I am 27 years old. I earn $31,000 per year. I just got my MBA and am in lots of debt from student loans. Please help me construct a budget where I can save at least $50 per month. My current budget is: rent $601; car note $375; car insurance: $142 every two months; electric, water, Direct TV: $150; food, etc. $200. I am strapped, and the student loan payments have not started at an estimated $301 per month! Please help. Thanks! – Poor Graduate
Answer:
Congratulations! An MBA from TMMU (Take My Money University) is an honor. You should be proud of the achievement. The unfortunate part is that now you’re getting your doctorate from the school of hard knocks.
Today’s lesson is one that high schools and colleges don’t teach. We’ll learn that it’s hard to repay debt, and there’s a limit to the amount of debt you can take on. So let’s start today’s class.
Your idea of creating a budget is right on. The first thing to recognize about a budget is that it is not a straitjacket. Rather, it’s a tool to tell you what’s happening so that you can decide what changes need to be made.
Generally, there are four big expense areas. These four items are: housing (about 35 percent of your budget), auto (15 percent), food (15 percent) and debt (10 percent). Among them, they account for 75 percent of your take-home pay.
The other 25 percent is needed for medical expenses, clothing, entertainment, cell phone, Internet, gifts, travel, etc. These smaller categories will not throw most people’s finances seriously out of control, nor will they be the solution to any big financial problem.
Now, let’s look at your budget. Your income is $31,000 per year, $25,800 after federal income, Medicare and FICA taxes. About $2,150 per month.
So how do your expenses line up with your income?
Housing (rent plus utilities): $751 or 35 percent per month. That’s right at the maximum.
Auto expenses (car plus insurance): $446 per month. Add a tank of gas and a little maintenance, and you’re at $525 per month or 24 percent. That’s too high by 9 percentage points.
Food: $200 per month. That’s 9 percent of your income. Just about where it should be. (Add food, housing and auto, and you’ve already spent 68 percent of your money each month. It’s easy to see how you’re pushing against your limit, even before beginning to repay student loans.) Now on to the last of the big four categories:
Debt: The $301 per month for student loans is another 14 percent of your take home pay.
When added to the rest of the Big Four, there’s just not enough money left for everything else. So what can you do? You’ve got three possible options. Increase income, reduce expenses or get some, or all, of the student loans forgiven.
If you want to increase your income, you’ll need another $300 per month in after-tax income to get your budget to balance and pay off the student loans (without any extra for savings). That means you’re looking for roughly a 15 percent pay raise.
Given that, cutting expenses is the most likely solution. The big expenses are home or auto. Taking in a roommate or refinancing your car are possibilities. Refinancing your student loans could also help.
Finally, you can see if you qualify for any student loan forgiveness. To qualify, you’d need to:
Perform volunteer work.
Perform military service.
Teach or practice medicine in certain types of communities.
Meet other criteria specified by the forgiveness program.
Note that bankruptcy will not help. Generally, student loans are not dismissed in a bankruptcy proceeding.
There’s a lesson in this for all of us. Just because you can borrow money for college doesn’t mean that you’ll have the ability to pay it back. Look at starting salaries in your chosen field. A ballpark rule is not to borrow more than you expect to make in your first year after graduation.
The recession is winding down, and shell-shocked consumers can finally begin to repair finances thrashed by the housing bust, stock-market collapse, and wretched job market. But the white-knuckle ride may continue, even as the economy recovers. The whole nation has been living on borrowed money and putting off tough decisions, and the bills are finally getting too big to ignore. Here are six eventualities that will keep the pressure on American families–while providing even more reason to save extravagantly and live carefully:
Taxes will go up. Politicians don’t want to talk about it, but there’s almost no way around the fact that middle-class Americans will have to pay more out of their pocket to keep government functioning. In many states this is already happening. At least 40 states face gaping budget shortfalls this year, with several of them planning to plug the holes by raising income or sales taxes or enacting new taxes on things like services. At the federal level, some taxes are already going up on high earners, but that won’t be nearly enough to cover the gap between what Washington spends and what it takes in every year. “It’s inevitable that they’ll have to find a way to have a truly middle-income tax increase,” says Clint Stretch of Deloitte Tax. That creates a conundrum for President Obama, who has backed himself into a corner by pledging no new taxes on the middle class. That promise seems impossible to keep with the government’s debt approaching $14 trillion–a sum equal to the nation’s entire economic output–and Greece providing an alarming example of what happens when fiscal discipline erodes.
