Feb 5

Beginning the Debt Payoff Journey

Well I have to say congratulations on the progress you are making.  The accomplishment of funding your first $1,000.00 for your beginning emergency fund is a big step.  By going through this process is going to demonstrate your determination and focus on your ultimate goal, becoming debt free except the mortgage (if you have one).

Now if, at the time of this post, you haven’t completed the building of your starter Emergency Fund quite yet, no worries.  Just keep focusing on that initial goal.  Once you have completed that step, just refer back to this post to move onto the attacking your debt process.

Now to begin with  I have updated the third table which displays the sample listing of debt.  I have removed the line item “Emergency Fund”.  This gave this person an extra $200.00 per month to attack his/her debt.  Here are the two tables to show that the line item has been removed and an extra $200.00 is left over after all of the initial expenses.

The above chart is the first with the Emergency Fund payment being allocated.  The chart below is updated since you have completed the beginning emergency fund of $1,000.00.  So I removed that line item and allocated its $200.00 towards the smallest debt balance owing.  You will also notice between the two charts that I have also updated the balances on each of the debt accounts, as well as re-ordered the accounts from the smallest balance to the highest balance..  The update is due to paying the minimum amounts to each of the accounts just to keep them current while establishing the emergency fund.  On the previous post entitled, Starting your Emergency Fund,  we calculated that just over 4.5 months would take care of it.  So I calculate five months of minimum payments going towards your debt.  But please keep in mind, I did not calculate the percentage rate being charged to each of the accounts.  I am for this example, just using straight dollar amounts.  However, loans, credit cards will have a percentage rate they tack on to your purchases each month you continue to have a balance.

So, if you remember back to the first step, once you had your finances organized and all payments directed to a specified account/expense, you had a remaining amount of $27.48.  So now that you have your beginning emergency fund established, take the $200.00 from that item and it’ll give you $227.48 now remaining.  So with this said, allocate this amount to the initial $35.00 minimum payment to Chase Credit Card.  You would now be making a monthly payment of $262.48.  But notice that your monthly total amount of your out going payments from your income remains the same.  It is now just being diversified to different accounts.  The reasoning for the allocation to the Chase Credit Card account is fairly simple, it is the smallest balance that you owe and will be paid in full the quickest.

 

So now that this person is entering his/her sixth month of working towards their debt free goal, you can now see a lot more clearly what it is going to take to pay your debt. Now you could simply roll over your monthly Chase payment towards your next in line, American Express Card plus its already allocated monthly minimum.  Then just continue with this momentum after each and every account is paid in full.  If you keep this up, you will be debt free sooner than you think and return to your Emergency Fund, but this time allocate all of the money you were putting towards your debt to your emergency fund.  The goal of the fully funded emergency fund is 10 months of your living expenses or in this case $23,635.40.

Now if you do need help on calculating your personal debt, especially the lines of credit and loans with interest rates attached, I have a special page with a debt calculator.  This calculator will give you information on a single debt account for the amount of time it’ll take you to payoff that account and how much of the money paid towards it went to interest, by plugging in the monthly minimums and then the option below to see how much additional dollars towards it would cut it down.  Click here to navigate to my debt calculator.

Jan 25

Emergency Fund….What is it and Do I Need One?

So in the process of truly becoming debt free, it is strongly suggested to have a emergency fund also known as a rainy day fund.  You may be asking what is a emergency fund exactly and why do I need one.  Well, unfortunately we are currently in a financial situation where the possession of a emergency fund would be very beneficial for both personal and business reasons.  The emergency fund would first eliminate the need of going into debt to pay a balance owed that arose due to a emergency of some kind.  No, a credit card is NOT a emergency fund.  A emergency fund is NOT a form of debt in any means.  A emergency fund is a financial safety net; a la insurance, just in case there happens to be a mishap or emergency.  We both know emergencies do happen.  It is a question on when and will you be financially ready to handle it without going into debt.

So now that you have a clear understanding on what a emergency fund is and why you need one, the question is now how much of a fund do I need and where  do I save this money?  First there are a plethora of financial experts that would say anywhere between 3 and 6 months.  But I would say that is definitely not enough, especially after what we are experiencing with the state governments shutting down the local economies and destroying all economic prosperity we were experiencing.  Well being shut down for as long as we have been has been longer than the 3 to 6 months of suggested emergency fund savings.   I strongly recommend 10 to 12 months.  I believe to have a fully funded emergency fund which consists of 10 to 12 months of living expenses (or operating expenses if you are a business), will be more of a cushion.  Even if the emergency is not that serious, it is always best to have more coverage than being under insured.  Remember, your emergency fund is insurance and NOT an investment.  It is there to cover those unexpected bills and expenses that arise like mechanical fixes to your car, a trip to the hospital or a broken pipe at the house.

