Be Conscious of Choice and Change

I am honored to have been asked to be a presenter in Fort Lewis College’s Fire Side Chat series.

This post is a compilation of my preparation notes and the resources mentioned during my talk.

Thanks,

Matt Kelly, Personal Finance Coach

If I knew in college what I know now, I would have made more conscious choices about things that affected my personal finances.  My hope for you is that you will make conscious choices and will consider the long-term affect your choices will have on your stress levels and true happiness.

Our choices are driven by our Dreams, Goals, Beliefs, Values, Culture and Lifestyle.  These are powerful forces.  They are able to help us achieve much and they can cause us to unconscious choices too. Consider your motivation regarding where you want to live, what type of home and car you want, will you live with debt, will you use credit cards, what type of wedding will you have, will you marry at all?

The list could go on and on and it is important to note that each choice we make is an effort to make ourselves happy.  Though if we have not consider what makes us deeply happy and peaceful we may be living someone else’s dream.  And no amount of spending will make us truly happy if we are not living our own authentic life.

Change is inevitable: So be prepared appeared in the September 29th edition of the Durango Herald.

Personal Finance Vocabulary:

Here is a link to my personal finance vocabulary document.

Resources:

Use the After Tax Take Home Pay Calculator to find out home much of your income you’ll really have available after taxes.  Because you can only spend what you bring home after all of your taxes have been paid.

Use this calculator to compare the cost of living in two different cities. As you choose where you want to live it is very important to consider the cost of living not just how much you expect to earn.

Knowing what you can expect to earn is critically important to choosing where to live. This report details the median household incomes for the the MSA’s in the US.

Of course how much you earn is also affected by your career choice.  Here is a link to a salary wizard which will help you determine how much you’ll earn based upon where you live.

Housing is typically the most expensive item in your budget.  Where you choose to live determines how much you’ll pay for rent and how much it will cost to buy a home.  The more you spend on housing the less money you’ll have for saving, investing and spending.  This report details the median cost of a home in the MSA’s in the US.

At 17% of household income transportation is the second most expensive budget item.  The Real Cost of Car Ownership is a calculator that can help you see how much transportation really costs. And it calculates how much money you would accumulate if you were to opt not to have a car and invest the difference.

Another look at the cost difference between car-commuting and public transportation is provided by Public Transportation.org in their report Save $9,381 by Riding Public Transportation. In Denver it is estimated that you would save $9,761, slightly above average, annually.

Plugging these numbers into a savings calculator I found that if you invested that $9,761 dollars each year at the end of 20 years you would have accumulated $482,417.14 and with no further investing that money will grow to be just over 1 million dollars in just 10 additional years.

Mint.com Question: As a recent college graduate, I’ve incurred a number of student loans, credit card debt, and a car payment.  After budgeting for my monthly expenses, I’ve found that I have some extra money that I can use to pay off some of my debt.  Where is the best place to start?

My Answer:

I encourage my clients to have no debt because I believe that debt and unconscious spending steal our dreams.

I suggest you begin by taking the extra money you have in your budget and building a $1000 emergency fund so that you have the ability to handle small emergencies.

Once you have your $1000 emergency fund, organize your debts from smallest amount to largest; either on paper or in a spreadsheet.

Take any available money you have and pay down the smallest balance debt.

Once you finish with the first debt take what you were paying on that debt and add it to the minimum payment of the next largest debt – keep that up until you are out of debt.

You’ll find that getting fewer bills in the mail will reduce stress and seeing real progress will keep you motivated.

You are at an ideal time in your life to get out of debt and stay out of debt so that you can work towards living your dreams.

Good Luck,

Matt

This was a great question asked on Mint.com – see my answer and other in the Mint Answers section.

Personal finance coach, Matt Kelly, lives in Durango, CO.  He blogs here at www.debtfreetribe.com and writes a monthly newspaper column called Money Savvy.

Today I’m going to review the United First Financial The Money Merge Account® Program; also know as a MMA for Money Merge Account.

They say, “Eliminate Your Mortgage.
The Money Merge Account program pays off mortgages faster using an interest-cancellation strategy. While many homeowners realize that they can save money by reducing the interest rate they pay on their loans, few think about the length of time they will be paying. The Money Merge Account program combines innovative software with traditional banking systems and personal coaching to drastically reduce your mortgage term and minimize your interest.”