It seems likely that Obama will use the final report from his debt-reduction commission, due December 1 (after the November elections, naturally), as a starting point for a debate on how to get the debt under control. The partisan warfare that follows will make healthcare reform look like a kindergarten sing-along. A new value-added tax on goods and services is one option, with Washington lowering or simplifying income taxes to make it look like a net win for the middle class. Paycheck withholdings for Social Security and Medicare could go up. Long-standing deductions or exemptions for mortgage interest, health benefits, and other privileges could be reduced or eliminated over time. The bite on taxpayers won’t necessarily be severe, but the rancor that comes with it will make everybody feel lousy. A good bet is that Congress dickers for at least two years, with no major changes coming until after the 2012 presidential elections.
How to prepare: Ask your accountant or financial advisor about the tax implications of any big financial decisions–and plan conservatively.
Government services will go down. Like tax increases, this is already happening at the state and local level, and it will trickle up to the federal government soon. The low-hanging fruit is stuff that state and local governments spend the most on: education, Medicaid, and other services for the poor, and public services like the fire and police departments. Several states, like New Jersey, Missouri, and Nebraska, are considering ways to consolidate town and county governments, to provide services with less overhead. The biggest battle at the federal level will be over cutbacks in Medicare and Social Security payments, which account for 35 percent of all federal spending. In addition to that, the postal service will reduce hours and service, and other agencies will follow. There will be fewer government jobs, as federal agencies downsize. And stimulus checks will become a thing of the past–so if you got one over the last couple of years, frame the stub.
How to prepare: If you rely on any type of government service, do contingency planning and make backup plans in case it disappears.
The retirement age will go up. The official retirement age–the point at which you can claim full Social Security benefits–is rising gradually from 65 to 67 by the year 2027. Expect it to go higher, sooner. Social Security is on a path toward insolvency at current payout rates, and one obvious way to fix that is to delay the point at which payouts start. Corporations, local governments, and many other institutions peg their own retirement ages to the Social Security standard, so many folks could end up working longer. A lot of them need to: The majority of Americans lack enough savings to retire, even with full Social Security payments. A few extra years of work might sound like a bummer, but expanding your planned working life also gives you a bit of breathing room to accomplish goals and build a nest egg.
How to prepare: Do your retirement planning under a variety of scenarios, including different retirement ages. Think about part-time work you might do to supplement Social Security payments. And build the biggest nest egg possible.
Incomes will rise slowly. That’s partly because taxes will take a bigger bite out of your paycheck, but also because the job market is likely to stay weak for an uncomfortably long time. The Congressional Budget Office, for example, predicts a higher-than-average unemployment rate through 2015, and with an excess supply of workers, employers will be able to pay less. We’re also in the midst of long period of transition in which big U.S. companies are substituting technology or cheap foreign labor for American workers, further depressing hiring and incomes. The key to getting raises and promotions will be making yourself more valuable–by getting extra training or education, say, or solving problems that stump others.
How to prepare: Start by living within your means and paying down any debt you have. And never take a future raise for granted. It might also be prudent to find a second stream of income, from a small Web business or consulting jobs, for example.
Uncertainty is here to stay. The recession is over, but it’s not back to business as usual. The U.S. economy is fundamentally changing, as foreign competition gets tougher, technology revamps the way companies operate, and old skills become obsolete quickly. There will still be good opportunities for workers who are able to adapt, but those expecting a paycheck for simply showing up every day and doing the same old thing will be the first to go when things change. “Be flexible and work outside your protected comfort zone,” says Susan Goldberg, a New York executive search consultant. “The individuals willing to take risks and operate differently will succeed.”
How to prepare: Ask what could go wrong with your job, income, and finances. Anticipate changes instead of simply waiting for them to happen. Identify your vulnerabilities and address them, whether that means getting more education, changing careers, or downsizing your lifestyle so you can save more.