Now that you have a goal, don’t feel overwhelmed to the amount of money you need to deposit into the emergency fund.  As I am in the process of directing the debt free journey with you here on my posts, you are currently in the process of building your beginning emergency fund.  This is for the purpose to gain momentum and to have something in place during your debt pay off journey.  Further it details on what you should allocate in building your fully funded emergency fund once you have become debt free, besides the mortgage, will be covered in a future post once we get to that step.  The question is now, where do I deposit my money for the emergency fund.  It is strongly recommended that you open up either a liquid money market account or checking account at a credit union that is not at your current financial institution where your checking and savings accounts are at.  You want to keep it separate from your main source of finances, but at the same time have 24 hour access to it.  After all, emergencies can unfortunately happen at any given moment.

Just for a quick example, I am placing the example expenses from the previous posts detailing a sample person’s budget in their attempt to become organized and to being their debt free journey.

The above information details your monthly expenses of $2,463.54.  Take the total month you pay out each month and multiply it by 10.  This will give you your goal amount of $24,635.40.  This would be your minimum amount needed to save to accomplish a fully funded emergency fund.  Now this may seem like a lot of money to save up in addition to keep paying out as you are living.  But, you will be only begin the process of fully funding your emergency fund one you have become debt free with the exception of the mortgage.  The initial step is the beginning emergency fund of only $1,000.00.  So once you have this amount your actual goal is now $23,635.40.  Below is a sample  table of this person’s current debt and the total amount of money being spent each month towards paying back their debt and not paying into their emergency fund or working towards retirement (coming in a later post).

So this person has $85,550.00 in total debt but is paying out $1,190.00 per month towards just keeping their debt accounts current.  Once they are able to finish their debt free journey, they would take the $1,190.00 and now allocate it towards their emergency fund.  This would take them a little over 23 months to achieve a fully funded emergency fund.  But to also mention, this person has additional reoccurring expenses that are not really required, that they could eliminate from their budget by cancelling those services and allocating those funds to their debt.  This would help them become debt free quicker and then fund their emergency fund quicker.  This ends up being up to the choices that you make and how determined you are in ceasing any paybacks to the bank and begin the process of building true wealth and a prosperous retirement.

Jan 15

Starter Emergency Fund

Congratulations on making yourself a priority and making it a point to tackle your finances. As I broke down in my last post, the first thing to do is to know where it is you actually stand with your finances. It was time to sit down and get your financial information organized.  This is the biggest step. Everything that follows is just the course of action that your situation leads you towards in your debt free journey.

In my last post, I gave you a step by step breakdown on organizing your your income and expenses. Once the organization is complete, you now know where you stand.  I will keep referring to these samples in this post as the example.

Just as a reminder:







The next step is actually a two step process.  The first is to now ensure that you are 100% current on all of your bills and accounts.  Once you have become current or if you already are, the first of this two step process is to maintain your current status by paying ONLY the MINIMUM amount due for your debt accounts as stated on your bill statements.

While, you are maintaining this status, it’s now time to build your starter emergency fund. This goal is $1,000. You may ask, what is a emergency fund and why do I need one?  A starter emergency fund, once established, is just extra insurance for when a true emergency is to happen.  As we all know, they do happen and they happen at the lease expected times.  Even though the starter emergency fund may not seem like enough to cover a serious emergency, it is still there as peace of mind and just the beginning to a fully funded emergency fund (I will tackle this step in a later post).

Now for this example, the person above has enough money left over for the month to add an additional amount towards his/her beginner emergency fund.  By adding the additional amount, it will help fund the beginning emergency fund that much quicker.  Now this may not be your situation, but whatever the amount of money you have left over, put it towards the starter emergency fund.  As the sooner you fund your beginner emergency fund, the quicker you can begin to tackle your actual debt.  However, I am going to save that for the next post as to begin the actual debt free journey.

