What changes can I make to reduce my monthly expenditure?”. This may range from trying to get a better deal on your mortgage, consolidating debts, cutting out the purchase of the daily paper, reducing the amount you eat out or try shopping for shoes or suits less often!! If looked at logically, there is normally always something you can do to reduce your expenditure.
However, there are occasions when your expenditure is as lean as it can be…what do you do then? Logically, if your spending cannot be reduced, the only option you have is to increase your income. Firstly, look at whether you are entitled to state benefits you are not currently receiving. Billions of pounds of benefits go unclaimed each year –
Oct 08 2010
Putting Yourself in the Picture – The Common Sense Money Guide to Effective Budget Planning
Sep 15 2010
Checking Accounts – Joint Or Separate?
Getting married requires lots of lifestyle combining and some of this can be difficult to do. Newly married individuals have to get accustomed to sharing things that they might have never had to when they were single such as the bathroom, furniture, and finances. One issue is whether or not to keep separate checking accounts or to form a joint one.
In the past, people always established joint checking accounts. Modern feelings have changed, however, since many people have become much more concerned about making good choices for their own financial health.
This basically means that if a husband and wife have dramatically different habits when it comes to spending money, they can wind up in serious financial problems. Keeping separate checking accounts can help prevent such problems. Each person would need to agree to deposit the money they earn at work into their own account. Of course, if a couple decides to use separate accounts they also need to decide which account will pay for the monthly bills.
Separate accounts can also be a source of problems between the couple if one of the people is less punctual when it comes to bill payment and thus incur extra charges. If the bills can’t be split between spouses exactly fifty-fifty, one person might get stuck with a larger amount of the month’s expenses and a resulting lower balance in their account. Bad decisions on the part of on the two will affect the financial status of both people.
Joint checking accounts can work well for couples who agree on spending habits. This plan would mean that both spouses deposit their paychecks into just one single account from which money is taken out to care for the couple’s monthly bills and expenses. Since there is just one checkbook for such an account, one of the two people should be assigned the task of managing monthly bill payment from the account.
Problems can arise with joint accounts for a variety of reasons. For example, if both the husband and wife receive a debit card to use with the account, that would mean that both debit cards plus the checkbook could all be used to withdraw money from the checking account. This could potentially lead to a situation where the account is carelessly overdrawn from. For the couple to keep this from happening, they would need to communicate about withdrawals from their joint checking account.
Some couples opt to have a joint account as well as their own separate checking accounts. This lets each person manage their own finances in the way in which they would like to and gives them a measure of financial independence.
In this situation, the joint account would be supplied with money from each individual’s personal account. The money in the joint account would then be used to pay exclusively for shared bills. The amount that each person deposits would be determined based off of their salary and can be taken out of their paycheck automatically.
Sep 03 2010
Clear Debt – Good Vs The Bad
In modern America, it is difficult to get through life without taking on some kind of debt. Most people cannot afford large purchases such as a house or education early in their lives, and so they take out loans to help them acquire these things earlier. Not all debt is harmful to your financial health, but it is important to make good decisions early in your life about what kind of debt to take on and what kind to avoid. Taking on too much debt with high interest rates can permanently destroy your hopes for a rich life and good retirement.
Good Debt
Loans which help you to invest in yourself or develop assets that don’t depreciate are good debt. Student loans, mortgages and loans for necessary medical procedures are all examples of debt that provides future returns in heightened income or lowered expenses. Loans for these items can usually be found with low interest rates, and when used wisely, can help secure your future wealth. Of course, you should always make sure that you will be able to afford the payments when they come due before taking out any loan.
Bad Debt
Consumer debt with high interest rates and no future return is the kind of debt that you should avoid. A good rule of thumb is that if you can eat it or wear it, you will not have any future return to show for it. Some credit card interest rates run as high as 25%, and if you only make minimum payments, you might end up paying more interest than principal over the decade it may take you to repay the card.
Try to evaluate debts as you would any other investment. Make your money work for you, and you will have a comfortable retirement to look forward to. But if you fail to carefully consider the kinds of debt you take on, your hard work will go towards paying credit card companies rather than yourself.
Apr 02 2010
How to Avoid Credit Card Debt
We all know the key to good health begins with a dose of prevention–eat right, exercise regularly, and get a good night’s sleep. Your financial health is no different. By taking a few steps of prevention today, tomorrow your finances will have a clean bill of health freeing you to live a life of opportunity rather than of difficulty.
