Budgeting: Your Key to Wealth

CIE Class 2013

What is a Budget?

An organized way of keeping track of your spendings, earnings and savings.

It’s telling your money where to go, not wondering where it went.

Budgeting Basics Money is active (it’s constantly moving) You must do a written plan for your money every month. You know

how much you have to spend, then you assign that money to your bills, savings, and other areas you will spend money on (groceries, eating out, etc)

You must balance your bank account.

Sounds easy right??

Then why don’t people do it? The term budget has a “poor” association to it. Truth- you’re just

telling your money where to go, so really it’s smart and leads to wealth.

They never had a budget that really worked. Truth- it typically takes 3 months of trial and error to get into a budget that works for you.

Many people don’t want to face the reality of where their money is going. Truth- it’s typically not as bad as you think it might be, and making and sticking to a budget gives you the power to change it.

Problems with money management When people don’t keep track of their money they get into debt. Personal

finance is 80% behavior and 20% head knowledge.

Overdrafts (going into the negatives) is a sign of sloppy and lazy money habits.

1/3 of all bank revenue (money the bank profits from) comes from overdraft fees (those non-sufficient funds we talked about). That’s money that could have been in the persons pocket but was paid to the bank because of laziness!

It’s elementary level math, all self-sufficient adults should be able to add and subtract.

29.5 billion dollars were spent on overdraft charges in 2012!

Using a debit card and/or credit cards instead of cash to pay for things.

Cash has an emotional “feeling” to it. You feel the loss of it when it’s gone. Using “plastic” does not. You spend and spend and never feel the “hurt” of that money actually leaving your pocket. There have been scientific studies proving that when you use cash it affects the pain receptors in the brain, when you use plastic it does nothing.

Question: Have you ever saved up money for something or had to pay someone back for something and you “felt” that money being used? For good or bad? Have you taken better care of something you saved up for?

http://www.youtube.com/watch?v=7NaNbylnJVo (using cash video)

What a budget can do for you: It will remove many of the money fights from your

marriage/immediate family. It will remove much of the guilt, shame and fear that is

associated with buying necessities like food and clothing.

It will show you what areas you are overspending in. It will give you a sense of power and control over your

money. It’s organized so you can easily see where your money

has been going and you can make necessary changes. Microsoft Excel is an easy program to use to make a budget.

If you use the envelope system for certain areas, it works because you have to do it!

Dave Ramsey’s Baby Steps If these steps are followed you will lead you to financial peace, security and

wealth Save $1,000 in a beginner emergency fund. ($500 if you making less than

20,000/yr).

Saving must become a priority. Keep in mind you must pay yourself first (your necessities).

Pay off all debt (except your house) using the debt snowball

Put 3-6 months of expenses into savings

Invest 15% of your household income into Roth IRA’s and pre-tax retirement plans.

Save for your children’s college, if you don’t have children put more into your own savings.

Pay off the house early

Build wealth and give

Baby Step #1

http://www.youtube.com/watch?v=PjbF7lgXXfY

Baby Step #2

http://www.youtube.com/watch?v=zZP9aflH7MY

http://www.youtube.com/watch?v=dCeFGMi0BnM

Question: Why does the debt snowball work better by starting with the smallest debt first?

Steps to get out of debt

Stop borrowing more money, cut the credit cards!

You must save money

Sell something!

Get a part-time job or work overtime.

Believe you can do it!!!

The envelope system How it works: you put your budgeted amount in different

envelopes (one for eating out, one for groceries, etc) You can’t spend more than your allotted amount and you

can’t borrow from one envelope to pay for something in another.

When you’re out of money, no buying until the envelopes are filled the next time. You just might have to tell yourself “no, I can’t get it yet.”

Video Clip:

http://www.youtube.com/watch?v=XwO_7OyowM8

Do you think you’d spend less if you had to use a limited amount of cash?

Saving MoneyCompound interest video clip http://www.youtube.com/watch?v=eIOUGZcmauo

Look at the Ben and Arthur example on saving and compound interest on your sheet.

Question: What is compound interest? What’s the key to making it work?

