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)
Wise preparation for inflation is a necessity in many nations if one wants to save for retirement. Generally, a fixed rate mortgage, owning gold, or holding property can be a good method of hedging against future inflation. The US currently has inflation under 3%, which is significantly lower than many other nations.
15.Jan.10 Financial Planning Comments (0)
A recent video by CNN money suggests that a good benchmark for preparing for retirement is to set a goal of having one’s investments reach 5 times that of their salary by the age of 40. So, if one were making $65,000 a year, the goal would be to have $325,000 in investments.
Additionally, they recommend setting a goal for age 50 to have investments worth 10 times that of one’s salary and about 20 times one’s salary by 60. Assuming one can achieve a 7% return on their investments, they should see a doubling of their money every 10 years. Under this method CNN claims that at 65 one could begin withdrawing 4% of their investments each year permitting them to take home 92% of their previous salary, a very comfortable amount to live on.
Financial planning is never an exact science – during 2009 it was not uncommon for many people at age 40 to be unemployed, so this benchmark would be of little assistance to them in planning for the future. Likewise, someone making minimum wage at age 40 will struggle to save much for retirement while someone making 6 figures would be perfectly fine not having anything saved at age 40.
The most important concept is that one plan. With the new year approaching, now is a great time to sit down and plan for the next decade, when and what to save, and how aggressively you’re going to need to save in order to be comfortable in your retirement years.
photo credit: anotherloverholenyourhead
Tags: investments, savings
28.Dec.09 Financial Planning Comments (0)
Most economists agree that a certain amount of unemployment is normal and indicates a healthy economy. This frictional amount tends to hover just above 4%. Once unemployment starts to climb much above that you begin to see a troubled economy.
With the exception of the mid-west, our country has been climbing quickly towards a 10% national unemployment rate. The last 2 years have seen unprecedented unemployment in many of America’s largest cities.
A visual timeline of the unemployment trend can be viewed here.
10.Dec.09 Financial Planning Comments (0)
As the end of the year approaches, it’s good to look back and make sense of the mistakes made to ensure they are not repeated in 2010.
Here’s ten financial mistakes to avoid:
Not diversifying. Seeing many stocks drop 50% or more in the recent financial upheaval left many with depleted retirement funds. Owning a diverse mixture of investments can help offset the bad years and hedge towards equal gains in good ones.
Not investing: The only thing worse than seeing your retirement drop 50% is not having one at all.
Early Adoption: New technologies can be great fun, but they can also be costly mistakes. Just ask anyone that bought an HD-DVD player for $1,000.
Playing Penny Stocks: Investing in Penny stocks can bring overnight gains of 100% or more. More frequently than not it results in a total loss.
Investing in FOREX: Foreign exchange markets are extremely risky. One example, a 13% CD offered on the Icelandic Crona ended up costing investors $6,000 or more.
Not Fighting: Whether it be a wrongful tow, a denied insurance claim, or a simple overbilling standing up for yourself and fighting yields better returns than doing nothing.
Buying Cars (or anything) based on monthly expense: The monthly payment should not be your primary method of determining your purchase. Actual price should.
Buying things on credit: If you cannot afford it, save until you can. Buying things based on expected earnings or promotions often results in large credit card debt.
Not getting credit: Credit scores require a credit history. Failure to ever get a credit card can make getting a mortgage impossible.
Buying a Condo: While condos can be great buys for many, those that bought just before the bust saw their value drop by as much as 90%, along with skyrocketing HOA fees.
Not diversifying. Seeing many stocks drop 50% or more in the recent financial upheaval left many with depleted retirement funds. Owning a diverse mixture of investments can help offset the bad years and hedge towards equal gains in good ones.
Not investing: The only thing worse than seeing your retirement drop 50% is not having one at all.
Early Adoption: New technologies can be great fun, but they can also be costly mistakes. Just ask anyone that bought an HD-DVD player for $1,000.