Big institutions won’t take care of you. Maybe you’ll luck out and get all the support you need from your company, for your entire career. But don’t count on it. One lesson from the last several years is that the era of stable employment and predictable careers is over, with agility and innovation being the new requirements for survival. “It’s important for companies today to be extremely flexible,” says Dan Amos, CEO of insurer Aflac. “They’ve got to be able to turn on a dime.” That’s true for workers as well, and if you’re counting on somebody else for job security, perks or benefits, or retirement income, you’ll be vulnerable when the next wave of transformation hits. Or the one after that.
How to prepare: Enjoy big-company benefits if you’ve got them, but don’t assume they’ll last forever. Exercise your entrepreneurial muscles, even if you work for somebody else, by coming up with new ways to solve problems and get the job done more efficiently. Be as self-sufficient as possible, and if you’ve been doing the same thing for a long time, ask yourself if it’s time to do something more innovative or exciting. You’ll be happy you did.
Debit cards are useful financial tools as they offer the convenience of plastic — without the risk of racking up debt. Just like credit cards, though, debit cards can lead to trouble if not used wisely. Here are experts’ nine best tips for managing your debit card.
1. Know yourself. Do you have bad money habits, such as not balancing your checkbook, losing receipts and getting hit with overdraft charges? If so, avoid pulling out your debit card every time you crave a latte, and pay cash for everyday purchases. “The debit card is a great tool, but it’s not for everyone,” says Susan Tiffany, director of consumer periodicals for the Credit Union National Association. “Just ask yourself upfront: ‘Am I the kind of person who’s going to run into trouble with this?’”
2. Keep track of transactions. Keep good records to avoid bounced checks, overdraft fees and stress. “Write down every purchase right away in your check register,” says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. This goes double for those who have joint accounts, according to Catherine Williams, vice president of financial literacy for Money Management International, a national credit counseling firm. “It’s really important that you both record all your transactions and be in close communication with each other,” Williams says.
3. Don’t automatically “opt in.” This summer, new federal regulations prohibit banks from allowing customers to overdraft with debit cards unless they opt in. Banks are urging customers to do so, but Leslie Parrish, a senior researcher at the Center for Responsible Lending, says 80 percent of consumers would rather have their card declined at the checkout counter than get hit with a $30 or more overdraft fee. “Your debit card could become your most expensive credit card if you don’t have enough money in your account and are extended credit,” Parrish says. Instead of opting in, Linda Sherry, national priorities director for Consumer Action, recommends you set up your own overdraft protection by linking your card to a savings account or a line of credit.
Your debit card could become your most expensive credit card if you don’t have enough money in your account and are extended credit.
– Leslie Parrish
Center for Responsible Lending
4. Watch out for holds. Before using your debit card to make hotel reservations, rent a car or even buy gas, ask whether any holds will be placed on your account — and how much and how long those funds will be held. If you don’t want your money tied up for what could be as long as a month, consider using a credit card for hotels and rentals instead, Tiffany recommends. (Or, make the reservation with a credit card and pay the final bill with your debit card.) “If you’re traveling and don’t have the balance to cover the holds they’ve placed, you could go to buy dinner and have your card declined,” Tiffany says.
5. Know the difference: debit versus credit. You’ve just swiped your card to pay for a new pair of jeans, and the clerk asks, “Debit or credit?” If you choose “debit” and punch in your PIN, the transaction happens online and is processed right away. If you choose “credit” and sign instead, the transaction may hit your account several days later, leaving you to think you have more money in your account when you don’t.
6. Be smart about choosing a PIN number. Try to choose a random combination of numbers that you can remember easily, and avoid choosing a PIN that a criminal could guess, such as your initials, your kid’s birthday, the last four digits of your Social Security number or numbers in sequence, recommends Greg Meyer, community relations manager for Meriwest Credit Union. “You wouldn’t believe the number of people who want to choose 0000 or 1111,” Meyer says. “That’s just asking, ‘Please rip me off.’”
