To improve your finances in 2015, start with a budget

This was originally published on Monday, January 5, 2015, in the Pacific Daily News. Click here to subscribe to the PDN.

Question: My New Year’s resolution is to improve my finances this year, but I just don’t know where to start. I feel overwhelmed and frustrated. Do you have any ideas that can help?

Answer: There is a lot to consider when you are planning your personal finances. The new year is always a great time to start making changes. Take advantage of the New Year’s tradition of making resolutions. Many make resolutions to lose weight, stop smoking or to go back to school. Resolutions aren’t only for personal physical changes, but also can be made for your personal finances. After all, resolutions are goals.

Before you make any goals, you need to know where you stand. Research your past spending trends and create a budget. A budget is a spending plan that will help you meet your goals. Start by calculating your monthly income. Your income should include your wages, tips, child support, alimony and any other money that you expect to receive.

Next, determine your monthly expenses. Expenses are usually broken down into fixed or variable expenses.

Fixed expenses are those that do not change and remain the same. Such as rent/mortgage, insurance (car, home, health), loans (student, car, personal) and some utilities. Some of your fixed expenses may be paid bimonthly, quarterly, biannual or even annually. These include income taxes, car registration or real estate taxes. Although you do not pay these monthly, you still need to include them into your monthly budget. Take the yearly total of the expense and divide it by 12. This will be the average monthly expense.

Your variable expenses occur regularly but fluctuate month to month. Variable expenses include utilities, food, gas, clothing, entertainment and hobbies. Because they vary, estimate their yearly total from last year and divide it by 12. The more expenses you list, the more accurate your budget will be.

Take the total of your expenses and subtract it from your income. The total will either be a surplus or deficit. Does this number accurately portray what you are left with at the end of the month? If it doesn’t, you will need to go back and review your budget until it truly reflects your monthly spending. If there is some money left over, you can use it to pay down debt, contribute it to a retirement or emergency fund, or just simply save it. If your budget breaks even or is negative, review where you can cut back on an expense.

It is important to be honest when creating your budget; it is the only way you know where improvement is needed.

People are shocked to see that it is the little expenses that add up. Many people have no idea how much they spend on eating out for lunch every day until they multiply the cost of a lunch by five (work days), then multiply that by four (weeks in a month). They then quickly see that it adds up. The same goes for your daily coffee, soda, bottled water or cigarettes.

The spending plan you created can also be used to predict different outcomes.

Try recalculating your budget by cutting back in areas that really are not needed or increase your income from the raise you are expecting.

Use these projected budgets to help you decide what areas you want to improve and what financial goals you want to achieve.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at http://www.moneymattersguam.wordpress.com.

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Preparing your finances for home ownership

So far, Money Matters topics have been determined by conversations I’ve had with clients, current events or simply what is going on in my life. My wife and I recently completed construction on our new home and closed a mortgage on it, so I’d like to share some insights into the process and tips on assisting you with owning a home. July will be dedicated to preparing for owning a home. If there is a topic you’d like me to cover, please email me at moneymattersguam@yahoo.com

For many families, there often is no greater financial goal than owning a home. Any major goal benefits from some thoughtful planning,and this certainly is true about the journey to home ownership.

In these next few columns, we’re going to talk about how you can begin preparing your personal finances for home ownership. When your finances are in good condition, you’re more likely to have access to the most favorable rates from financial institutions. Those rates can make an enormous difference in the amount you spend and save over the life of the mortgage.

Debt

One of the first steps you should take in preparing fora mortgage is to pay down your existing debt.This debt can affect your mortgage application and timeline in a number of ways. Here’s how:

Your debt-to-income ratio.  Financial institutions want to see that you have the financial capacity to pay your debts over the long run. One way to measure this capacity is to look at your debt-to-income ratio, or the amount of your total monthly debt obligations (including your mortgage expenses), compared with your gross income.

Ideally, your total debt obligations should be less than a third of your gross monthly income.  A lower level of debt is even better,both for your mortgage application and your personal finances.

Your credit score.  Debt affects your credit score, which in turn affects your mortgage application.

The amount of debt you owe counts for 30 percent of your credit score.This part of your score is determined, among other factors, by the amount of credit that you use, compared with the amount of credit available to you. The quality of your credit is a major consideration in your mortgage application, and the less you owe, the higher your score will be.

Saving.  The more debt you have, the harder it can be to save. This is a time when you need to save, because a down payment gives you an enormous advantage.  Credit card debt in particular is draining, because this debt often combines high interest rates with very low minimum payments that read just every month.  Under those circumstances, you can end up paying more interest than you anticipated, and that interest could have otherwise been used for saving.

Paying it off.  When you’re thinking about how to pay off your debt and improve your future mortgage application, it can help to think first about the sources of your debt.

