Question:
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.
Class dismissed!
By Gary Foreman (CreditCards.com)
Tags: budget, debt plan, Student Loans
21.Jul.10 
Budgeting, Debt Management, Financial Planning, Organization 
Comments (0)
Don’t exhale just yet.
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.
By: Rick Newman
Tags: Debt, planning, recession
01.Jun.10 Budgeting, Debt Management, Financial Planning Comments (0)
In a recent article by Mary Pilon at The Wall Street Journal, she describes the suffocating student loan debt from which many professionals are suffering.
“When Michelle Bisutti, a 41-year-old family practitioner in Columbus, Ohio, finished medical school in 2003, her student-loan debt amounted to roughly $250,000. Since then, it has ballooned to $555,000.
It is the result of her deferring loan payments while she completed her residency, default charges and relentlessly compounding interest rates. Among the charges: a single $53,870 fee for when her loan was turned over to a collection agency.”
Pilon goes on to argue that while some people may view student loans as “good debt,” borrowers still need to be cautious when assuming student loans. This is because student loans, unlike mortgages or credit cards, are almost impossible to be dropped if you can’t make the payments.
Read the article here.
Tags: debt management, Student Loans
20.Apr.10 Debt Management, Student Loans Comments (0)
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.
Read all of Rowley’s article on Yahoo! Finance here
photo credit: dieselbug2007 on Flicker
Tags: Debt, Debt Elimination, Home Loan
08.Mar.10 Budgeting, Credit Card Debt, Debt Management, Payoff Mortgage Comments (0)