7. Go online daily to check your account. Stay on top of every transaction to find out right away about unexpected fees or holds, accidental double charges or fraud. This is especially important with debit cards because any money you lose is your own — not the bank’s, says Tom Harkins, chief strategy officer for Secure Identity Systems and former vice president of security and risk for MasterCard International. By federal law, your losses from fraudulent activity on your debit card are limited to $50 — but only if you notify your bank within two days of noticing a problem.
8. Be careful when linking accounts. If you’re going to link your debit card checking account to a savings account, avoid exposing too much of your money to fraud, Harkins says. “The more accounts you link, the more you’re giving fraudsters free reign,” Harkins says. Your liability might be limited, but it could take days or weeks for the bank to reimburse you. “That’s the risky part — your money is gone, and the mortgage is due tomorrow, you’re going to start bouncing checks and you can’t even make an ATM withdrawal,” he warns.
9. Use a credit card for big purchases. The bottom line: Debit cards don’t offer as many consumer protections as credit cards. Cunningham recommends making large purchases — such as stoves, refrigerators or plane tickets — with a credit card. “You might want that product protection in case there’s a dispute down the road,” Cunningham says. A real-life example: When Steve Rhode, a consumer debt expert at GetOutOfDebt.org, lived in England, he used his credit card to buy plane tickets to fly his family back to the United States, but the airline went out of business before his trip. “I was able to file a claim with the credit card company and they wiped off the charge,” Rhode says. “If I had used a debit card, that money would have been gone for good.”
Take these steps to renew, review, refresh and regrow your finances:
You probably have a little money stashed around the house and don’t even know it. But forget turning over those couch cushions and going through old coat pockets. Instead, try a little financial spring cleaning. Here are 10 ways you can find a little extra cash and get more mileage out of the money you do have. And you don’t even have to battle the dust bunnies:
1. Get rid of clutter. Just as spring is a good time to clean out your closets, it’s also a good time to go through your finances and toss out the things that no longer fit your life, says Gary Foreman, editor of frugality-minded Web site The Dollar Stretcher.
Foreman and his family were using one of the inexpensive movie download services so much that they dropped one of their expensive cable subscriptions. “It was rare that we were watching it,” Foreman says.
His tip: “I go through the financial statements and look at them like they’re closets,” he says. Ask: What am I not really using anymore?
2. Sweep away those winter bills. Warmer weatheris here, soif you’re still shoveling those leftover Christmas bills, it’s a good time to get rid of them, says Foreman.
One way to handle them is to strategize a one-time idea to make some extra money, such as a garage sale, online sale or even volunteering for overtime at work, he says.
Or just put yourself on a more stringent payment plan. And you can use an online credit card calculator to see how quickly you can deep-six that debt. What you gain financially: peace of mind and a huge amount of interest that you won’t be paying every month.
3. Organize for next year’s taxes. One task to make it easier: create a folder (paper or on computer), to hold all of the charitable deductions you make throughout the year, says Linda Sherry, director of national priorities for Consumer Action, a Washington, D.C.-based advocacy group. Those deductions add up fast, “and it can be difficult to follow up later,” she says.
You can do the same for other spending categories that you need to track throughout the year. And some banks offer software that makes the task easy, she says.
And don’t forget your withholdings. If you were substantially over or under for 2009, this is also a great time to adjust your withholdings for next year.
4. Play with the techno-toys. One thing that can make your life easier: alerts to tell you when you’re approaching your preset limits on credit and debit cards, says Sherry. Often you have the choice of setting them to reach you by e-mail or text message, and they are “tremendously helpful,” she says. By avoiding going over your limits, you bypass having to pay extra fees.
5. Put your savings on autopilot. Set up an automatic draft to your savings account, “even if it’s just $10 a month,” says Barbara Stanny, author of “Overcoming Underearning: A Five-Step Plan to a Richer Life.”
It’s as easy as going to your bank’s Web site and arranging to have the money automatically transferred every month from your checking account or payroll deposit, she says.
Don’t worry about interest rates — they’re pitiful today — but look for a savings account “that has no charges,” Stanny advises.
Planning something special in your future, such as a vacation or new car? Open an account just for that, says Stanny, who says a friend of hers is doing this to save for a dream purchase: a boat. Even saving just a little at a time, “it’s amazing how fast it adds up,” she says.