So for now, I will just stick to the beginner emergency fund and getting that funded.  Remember to deposit this money into a liquid money market account or a checking account that IS NOT directly associated with your current banking situation.  You want to keep this account available 24 hours a day, but to not have easy and direct access to it.  This will prevent you from overspending your main account(s) and then just simply tapping in to the emergency fund.

If you do not have the money left over at the end of the month, like in this example, then just keep at it and pay into the fund what is available up to the $1,000 goal.  If you are finding yourself beyond tight, then it is wise to really look at where your money is going.  You may be paying for unnecessary items or services for which those allocated funds would be better off going towards your emergency fund.

For example, it is best cut ties with your streaming music and video services.  For right now, those are LUXURIES and are not NECESSITIES.  Say goodbye to Spotify or Apple Music.  Say goodbye to Hulu or Netflix.  These companies along with others do not care for your financial situation and your effort to becoming debt free.   All they care about is the money that they are currently receiving.  You will obviously find this out as you begin cancelling these accounts.  They will try to entice you with a offer at the cancel page of their app(s) or web site.  Plus, do not for get to remove your stored credit/debit card on file prior to cancelling.  Now that you are saving an extra $9.99 per month that was going towards streaming music and $14.99 for streaming videos ($24.98); you can take that amount and deposit it into your emergency fund.  Cutting unnecessary services will help you achieve your emergency fund and become debt free that much faster.  So, let’s cut it ALL out.  These companies will survive without you and you will survive without them.

Aug 14

Organization of your Finances

I know it has been a extremely rough roller coaster ride this past year.  Whether you lost your employment and received a stimulus check, received unemployment benefits, or gone on to work as a contractor for a delivery and/or ride share app; you’re in the position that you just do not know what to do with regards to your finances and where your income is going to come from.  Well let us take a step back and take a few breaths to calm down and clear our minds first to get situated.

It is now time to tackle our finances to see where you really stand.  It is time for your debt free journey to begin.

Now with a clear head on our shoulders, let’s gather up the most recent bills and statements from all of the accounts, whether they are reoccurring services or debt that is owed.  First thing to do, once you have all of your paperwork in front of you is to create three separate categories in which to file these documents.  These categories are: Basic Walls, Reoccurring Expenses, and  Establish Emergency Fund & Debt Payments.

 

  1. Basic Walls (the Necessities)

    1. Gather all of your most recent sources of income and their statements.  Calculate each source of income for its monthly total.  Add all of the sources of incomes’ monthly totals for your TOTAL MONTHLY INCOME.
    2. Now let us gather your information for the basic wall of expenses.  This refers to the expenditures that are 100% absolutely NEEDED in order to LIVE your life.  These fall into the classifications of housing (mortgage or rent); housing insurance (home owner’s or renter’s); groceries ( no restaurants involved here); utilities; and transportation (auto insurance & fuel).  I want to add a note to the table below.  This one displays a person as a renter.  In which case the rent and renter’s insurance (not required, but strongly suggested) are an itemized amount.  If you by chance are paying a mortgage, then leave these two fields out with $0.00.  In the fields of Mortgage and Home Owner’s Insurance, place the respective amounts that you are paying out monthly.  If your mortgage payment includes your home owner’s insurance, then leave that line item at $0.00.
    3. After you have come to categorize and total up your first priorities in knowing your income and the first expenditures to come out of your income, it’s time to calculate the remaining amount of income you have for any other reoccurring expenses and or debt that you have.  For this just take your “TOTAL INCOME” and subtract your “TOTAL EXPENSES”.  The result will give you the amount of income you have left for any other NEEDED services or luxury services that are provided to you.  These items where services that are NOT a NECESSITY will need to be eliminated.  The amount of money saved from these items will just be adjusted on your remaining income, giving you more of your money to attack your debt and become debt free that much quicker.
  2. Reoccurring Expenses (the Luxuries)

    1. Now that you know what it takes in order just to survive off of your income, let’s take this remaining income and figure out what other expense you are paying to that is not debt.  We will come to the debt section shortly.  But at the same time, this category is where you will have a complete understating of your unnecessary expenses that are prohibiting you from paying off your debt and building your emergency fund as quickly as you would have hoped.
    2. Okay so the picture is definitely becoming clearer on where your hard earned money is going each month that is not debt.  This also reveals why you may be living paycheck to paycheck, because of the above luxuries.  But now let us see how much of your income is remaining to finally start building your beginning emergency fund and pay off just your monthly minimum amount due to your bills.
  3. Establishing your Starter Emergency Fund & Debt Payments

