Debt Management

Over the last two weeks, Powercat Financial Counseling has been providing you with some useful financial tips on how to better manage your money. So far, we have discussed the importance of having financial goals and why people should integrate budgeting into their everyday lives. This time, we are going to talk about debt management as a necessary step for your overall financial success.

Borrowing money and having debt are a part of life. And, for the most part, debt is unavoidable. For many people, obtaining a quality education and purchasing your first house would be a daunting task without some kind of debt. In fact, capitalism was built on the extension of credit. Responsible borrowing to a very large extent is what drives the economy; higher spending leads to the creation of more jobs and higher incomes, which in turn is correlated with higher spending.

As you can see, debt can be our friend, but it can also get us in trouble. As of December 2014, total consumer debt in the U.S. is $11.7 trillion. (eg. mortgages, credit card debt, student loans, etc.).  Debt can be problematic when it used to buy unnecessary things we don’t really need, and especially when we don’t have enough income to cover our debt expenses. Debt requires a degree of self-control to avoid getting caught in the debt cycle that can last a lifetime if you are not careful.

Know How Much and Know Who You Owe

Start off by making a list of all of your debts. This list needs to include all of the creditors, total amount of the debt, due dates, and what your monthly payments are. One easy way to confirm the debts on your list is to get free credit report from www.annualcreditreport.com. You can select a free credit report from each of the 3 credit bureaus once a year (TransUnion, Equifax, and Experian).  Pulling free credit reports periodically will also ensure that there aren’t any unknown debt charges under your name.

When To Stay Away From Debt

Stay away from compulsive buying. Avoid financing a long term asset, such as a home or even a car, with a short term loan from your credit card company. The value of your home or your car will not benefit you when paying your monthly credit card bill. Moreover, borrowing long-term for a short term asset such as a home appliance can get you in trouble as well. If you take a 10-year loan to buy a brand new computer with extremely low monthly payments, you will still be paying long after the computer is obsolete.

Timely Payments

The crucial step is to pay all of your bills on time. Late payments make it harder to pay off your debt and you will be charged with a late fee. If you miss multiple payments in a row, your interest rate and finance charges will increase while your credit score will be negatively affected for up to 7 years. To make sure you are not missing payments, use a calendar system on your computer or smartphone. You can also set an alert several days before your payment is due or you can even have automatic payments withdrawn from your account so that you are never late on payments (but be sure to have enough in the bank to cover the payment). In case you miss a payment, don’t wait to pay outstanding charges until the next due date; rather, pay as soon as possible to avoid ‘missing payment’ reports to the credit bureaus. As a matter of fact, 35% of your credit score is determined by your ability to pay bills on time.

Pay More and Know Which Debt to Target First

Logically, your goal is to pay off all of your debts as quickly as possible. In order to speed up the debt repayment process, you can pay more than the minimum payment every month! Time value of money is a very powerful concept. Paying just the minimum payment on your credit card won’t get you very far and you will be mostly paying your interest cost while the loan balance won’t change much. For example, if you have a $1,000 credit card balance at 18% interest rate and you pay just the minimum each month (assuming minimum is 2% of your credit balance), it will take you over 7 year to pay off $1000 credit card balance and you will end up paying $1865 ($1000 balance and $865 in interest). If you have multiple loans, paying off the loan with the highest interest rate first would be your priority, while the rest of your debt would be paid in descending order in terms of interest rates. Paying off the loan or credit card with the higher interest rate would be a wise choice because you will be paying less in total interest on your debt. Some financial gurus even suggest to pay off smaller debts first which will drive your motivation to take care of any other outstanding debts you might have.

Understand Interest Rate Risk

Every time you borrow money, the bank will charge you an interest rate. In simple terms, interest is the cost of using someone else’s money. If you are a borrower, it is in your own best interest to get the lowest interest rate possible.  Every time you are borrowing, it is crucial to understand the interest rate risk associated with the borrowing and to understand the interest rate environment. There are variable interest rates and fixed interest rates. Variable interest rates will change and its movement will depend on market forces while fixed interest rates will stay put for the life of the loan. If you are borrowing at a variable interest rate right now and you are expecting interest rates to rise in the near future, the cost of your debt will rise as well. As  of right now, interest rates are at an all-time low, but this trend will most likely reverse in the near future as the Federal Reserve is looking to raise interest rates which will force the overall cost of borrowing to increase for consumers.

Don’t Forget To Save Money Along the Way

Paying off your credit card balance or your student loans is great, but if you are cutting debt at the expense of your retirement portfolio, you will end up disappointed in the future. A lot of employers are offering 401(k)s and they are willing to match a certain percentage of your salary if you are committed to contribute into your 401(k). In a sense, this is free money that you should not pass on.