6 . Scope out your credit cards and credit report. You’re entitled to at least three free copies each year — one from each of the three major credit reporting agencies — TransUnion, Experian and Equifax. Get them for free at AnnualCreditReport.com, the government-mandated site. If you want your credit score, expect to pay for it. Don’t fall for gimmicks from companies that require you to buy a service before getting your so-called free score.
These days, credit reports are being used for everything from setting insurance rates to evaluating job candidates. So making sure your report is accurate can save you some money.
Also, 2009 was a tumultuous year for credit cards. Check the interest rates, credit limits and any rewards programs tied to your plastic. While canceling credit cards can hurt your credit score, you may want to shelve the cards with high APRs and pay down balances on cards with low credit limits to increase your credit utilization ratio. The lower your ratio, the better your credit score. Cash in your rewards, or if your rewards program isn’t working for you, check out other rewards cards that better suit your lifestyle.
7. Check those beneficiaries. Some financial accounts (insurance policies, too) don’t pass through your will, even if you have one. Instead, the assets go directly to the beneficiaries you named when you opened the account or bought the policy.
Over the years, life changes. You get married, divorced, have kids, etc. But too often, you forget to revisit those beneficiary selections. That means if the worst happens, the money in that bank account you opened in college, pre-spouse and kids, could still go to Aunt Edna or your ex.
So take a look at each of your financial accounts and insurance policies to make sure that the money will go where you need it to go now — not where you wanted it to go years ago.
8. Revisit your insurance. The past few years have been a bumpy financial ride for everyone. If your circumstances have changed (cars, job, home or home value), have you changed your insurance too? If not, you could be carrying too much (too expensive) or too little (risky if you have to make a claim). Spring is a great time to take a quick look and make sure that your coverage is, as Goldilocks said, “just right.”
9. Clean house. You know those old household white elephants that have been around so long you don’t even see them anymore? Bad financial habits or outdated decisions are just like that. Lurking on the edge of your life, they take up space and resources without offering much in return. But spring is a great time to examine your financial “big picture” and clear out what isn’t working for you.
Look at the reasons behind your current financial situation, says Foreman. For instance, “is there a reason you’re always carrying $3,000 on your credit cards?” he asks. Or do you need to be a two-car family? And are those family cars you bought then the best ones to meet your needs now?
With this step, you might find that you want to cut spending, increase your income or some combination of the two.
The secret to getting the most out of this one: take off the blinders and really look at everything to find out what is (and isn’t) working for you financially.
10. Think about getting outside. Just as physical spring cleaning gives you a chance to bring the outside in and vice versa, financial spring cleaning has a fun side, too, says Foreman.
“Now’s a good time to start thinking, ‘What are you going to do for a vacation this year?’” he says. And from “stay-cations” to weekend and long-weekend getaways, there are plenty of economical alternatives to the old standard 14-day sojourn.
And a little advance planning can give you a financial advantage. Says Foreman, “You can get information on the Internet, send for a brochure,” and salt away a little money for whatever you choose.
With the average American saving around 3.3% it seems like getting out of debt could be difficult. However, in a recent article author Laura Rowley points out,
If savings behavior isn’t changing, consumer attitudes may be. A recent Gallup poll found 62 percent of Americans say they enjoy saving more than spending, while 35 percent reported the reverse. Back in 2006, respondents were split about 50-50 on the question. Moreover, 57 percent say they are spending less money in recent months than they used to, up from 50 percent last July. Among the newly frugal, 38 percent say this spending pattern is the “new normal,” while 19 percent say the budget cuts are temporary.
Rowley goes on to explain that the average American can significantly reduce their debt by using a small portion of their extra income to pay down their debt. In her example she points out that one home owner was able to save $23,900 over the life of the loan by paying $35.86 more a month towards his home loan.
At MoneyDesktop we are passionate about helping people get out of debt as quickly as possible. The best part is, it’s not that hard. Our software shows you where your money is going and gives you step-by-step instructions on how to get out of debt. Results like those mentioned are not uncommon for our users, so if you haven’t already, give MoneyDesktop a try for free today.