Keep the Right Perspective
Much of the problem with credit card debt problems comes from changes in credit card availability, advertising, and values over the past 75 years. According to Linda Tucker, Director of Education for Consumer Credit Counseling Service in North Little Rock, Arkansas, it wasn’t until the 1960s that credit cards started becoming available to the average consumer. Now today, nearly everyone has access to a credit card.
Advertising plays a role too. Howard Dvorkin, author of Credit Hell: How to Dig out of Debt and founder of Consolidated Credit Counseling Services, an organization that provides education on debt and a debt management program, says that according to one survey consumers are exposed to 300-400 advertisements every day. Combine this with a shift from saving for the future and we have a society trying to keep up with the Jones’ satisfying the desire of the moment. Add the purchasing power that comes with a credit card and you have the perfect formula for disaster.
But it doesn’t have to be this way. If there’s one thing Dvorkin wants consumers to know, it’s that you don’t have to be a slave to the credit card company or even to the seduction of advertising. You can have control over your financial health without depending on a credit card!
Manage your finances
Starting with a strategy will help keep you on track before you ever even pull out the credit card. According to Tucker the first step is determining your monthly income and needed expenses. As part of these monthly expenses, figure in 5-10% of your income to set aside for emergencies, long range savings such as a retirement account, and short term savings. If you have some savings then you avoid having to put large amounts of debt on a credit card in times of a crisis.
Setting up a budget is not always easy, so if you want some help Consolidated Credit Counseling Services offers free budget counseling. You can also consult your phone book to see if your community has a local office of Consumer Credit Counseling Service.
Setting up a budget is just the first step; sticking to it is the next, and often more difficult task. To help keep you on track set goals and put motivators in place. Tucker suggests setting a savings goal with a deadline. Savings goals can include emergencies, vacations, cars, and of course don’t forget long range goals such as retirement. Tucker also says a reward program can be a great motivator as well. Just keep in mind that whatever you choose as a reward, it shouldn’t compromise the hard work you’ve done in managing your finances.
Finally, you need to monitor how much you charge on your card in relation to your credit limit. You should never charge more than 30-50% of your available limit otherwise your credit score could go down. For more information on credit scores read our article On the Path to a High Credit Score.
Shop for the Right Card
Dvorkin says it’s important to really shop around and get a credit card personalized for your particular situation. Ideally he suggests getting one with no or very low fees and low interest. It will take a little time to compare various offers, but with the high saturation of the market you’ll find the perfect fit for your wallet. Browse the Card Reports section of CardRatings.com to shop for every kind of credit card including reward, low-rate, business, and cards for those with poor or no credit.
Read the Fine Print
An afternoon reading the fine print probably doesn’t sound very appealing, but that one hour spent reading can save you hours of headaches and hundreds of dollars in the long run. You’ll understand everything from your interest rate and fees to how to earn rewards and how long of a grace period you have.
Know Your Interest Rate
If you’re going to use a credit card, regardless if you pay the balance in full each month, you need to know the interest rate. This means not only knowing what interest rate you were offered, but also the interest rate the issuer actually gives you on approval. In addition, check the rate on your monthly statements because credit card issuers can raise your rates for little or no apparent reason and with little warning.
Even those who don’t carry a balance need to know their interest rate because emergencies do happen. Unfortunately, cars break down, jobs are lost, deaths happen, and marriages end. While it’s always a good idea to have an emergency fund, sometimes the job search takes longer than expected or the second car breaks down too leaving you with no other choice but to put some expenses on the card. If you’re not up to date on your interest rate, you might end up paying more in interest than you have to.
Pay the Balance in Full
This is important in keeping control of your credit cards. Before using a credit card for a purchase, ask yourself, “Do I have the funds to pay for this?” In cases of emergencies where your emergency fund won’t cover the whole amount you need to charge, experts say at least pay more than the required minimum payment.
Pay on Time
Michael Killian, credit and debt management guide for About.com, says never make a late payment to anyone including car and house payments. Because of the universal default clause in credit cards’ terms and conditions, credit card companies can raise your interest rate if you are late paying any creditor or even your utility company. Read our Universal Default article for more information.
In fact, Killian recommends being very early if at all possible to account for mail time and processing by the credit card company. If you’re payment arrives before the actual due date you will end up saving money on interest because any interest you pay is calculated based on the average daily balance; so if your payment can bring down that average you will pay less interest.