Available Debt Help

If you have been struggling to pay your bills on time for a long period of time, there is help available. The first step would be to talk to your creditors and try to work out a modified payment plan that can possibly trim down your payments to a more controllable level. The second step would be to contact a debt relief company, like a credit counseling agency.  HCCI is such an agency that can help you get a debt management plan together that works for you.  They can also advise you on other options.  The other debt relief options include debt consolidation, debt settlement, and bankruptcy. These options have advantages and disadvantages so make sure to proceed very carefully.

Be on the lookout next week for more helpful tips about personal financial management during Financial Literacy Month.  If you have any questions about debt management or other financially related questions, Powercat Financial Counseling is here to help. You can make an appointment at our website: www.k-state.edu/pfc.  We provide free and confidential counseling to all K-State students.

Elvis Hodzic
Graduate Assistant
Powercat Financial Counseling
www.k-state.edu/pfc

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Creating a Budget

Now that you’ve thought about your financial goals, it’s time to determine how you’ll get there.  Before you can know how much you can save, you’ll need to know how much you have left over each month. Do you ever feel like you work really hard, but never have money? Or, do you wonder how your whole paycheck from two days ago is already gone? Budgeting may be the answer to these questions. For the second article in the four part series for Financial Literacy Month, we at Powercat Financial Counseling (PFC) will be educating you about the importance of budgeting and how to create a budget.

What is Budgeting?

When I think about what budgeting is I think about a famous quote by John Maxwell that says, “A budget is telling your money where to go instead of wondering where it went.”  Budgeting is tracking your cash inflows and cash outflows. It is a process in which you create a plan of how you want to spend your money. After you create this plan, it allows you to determine the amount of money you will have to accomplish goals you want to achieve. Budgeting is a simple yet complex task:  it takes work and discipline. It is a mindset and an attitude.

Why Budgeting Is Important

Now that we know what budgeting is, let’s discuss the importance of it. Budgeting is important for many reasons. One of the first reasons budgeting is important is due to the fact that it allows you to see whether you are spending more than you are making, or if you are coming out on top. We all want to come out with extra money, right? Budgeting is what helps you come out with extra money or break even at the end of every month. Creating a budget can also help relieve stress when unexpected things happen.  And finally, the budget will help you reach your short and long term goals discussed last week.

Creating a Budget:

If you have never created a budget, or even thought about a budget, don’t worry:  we are here to help. PFC offers an awesome tool called the, “Spending Plan Worksheet.” This worksheet is an excel document that allows you to create your own spending plan for each week, month, semester or year. The amount of time you set your budget for is completely up to you and what would be most beneficial for your situation. Budgeting is typically in the form of a three step process:

  1. First, you will estimate your income and expenses for a monthly period. For a lot of people, this is a major guessing game, because most people don’t know off the top of their head how much they are spending on coffee, eating out, gas, groceries and other expenses each month. After you have estimated the income and expenses, you should go through and decide whether your expenses are needs or wants.  A need can be determined based on what would have a consequence should you not pay it (i.e. rent, groceries to an extent, or tuition) whereas a want is one you can cut back in and deal without month to month (i.e. clothes, eating out, and entertainment).
  2. After your estimation is done, you will then begin the “fun” part, writing down the actual income and expenses. When recording your expenses, don’t forget to add in those “every once in a while” expenses such as getting your oil changed, getting your hair cut, and other activities. When you are calculating these expenses, take the amount you spend in a year on that activity and divide it by 12, since you are using a monthly budget. For example if you are doing oil changes, it costs you $20 every three months, which is $80 per year. Now that we have determined the annual amount, we divided it by 12, which equals $6.67 each month; this is what you should put away so that you are prepared for the expense when it occurs.  There are many ways to track your expenses for a given period (a month in this case). You can use the receipt method, which is where you keep all your receipts and record the transactions. You can also use bank statements, but bank statements don’t account for cash transactions, so you don’t want to forget to include those! You can also use the check register method, which is where you keep a running tab of your checking account. In this process, right after you spend money you write it down (in a register or excel sheet) so that you know exactly what you are spending and why.  You can also use wwwMint.com.  For more information on using Mint, check out our other article on the topic.  These are just a few ways of keeping track of what you are actually spending. Feel free to do what is the easiest and most effective for you. After you have tracked and written down your actual amounts from a month’s time, you will want to go through and prioritize your needs and wants again, to see if it has changed based on what is actually happening, not on what you thought was happening. In this step, most people are shocked because they are spending way more than they thought. For college students, we tend to spend way more eating out than we think we do, or we spend way more on coffee than we really should. The reason we estimate first, and record actuals second is so that you get a good feel for how in tune you are with your spending habits. After you become in tune, you can begin to change your spending habits to better fit your financial needs.
  3. The third step is to start determining what you want to changed, and how to attack those changes. This involves deciding if you want to be spending what you currently are or if you would like to spend more or less in each category.  If you have a deficit, it’s important to address it by increasing your income or decreasing your expenses.  If you have a surplus, you can decide where to put that extra money.  Once you determine where you want to start changing spending habits, you can start to create a spending plan/budget for next month.