Expenses.  First, consider the items that you purchase. What are you spending your money on?  Are these expenses basic needs, or are they discretionary items?  Which expenses can be cut? It can help in this case to look at your past statements and receipts for an accurate account of your spending.  Cutting expenses allows you to stop overspending and create room in your budget for paying down debt.

Habits and attitudes.  Are there circumstances that trigger your impulse to overspend? How much attention do you pay,day to day,to your spending and balances? A budget program or notebook helps you pay attention to your spending, as you record and categorize your transactions. When you identify causes and circumstances behind overspending, you can start thinking about healthier financial alternatives.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com 

Prepare your teen for college living

Graduation may be approaching for your son or daughter, and he or she could be headed off in one of any number of directions. No matter what the destination, your teen needs to be prepared to manage the costs that are going to come.

A better understanding of the cost of living can motivate your teen to think more carefully about the future. Life after high school is a crucial time, when young adults explore different directions they can take for a career, and start amassing the education and training they need in order to set those careers in motion.

Knowing the costs they can expect when they live on their own can help them stay focused on their long -term career goals, and help them more effectively manage the costs they have during education and training.

One way to introduce the cost of living to your teen is to show him or her your family budget. Your teen will be able to see an overview of basic living expenses, and also see the planning and management that have gone into your household budget. You also can walk your son or daughter through major financial decisions your family has made, and discuss what you did to overcome any financial difficulties.

Costs change with inflation and other factors, and your teen’s immediate budget in the years after high school won’t be the same as a family budget. But your son or daughter will at least have a rough idea of future costs, and have an example to follow in managing those costs.

Here are a few examples you can start with:

Bill payment list or monthly budget.

Your monthly budget should include all of your expected bills for the month, as well as the total amounts that you spend on categories like groceries, dining out, entertainment, household, etc. It also should include your long-term savings goals, subtracted from your account in monthly or bi-weekly increments.

In lieu of a budget, your bill payment list can give your son or daughter a quick snapshot of your family’s housing costs, utilities, auto loan costs, and other long-term obligations they can expect in the future.

Family goals. If you have a list of goals that are outlined and prioritized, you also can show this to your teen. It can be heartening to see the progress that your family has made, and it also can give your teen an example to use in creating and managing a personal list of long-term goals. This goal list will provide a larger overview, covering a longer period of time than your monthly budget.

Budget tracking. You already may have introduced your teen to a simple version of your budget tracking system, but now is the time to go into detail about your methods. This is especially important if your teen will be living independently from you immediately after high school. Financial software can simplify the process of adding, tracking and categorizing expenses in a centralized place, so it can be worth looking into for you and your teen.

After you’ve reviewed the family expenses with your teen, you can help your teen build a personal budget as he or she starts a new life.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii.  You can email him at  moneymattersguam@yahoo.com.

Control impulse buying

Spontaneous purchases are fine if you have the funds to spare. But if you find yourself going over your limits on your credit cards, stuck with overdraft charges on your bank accounts, or simply unable to save for your larger goals in life, it’s time to rein in your spending habits.

Here are some things you can do:

Check your finances. Before you buy any major, unplanned item, give yourself permission to check your budget and account balances first. Convince yourself to walk out the store, go home, and look at your finances. If you didn’t have it on your mind before you went into the store, then it’s not an immediate need, and it can wait a day or two.

After your bills, your savings goals and your needs for the month, can you still afford the item right now? If the answer is yes, then you can buy it, worry free. If the answer is no, you’ve managed to hold yourself in check.

Take some time to cool off. You need time to see if the item is a true need or an impulse that you’ll regret later.

Try adding the new item to a list of purchases you’ll make next month, after you’ve paid your bills and socked away savings. Even the act of adding the item ta list can be enough to alleviate pressure to buy it right away. If you still want the item later, and you can afford it after you’ve taken care of your necessary expenses, you can buy it with the certainty that your finances are still in good shape.

Set aside a small amount every month for impulse shopping. Having a certain amount of freedom to spend on small things you enjoy can be more sustainable than simply trying to control all of your spending at once. And if you set a limit on your impulse shopping, that’s still a greater degree of control than you had before.

Avoid temptation. If you know you’re tapped out for the month, and that you’re prone to impulse shop with your credit cards, try to stay away from the places that are likely to set off your spending habits. If you tend to shop on the Internet, you can download a website blocking application that can temporarily shut off access to websites you choose. Those controls can help you get to the end of the month with your budget intact.

Keep your budget with you. If you can keep electronic notes on your cellphone, try keying in your budget for the month.

There’s an opportunity cost to every impulse purchase you make. Items on your budget will have to wait until the following month, savings might be deferred, or you could be giving up a low credit card balance. If you can see those opportunity costs in front of you as you shop, you can make better, more informed financial decisions.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. You can email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at http://www.guampdn.com

Habits that help you stick to a budget

With a few tools and habits in place, you’ll find that it’s not difficult to stick to your budget. Here is what you can do:

Pay your bills at the same time. Even when you have multiple due dates on your list, it never hurts to pay early. Schedule your bill pay sessions immediately after your pay periods for the month, and pay them all at once. You’ll simplify tracking for your budget, avoid late fees, and feel immediately secure that your fixed expenses are taken care of.