So far so good; I totally agree with paying off all debt.

So how does the MMA system work?

First buy their system for $3,500.

Then they say the user will

1. Need a deposit account; usually a  checking or a saving account.
2. What they call a Facilitating Account which is a savings account or a Line of Credit.
3. Need their software to tell them when to transfer money between accounts.

What I’m not liking here is the idea of using debt to pay off debt. Not to mention that banks aren’t really excited about Home Equity Lines of Credit at this time.

What I’m seeing is that if you were spending less than you make the software might have you fill the facilitating account with surplus money and then pay off debt with that money.

Or as I saw with friends who bought this program, for $3,500, the software told them to pay off a higher interest rate truck loan with their Line of Credit and then there was nothing they could do until the paid down the Line of Credit.  All that advice for $3,500?

One of the reasons they say you can’t do this yourself is that it’s too complicated and requires very sophisticated software.

I just don’t agree – you could do this with a pencil, paper and calculator and some basic personal finance principles.

My opinion is save the $3,500 and do it yourself.

Here are the steps I teach in my personal finance class:

1. Save a $1000 Emergency Fund
2. Establish a budget
3. Start using the cash envelope system
4. Begin paying off your non-mortgage debt from smallest balance to largest
5. Consider selling anything that will take longer than 18 months to pay off
6. When your done paying off your non-mortgage debt, grow your emergency fund to equal 3 – 6 months of living expenses
7. Begin saving for financial independence
8. Begin saving for college, if you have kids or someone you want to send to college
9. Begin saving a $20,000 major medical fund
10. Begin paying off your home aggressively

I tend to put paying off your home last in the the process, but that is because I value peace of mind over not having a mortgage.

Don’t get me wrong – I want that mortgage done ASAP too.  I just don’t happen to believe in magical software and borrowing to pay off debt.

Found money is any money that comes to you unexpectedly…money you did not necessarily earn as Jimmy Buffett would say.  And there are 3 things you must do every time you are lucky enough to fine some money.

I’ll start by describing what you should not do.  A volunteer firefighter in Colorado won a $1.2 million home in Maryland.  After selling the home and paying the taxes the found money amounted to about $200,000.

So what did she and her husband do with their found money?  They took $50,000 and bought a new truck, paid off some debt and saved the rest.

• $50,000 for a new truck.  Not a good choice.  The truck will go down in value fastest in the first years of ownership.  I would have suggested buying a 2 year-old, low mileage truck.
• Paid off some debt.  I would have suggested paying off all debt.
• Saved the rest.  Good and I would suggest it go in an emergency fund.

The 3 things you must do when you get found money are:

1. Establish a $1000 emergency fund.
2. Catch up on any past due bills and if there are none then use it to pay off debt.
3. If you have no debt, other than a mortgage, then use it build your emergency fund to equal 3 to 6 months of living expenses.

Following these 3 steps make sure you are on the path to financial independence.

Use this tool to determine your personal finance grade.

How Healthy Are Your Finances?

It’s time to change your vacation plans if you see any of these red flags.  And by change your vacation plans I mean – plan a less costly vacation.

These are by no means all of the possible budgeting red flags, but they are common. If you notice that

1. You are unable to pay cash for your vacation – using a credit card is borrowing money.
2. You don’t yet have a minimum of a $1,000 emergency fund.
3. Going on vacation will cause you to stop paying extra on your debt payoff.

Then it’s time to go back to the planning stage so that you can design a vacation that you can truly afford.

I understand that it’s important to rejuvenate by taking time off from work even if you are focused on getting out o debt.  However, ignoring these red flags can make it even harder to get out of debt.

Some of the ways to reduce the cost of your vacation are to:

1. Stay closer to home to reduce the cost of getting there.
2. Reduce the number of days you’ll be away from home.
3. Stay home and be a tourist in your own town.

If you watch for these red flags and adjust accordingly your vacation will be relaxing and fun instead of financially stressful.

Related articles:

• Inexpensive 2-week vacation (mytotalmoneymakeover.com)