Although there are only three steps listed, it is important to frequently update and monitor your budget throughout your whole life. By doing this, you are identifying where you may be wasting money, and where you can be putting that money.  This can help you put your money to better use to help you achieve your financial goals.

Be on the lookout in the next few weeks for more helpful tips about personal financial management during Financial Literacy Month.  If you have any questions about creating a budget or general financial management and would like help with any of those questions, please make an appointment and come see us at PFC.  You can make an appointment at our website: www.k-state.edu/pfc.  We provide free and confidential counseling to all K-State students.

Miranda McMahon
Peer Counselor I
Powercat Financial Counseling
www.k-state.edu/pfc

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Setting Financial Goals

April is Financial Literacy Month, and Powercat Financial Counseling is taking this opportunity to write a series of articles related to basic financial management.  To kick the month off, we’re starting with setting financial goals.

Planning Ahead

Setting goals, especially financial ones, can be a challenging, and sometimes daunting, task.  Having goals is important, though, in that they give you something to aim for and work towards.  To quote Zig Ziglar, “If you aim at nothing, you will hit it every time.” A good place to start is to think about your life in the future.  How do you want to live?  What do you want your life to look like?  Do you want to be debt free, buy a car and a house, start a family, or travel?  How will you accomplish these tasks and get to the life you really want?  Thinking about these things now is important.  When you graduate and enter the workforce, it is easy to get caught up in your daily routine and not give much thought to your future.  You will probably be inclined to think a few weeks or months ahead, but it might be hard to think a few years ahead.

Short-term vs. Long-term:

A short-term goal is one that is set for two years or less, and a long-term goal is one that is set for five or more years.  Some examples of short-term goals are planning for spring break and summer trips and building an emergency fund, while long-term goals might be buying a car, buying a house, or paying off student loans.  Even if you have trouble coming up with specific savings goals, you should still try to save whatever you can.  A good first goal for everyone, which should be a priority, is an emergency fund.  An emergency fund is a separate store of money which you access only in emergencies (ordering a pizza in the middle of the night because you don’t have food around is not an emergency).  If your car suddenly got a flat tire, how would you pay for it?  If you lost your job all of a sudden, where would the money come from to get you by until you get another job?  These are the types of situations in which an emergency fund would be useful.  It is recommended that you work up to having three to six months’ of living expenses saved up in the event you lose your job or are unable to work due to an injury.  This may seem like a lot of money, and depending on your situation, you as a college student could probably afford to wait a little while to get to the point of having this much saved.  Your parents may be willing to bail you out if something comes up.  But it is still a good idea to have at least $500 to $1,000 on hand in case of emergencies.  Life happens: will you be prepared when it does?

SMART Goals

When setting goals, it is important to define them well.  Your goals should be Specific, Measurable, Attainable, Relevant, and Timely, or “SMART.”  If your goal doesn’t have these characteristics, you will likely give up on it.  This is why it is important to write out your goals with these specifications and keep it somewhere where you will see it on a regular basis.  You will also want to prioritize them.  It is important to note that your goals may change over time and to review them periodically to make adjustments as necessary.  Set a reminder for yourself every few months to review your goals and see if you need to adjust them.  Maybe something came up since you set and prioritized your goals, or perhaps your goals will drastically change once you graduate; if so, you will want to make the necessary adjustments and re-prioritize.

Motivation to Save

Some people find saving to be difficult for them, whether it is because they feel like they are depriving themselves or they have loans to repay that they don’t think that they can save.  One way to save without “missing” your money is to ask your employer or your bank to direct deposit a portion of your paycheck to a separate savings account.  The general recommendation is that you save 10% of each paycheck; however, be careful not to set aside so much that you aren’t able to pay for your immediate expenses.  Every little bit adds up, so save as much as is within your means even if it is only $10 or $20 a month.  If you are able to save more than 10%, that is great too.

“If you are failing to plan, you are planning to fail,” said Benjamin Franklin.  Planning really can be a challenge, especially if you don’t know how to start.  One website that might be helpful is Sorted.org: https://www.sorted.org.nz/a-z-guides/setting-goals#s6.  It helps you to organize your goals with its “goals worksheet” and walks you through the planning and implementation process, offering tips along the way.  It even talks about goal-setting in relationships, which can be even more of a challenge than setting goals on your own.

In closing, it is important to set goals in order to achieve the life you want.  Start thinking about it now and begin developing a plan to get you there.  You will want to evaluate the short term and the long term, but allow for some flexibility in case your desires or values change.  Saving as much as you can now and building up an emergency fund will pay off in the long-run.  Be on the lookout in the next few weeks for more helpful tips about personal financial management during Financial Literacy Month.  If you have any questions about setting goals or financial management and would like help with any of those, please make an appointment on our website: www.k-state.edu/pfc/services.  We provide free and confidential counseling to all K-State students.

Rachel Vogler
Peer Counselor II
Powercat Financial Counseling
www.k-state.edu/pfc

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