Save your receipts and track your cash. Hold on to your receipts, and keep notes on your cash expenses. Even when you use your debit or credit card, some expenses can take a while to show up on your online statements. With receipts or notes on hand, you’ll be able to find your current balance at any given moment.

Use a budget spreadsheet to track your spending. On a piece of paper or a spreadsheet document, list your categories, such as fuel, groceries, dining out, entertainment, personal items, household, gifts, etc. Make sure this list is tailored for you. In the next column, add your budget targets. To the right of your targets, you can draw a grid, and whenever you spend in a particular category, you can add that expense to a box on the category line.

With this spreadsheet, you can periodically check to see whether you are coming in under budget, by adding up the boxes on the category line, and comparing them to your target. You can carry this list around with you in your wallet as a reminder, or you can update your spreadsheet every week to see how you’re doing. When this kind of attention becomes a habit, it’ll become much easier for you to consistently come in under budget.

Use financial software. A personal finance program like Intuit’s Quicken can simplify things, by eliminating some of the legwork and manual calculations involved. Quicken allows you to download transactions from your financial institutions, or enter them manually, so you’ll have an easier time tracking your current balance. You can choose a budget category for each transaction, and Quicken will total the amount of expenses in each budget category when you decide to pull up a report.

Try using cash. If you find that you are frequently overspending, in spite of laying out a budget, it could help to use cash. If you put away your credit and debit cards, you can’t be tempted to use extra funds and spend over your budget. There is another good reason to use cash: that money in your hands can be harder to part with, compared with a card. You might be much more attuned to its value and its limits, when you can count how much you have left for the month.

Split your discretionary spending fund into the number of weeks in the month, and try carrying enough cash to cover that week. You can’t overspend if you don’t have the means on hand.

Remember to reward yourself. Leave some room for fun in your budget. Try shifting fun money toward the end of the month or pay period, so it doubles as your reward for sticking to your budget. It’ll keep you motivated and keep your budget sustainable

Michael Camacho is the president and chief executive officer of Personal Finance Center. He has more than 18 years experience in retail banking and with financial institutions in Guam and Hawaii.

Cutting your budget to meet your goals

With a strong budget, you make the most of the resources you have. You can be certain that you are steadily working toward your most important goals, and that every dollar you earn is going exactly where it needs to go.

Over the past few weeks, we talked about how to get started on your own budget, by recording your current income and expenses. We also went over steps you can take to set and prioritize your goals.

This week, we’re going to combine your financial situation and your goals into a workable budget.

First, simply add your goals to your list of expenses, and subtract that total amount from your income. Now you know what you need to cut from your expenses in order to make room for your goals.

If that figure is a little overwhelming for you, try to be patient. Small cuts from the different parts of your budget add up quickly.

Next, go through your budget, line by line, and brainstorm about different things you can do to save with each expense. You don’t have to commit to those ideas now — just recognize them as options and try to calculate out your savings.

Do you really need it? This is the basic question to ask yourself as you go through the different areas of your budget. It could be that you consistently choose a more expensive version of an item or service when a cheaper alternative exists. Figure out why. Understanding the reasons behind your habits can help you adjust your behavior to fit your overall needs.

Make cuts to specific categories. Pay attention to your budget categories, especially the categories where you know you’re most likely to overspend. If your expenses are high in a subcategory, like DVDs in entertainment, try isolating that subcategory in your budget.

When you’re making cuts in these areas, try to translate the dollar figures into spending behavior — for example, how many times per week you purchase a particular item. Instead of trying to go without, you can simply slow down your spending, so that you’re left with a lower monthly figure. You can then reroute that extra savings toward your goals.

Stay realistic. It doesn’t help to come up with budget targets and then ignore them because they were too strict to begin with. Make small cuts at first, and then gradually increase them.

Take a closer look at your fixed expenses. While it can seem like these expenses won’t budge, there are always savings to be found.

While your minimum credit card payments can be considered a fixed expense, those minimums will go down drastically if large payments are made. You can save on utilities by talking to your family about shutting down appliances when they’re not in use, and buying energy efficient appliances. With cable and cell phone plans, shop for better deals once your service contracts have ended.

Adjust your withholding. If you get a large tax refund every year, you’re withholding more income for taxes than you need to. If you withhold less, you’ll free up some income, which can be used for your goals. Just be careful — you don’t want to end up owing taxes. Talk to a tax professional or visit IRS.gov’s withholding calculator online to check your numbers.

Michael Camacho is the president and chief executive officer of Personal Finance Center. He has more than 18 years experience in retail banking and with financial institutions in Guam and Hawaii.