Playing Penny Stocks: Investing in Penny stocks can bring overnight gains of 100% or more. More frequently than not it results in a total loss.
Investing in FOREX: Foreign exchange markets are extremely risky. One example, a 13% CD offered on the Icelandic Crona ended up costing investors $6,000 or more.
Not Fighting: Whether it be a wrongful tow, a denied insurance claim, or a simple overbilling standing up for yourself and fighting yields better returns than doing nothing.
Buying Cars (or anything) based on monthly expense: The monthly payment should not be your primary method of determining your purchase. Actual price should.
Buying things on credit: If you cannot afford it, save until you can. Buying things based on expected earnings or promotions often results in large credit card debt.
Not getting credit: Credit scores require a credit history. Failure to ever get a credit card can make getting a mortgage impossible.
Buying a Condo: While condos can be great buys for many, those that bought just before the bust saw their value drop by as much as 90%, along with skyrocketing HOA fees.
photos: futureback credit: {Guerrilla Futures | Jason Tester}
dvd credit: hainteractive
car credit: Police_Mad_Liam
card credit: apesara
04.Dec.09 Financial Planning Comment (1)
Americans with an AGI of less than $75k are eligible for a $400/per person stimulus credit. The making work pay stimulus has been attracting noticeably less attention than other stimulus offerings. For those that have normal paychecks the stimulus is applied directly through reduced withholdings. Those that are self employed, do not have withholdings, or otherwise need to claim the credit may do so by filling out an IRS schedule M and requesting $400 on their 1040.
A video on the IRS’ channel on Youtube (The IRS is on Youtube!) explains the credit in better detail. It can be viewed here.
photo credit: alancleaver_2000
03.Dec.09 Financial Planning Comment (1)
A new stock exchange is experiencing astonishing growth on the African continent: the Somali Pirate Exchange. Having quickly grown from 15 to 72 ‘maritime’ firms, the exchange allows local residents to contribute supplies, manpower, or funding to piracy efforts. With 10 successful ransoms paid, the exchange has offered an impressive return on investment to financiers from Somalia and neighboring countries.
Taking place in a small fishing village, Piracy has dramatically affected the local economy. According to Reuters:
“Piracy-related business has become the main profitable economic activity in our area and as locals we depend on their output,” said Mohamed Adam, the town’s deputy security officer.
“The district gets a percentage of every ransom from ships that have been released, and that goes on public infrastructure, including our hospital and our public schools.”
With piracy efforts commanding up to $4,000,000, a single ransom plays a dramatic role in changing the wealth of investors. One investor in the recent Spanish ransom hijacking received over $75,000 for her investment of a rocket-propelled grenade.
photo credit: twicepix
02.Dec.09 Financial Planning Comments (0)
Warren Buffet is infamous for his investment strategies, favoring long holds of profitable companies to quick trades of speculative ones. His portfolio history is an impressive timeline of decisions made with incredible foresight.
The complete opposite of a day trader, his investment strategy focuses on long term goals. Proper budgeting for one’s personal finances can also benefit from good planning.
While many know of his success with Geico, few realize he has owned large portions of everything from See’s Candies to Fruit of the Loom.
Click here, or on the image to view full size.
16.Nov.09 Financial Planning Comments (0)
The price of gasoline tends to vary greatly here in the US. It generally jumps during the summer when demand is highest, then drops off during the winter. Sanctions, disasterss and other international events can also effect the price by reducing supply.
Those spending $3 a gallon at the pumps can take some refuge in knowing that they’re spending half what most Europeans spend on a gallon of petrol. Here’s a chart showing the ten most expensive locations to gas up along with the ten cheapest. As usual, Venezuala leads the world in price due to heavy government price subsidies for residents.
Sierra Leone leads the world with a gallon of gas running $18.40, again supply and demand plays a heavy part in the cost to the consumer.
Considering recent events with Iran, it’s quite possible that a change in gas prices will be forthcoming.
28.Sep.09 Financial Planning Comments (0)