Some people have turned to online bill paying to avoid potential problems with the mail. While Killian doesn’t recommend this form of payment because of the increased risk for fraud by hackers–especially if the company is not reputable or doesn’t offer encryption–it is definitely a better option to a late payment.
Use it Like Cash, Not a Credit Card
In one sense, you need to use your credit card like cash by paying your balance in full each month. But remember it’s really not cash. Imagine the feel of that sleek, plastic card in your hand. It’s so sleek that it slides right out of your wallet with little effort at the check out counter. Each time you pull it out it looks and feels the same. You cannot physically feel your charges climbing higher and higher.
Now imagine a wad of twenties. The first time you pull it out its thickness fills your hand…you feel rich (well, at least you feel like you can afford the purchase your making). :0) But with each purchase the wad gets a little smaller until eventually it’s gone…and now you know you can’t afford any more purchases. Dvorkin calls this the green factor–with cash you can physically feel how much or how little you have.
The point is that you need to be in control of your credit card and spending habits. It’s much easier to be swept away if you use a credit card for all your purchases.
Limit the Plastic in Your Wallet
Every credit card comes with its own set of terms and conditions including varying interest rates, penalties, fees, grace periods and due dates. It is much easier to make payments on time, remember which card has the lowest rate, and save you from making a mistake that will affect your credit history if you only have to keep track of one or two cards.
Avoid Extra Expenses
Sometimes it’s the little extra expenses that sneak up on you before you even know it.
Cash Advances
Typically cash advances come with a much higher interest rate, fees, and no grace period. The moment you take a cash advance you start paying interest on that balance, which means even if you pay the entire balance in full each month you still pay interest.
In addition, credit card companies apply payments to the balances with the lowest interest rate first. So your $200 cash advance will continue earning 20% interest until your $2000 purchase balance is completely paid off.
Extra Products
Credit card companies will try to get you to purchase additional products such as fraud protection and insurance. The truth of the matter is you usually don’t need it. By law you are liable for a maximum of $50 if the victim of fraud, and in most instances you are not liable for any amount. If you are thinking about adding on insurance, first read our article Credit Card Protection Insurance–Should You Get It?
Early Education
The best method for prevention is teaching our youngest generation all about money before they even qualify for a credit card. Statistics show that students are entering college without ever having a personal finance class or knowing how to balance a checkbook. Yet once students arrive on campus credit card issuers are eager to sign them up. College students are racking up the bills. Some even drop out of college to find a job so they can pay their credit card bills. And those who do graduate typically enter adulthood with thousands of dollars in credit card debt and student loans.
In addition, advertisers market more to younger and younger children, so it’s imperative to teach them very early about the lure of money and how to manage finances. The earlier children learn how to manage finances the less likely they will be to fall into credit card and debt problems as an adult.
Fortunately many wonderful resources exist for parents and educators. If you have elementary aged children check out The “It’s a Habit!” Company and introduce your children to Sammy the Rabbit who will teach them all about the importance of saving and developing good money habits. The Jump$tart Coalition for Personal Financial Literacy is another organization dedicated to providing resources for teaching children from Kindergarten on up through college valuable lessons in personal finance.
So there you have it. Some simple steps you can start taking today to avoid the trap of credit card debt and to help others do the same!
Feb 26 2010
Long-Term Financial Planning For Business Plans
There are various factors that you need to look into in order to do long-term financial planning for business plans. Some of these factors can be discussed as follows.
Balance Sheet Balance sheets show the assets and liabilities of a business. This can eventually help you assess the financial health of a business.
Budgeting And Business Planning
The budgeting and business planning are very important, and you must consider them while making out your long-term financial planning for business plans. You must learn how to include them in the daily running of your business.
Financial And Management Accounts Another important factor is financial and management accounts. It is very important for you to learn how to file financial accounts, understand types of management accounting, and use analytical accounting tools.
Set Up A Basic Record-Keeping System You must also have a clear understanding regarding what you need to record and for how long, with systematic guidance on setting up your own system.
Set Up A Simple Profit And Loss Account For Your Business You must keep and maintain the financial records in order to report your profit or loss.
Cashflow Management When you neglect your cashflow, you risk insolvency. There are certain essential rules that you need to follow. You need to learn them.
Identify Potential Cashflow Problems In order to do effective long-term financial planning for business plans, you must also learn out how to use cashflow forecasts and business plans to avoid financial problems.
Overall, if you keep the above things in mind, you will certainly be able to make proper long-term financial planning for business plans.
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