    1. Congratulations!  You have made it through to the building of your starter emergency fund and debt paying section.  The reason why I am including the Emergency Fund with your Debt is actually pretty simple, it is an expense that is coming out of your income but is being reallocated into a completely separate liquid money market account.  This would be your first line item to pay with the remaining income you have at this point.  All of the remaining income will be focused at just paying your minimum amount due to each and every piece of debt you have just to keep them current.  Further explanation of this process will be coming at the overall summary.  So let’s get started with this already.
    2. Here is the final step to figure out.  The amount remaining may be positive or may be negative.  If the amount is a negative, than you will most likely need to go back to the monthly reoccurring table to see what services you will NEED to cut in order to bring your number to either a even $0.00 or a positive amount.  Now if you still have some income remaining after all of this.  Then it is time to see where you can contribute towards your debt payments.  The first goal is the starter emergency fund.  After your starter emergency fund of $1,000.00 is funded, then attack your smallest piece of debt with the remaining amount of your income.  But for now, here is what is left of your income.

 

The Final Take Home:

Please keep in mind the above information was just a random sampling of what someone may be dealing with as far as their finances.  This in no way represents a true person’s financial situation.  The purpose of the above information is so you can use this process as a nice and easy way to gather all of your finances and become organize.  Feel free to use your spreadsheet software of choice to begin the process of organization as the starting point for your debt free journey.  Coming soon to the resources section, I will be providing an online spreadsheet where you can simply input your information and print out for your records.

So the above make believe person’s information has them with $27.48 left in the bank after all of the expenses are paid for them to remain current.  So with the excess amount, this person can now allocate to their emergency fund an additional $27.48.  After this payment plus the pre-allocated amount as listed above of $200.00, this person will have completed their first goal of building their starting emergency fund of $1,000.00 in approximately 4 and a half months.  The last installment payment would be for only $90.08.  This  will now leave $227.48 plus the already allocated minimum monthly payment that can go towards the lowest balance of debt.

So with the starting emergency fund now off of the debt table above and into the fifth month of this journey, this person now will have an additional amount of $200.00 to place towards the debt.  The remaining amount will now go from $27.48 to $227.48 assuming that their income remains as well as all other expenses.  All of this will go towards the lowest remaining debt to begin attacking all of their debt.

That is how becoming organize with your finances and creating this budget can ultimately save you from any undue stress to dealing with the demons of debt.  My next article will break down the actual debt payment process utilizing this person’s finances as the continuing template.

Jul 2

Truth about Credit/FICO Scores

FICO (NYSE: FICO) is a leading analytics software company, helping businesses in 90+ countries make better decisions that drive higher levels of growth, profitability and customer satisfaction. This is stated right on their web site.  This statement refers to businesses who use their service.

FICO at a Glance

FICO’s groundbreaking use of Big Data and mathematical algorithms to predict consumer behavior has transformed entire industries. The company provides analytics software and tools used across multiple industries to manage risk, fight fraud, build more profitable customer relationships, optimize operations and meet strict government regulations.

A History on FICO

1956 -Engineer Bill Fair and Mathematician Earl Isaac founded FICO – with an initial investment of $400 each – on the principal that data used intelligently, can improve business decisions.

1958 – FICO builds its first credit scoring system for American Investments.

1972 – ASAP, the first automated application processing system, debuts at Wells Fargo.

1981 – Bill Fair and Earl Isaac along with the rest of the FICO team, introduces the first FICO credit bureau risk scores.

1995 – Fanie Mae and Fannie Mac recommend use of FICO scores in evaluation US mortgage loans.

2005 – 10 millionth score sold to US consumers through my fico.com and partners.

2013 – Makes FICO scores available to millions of consumer through FICO score open access program.

 

What makes up the FICO Score:

SO the above information tells you more about the company at a glance and its history.. The pie chart is basically the main focus on the FICO score.  The all mighty FICO gods do not help nor determine your level of wealth at all.  It is strictly a measurement tool using you history of debt in order to see if you are qualified for even more debt.  FICO Score equals the 
I love Debt Score”.

In forthcoming posts, I will be writing a step by step way to organize your personal finances, become current on your financial obligations, start buildings your initial emergency fund, begin your debt free process, and then return to building your fully funded emergency fund of 10 months of expenditures.