Key to wealth building: Discipline is the key ingredient Building wealth is a marathon not a sprint, it doesn’t happen

overnight, it takes time. 40 yrs. of saving 100.00 per month (that’s only 25.00 a week)

every month at 12% interest will build 1,176,000. If you start at age 15 you’ll have this amount when you’re 55 years old.

Compound interest is AWESOME! You must start NOW!

Buyer Beware Instead of financing items or borrowing money (using

credit cards) to pay for things, pay cash! Example: if you finance a dining room set from a

furniture store with payments set at 211.00 a month for 18 months and they are going to charge you 24% interest you end up paying $5,064 for that furniture set.

If you would have saved the same amount per month (211.00) for 18 months (the same time frame of you paying it off) you would have been able to pay for it in cash.

In todays culture we often have the mindset of I have to have it now. If you don’t have the money, you have to tell yourself NO! You can’t live the lifestyle of a rich person when you don’t have the income of a rich person.

Marketing TacticsBeware of these tactics that companies use to reel you into buying something:

They are very good at what they do.

They make their product look like a necessity.

Ways they sell to us: Personal (one on one) selling (they act like your friend)

Financing and Convenient payment plans (most people that purchase under “90 days same as cash” do not pay it off in 90 days, then they are under a payment plan with high interest with the interest starting from day 1 not day 91. Also the payments that they send you as a bill are not going to equal you paying it off in 90 days)

-Store loyalty and reward cards, store debit and credit cards, mobile payment options (no emotional connection with this type of spending so you spend more than you would with cash)

TV, radio, magazine, and internet advertising (they spends millions on this! A 30 second commercial costs $300,000 ($10,000 a second) whereas the cost to product an hour of prime tv costs $83.00 a second.

Product positioning (brand recognition, color, shelf positioning and packaging)

They make you think there’s only 1 left so you must get it now.

They’ll tell you beforehand you’re going to have “buyers remorse” after a significant purchase ($300+), to make you feel normal and not cancelling your purchase.

Credit Myths

Myth: You need to have credit cards or a car loan to build up your credit score.

Truth- Your credit score can be calculated by paying bills on time. You do not need to have credit cards or a car loan to do this.

Myth: Debt is a tool and should be used to create prosperity.

Truth- 7/10 of the Forbes 400 richest people in North America started with nothing, 75% replied staying debt free is the key.

Myth: You need a credit card in case of an emergency.

Truth- If you have that 1,000 emergency fund saved up, that is for emergencies! You don’t need a credit card. PS Christmas gift buying isn’t an emergency.

Wise Buying Strategies Wait overnight before making a purchase, sleep on it and see how you feel in the

morning about buying it.

Carefully consider why you are buying that item.

Remember that no amount of stuff equals happiness. You can buy “fun” but you cannot buy happiness.

Never buy anything you don’t understand (insurance, etc)

Weigh your options on spending vs. saving for that big purchase.

Seek the counsel of a trusted family member or friend before making a big purchase.

Don’t buy a new car, they lose value very quickly as soon as you drive it off the lot.

Rules of Negotiating:

Use the power of cash

Understand the use of walk away power.

Silence is power

Say “that’s not good enough” when negotiating on items like a car.

Identify the “good guy, bad guy” technique (the salespeople really aren’t your bff, they are trying to make a sale.

Negotiating Video Clip: http://www.youtube.com/watch?v=PBJ1LDA_vSk

Credit Questions:

Why do items eventually cost you more if you pay for them with a credit card?

Why should you run your credit report every year? What is shown on it? (you can do this for FREE, don’t pay to do this)

What does it mean to have good credit? If you don’t have a credit card what else can they look at to approve you for a home loan?

Minimum wage info

What does the term minimum wage mean?

How much is minimum wage in Indiana?

Is minimum wage the same in all states? Why?

If someone worked full time (40 hrs) on minimum wage how much would they earn annually (for the year)?

(Remember taxes aren’t taken out of that yet)

Get your education and make way more than minimum wage!!!! Start this program now and you’ll live debt free and you’ll end up very wealthy.

FYI: If your parents would be interested in doing a session of FPU, Northside has a couple every year. $90.00 (this pays for the workbook and holds you accountable to go).

To sum it all up

What jumped out at you during this lesson? How can this affect your future life?

Now complete Seth’s Budget WS (due Tuesday)Quiz over this stuff is on Tuesday, 11-11-14