Maybe you’ve made a credit mistake or two, but there’s no reason to freak out. Here are the three common problems people make, as well as what you need to do to solve them.
Problem No. 1: Opening too many credit accounts. Ah, this is a common one. You may have applied for credit randomly, causing your wallet to burst with plastic. It also resulted in the ability to charge and (temporarily) live far beyond your means. Without enough cash to pay for what you wanted, those open lines of credit probably made buying what you couldn’t afford too easy.
Solution: If you have any active lines of credit left, review them and decide on a couple that you want to keep. They should be accounts with the lowest interest rates and other favorable terms. Tuck the others away in a safe place, or if you feel you can’t control overspending, close them entirely. In the future, only apply for the credit you require and won’t abuse. The average person needs just a couple of accounts — a general purpose credit card that you can use anywhere, and perhaps a retail card at a store where you regularly shop.
Problem No. 2: Letting debt escalate. A $10,000 total liability is not unusual, but it’s a hefty sum for one person to repay quickly. You know this now, but while you were using the credit cards, you needed to have kept your eye on the ball (er, bill). Certainly you didn’t get to that figure overnight, and the moment you discovered it was getting out of control you should have stopped charging and focused on repaying the balance.
Solution: When you do use credit again, you’re going to have to make sure your debt never gets out of hand again. To do that, always check your balance before charging. If you know you’ll have enough money to pay for everything you charge in full without neglecting your essential expenses, great — go for it. If not, put the card away.
Problem No. 3: Reneging on your contract. If you have arranged a hardship program through a qualified credit counseling agency, your creditors will probably report you as delinquent, since you’re not making the originally agreed-upon minimum payments. On the other hand, if you are settling the debt by negotiating the balance with a debt settlement company, you will also see credit damage because you are paying less than the total owed. It will be notated on your credit report as “settled,” which is much less desirable than “paid in full.” Why such damage? You’re reneging on a contract. When you got the credit card, you promised to pay according to their terms. When you don’t, you get dinged.
Solution: If you are using a hardship plan, resume minimum payments again as soon as possible. In the event you’re with a debt settlement company, the accounts have likely gone into collections, so you may as well continue and get the financial break. The prescription for both of these scenarios is basically the same: Wait for notation to age — after seven years, the negative information will drop off the reports (and after a couple years it will become considerably less important) and start to use credit responsibly now. By charging regularly, and paying on time and in full, you’ll establish a positive credit history as you’re waiting for time to work its magic.
Erica Sandberg’s articles and insight are featured in such publications as the Wall Street Journal, Pregnancy, Babytalk, Redbook, Bank Investment Consultant, Prosper.com, MSNMoney.com, and Smartmoney.com. An active television and radio commentator, Erica is the credit and money management expert for San Francisco’s KRON-TV, a frequent guest on Forbes Video Network, Fox Business News, Businessweek-TV, and all Bay Area networks. Prior to launching her own reporting and consulting business, she was affiliated with Consumer Credit Counseling Services of San Francisco where she counseled individuals, conducted educational workshops, and led the media relations department. Erica is a member of the Society of American Business Editors and Writers, and on the advisory committee for Project Money.
According to the NY Times: “the number of food stamp recipients has climbed by about 10 million over the past two years, resulting in a program that now feeds 1 in 8 Americans and nearly 1 in 4 children.”
This offers a brutally realistic view of the state of our economy, with most areas experiencing 100% growth since 2007 in food stamp usage. States like Michigan, Oregon, and Maine along with much of the south are currently seeing food stamp usage climb in excess of 20%.
The government of North Korea has decided to devalue its currency at an exchange of 100 old Won to 1 new won. Allegedly an attempt to punish those that have profited from the black market, the government is limiting the amount each resident may exchange to $150,000 won. This limit has caused stores, restaurants, and all other forms of commerce to close until the new currency takes effect. It has also led to at least 2 suicides as residents deal with the harsh reality that their life savings has been reduced to at most, $150.
This act is not unique to North Korea. Many countries including Argentina have replaced currency in the past in order to curb inflation.
Budgeting, Debt Management, Financial Planning, Organization 
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