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Personal Finance

Personal Finance Covers the Following 8 Areas:

1. Income

Income is the money that you earn from your job, your savings, your investments, and royalties.  The goal here is to earn more income than you spend on bills and entertainment.  Your focus should be to balance your incoming and outgoing money each month, hopefully with some money remaining for savings or investment.

How do you do this?  The first step is to identify all of your income sources and amounts.  These amounts may vary if you work overtime on occasion or get a temporary or seasonal job.  You should use your consistent earnings for your budgeting.  All extra earnings will be considered budget bonus money at the end of each month.  We will discuss what to do with that bonus money later in this article.

2. Living Expenses - Bills/Budgeting

Once you have identified all of your income sources and amounts, the next step is to identify all of your expenses.  This step is more difficult due as there will be more items to identify and determine monthly costs.  Examples of these items are:

  • Rent/ Mortgage payment.
  • Car loan or lease payment.
  • Student loan payment.
  • Credit Card payment.
  • Insurance payment.
  • Water, Telephone/Cell phone, Electric, and Gas Utility bills.
  • Internet, cable, satellite, streaming movies or television shows membership fees, etc.
  • Groceries and Dining out.
  • Gasoline for your car or public transportation costs.
  • Household needs like cleaning supplies, lawn maintenance, etc.
  • Personal needs like bathroom items and clothing.

Your next step is to determine your entire amount of outgoing expenses and compare to your income.  Your income NEEDS to exceed your expenses.  If not you are living in debt and it will only get worse.

If you are out of balance, meaning you have no money left at the end of each month after paying your bills and debt, then you need to change something.  You will either need to increase your income to offset the out of balance condition, or you need to reduce your outgoing expenses.  You will need to either get a part-time job or find other ways to increase your income, or you need to review your list of the eleven bullet items above to figure out how to reduce or eliminate those payments.

Here is a link to some free budgeting type templates I have on this website and Pinterest:

Free Finance Related Templatesand on this Pinterest Board.

3. House Mortgage - Long Term Debt

Long Term Debt is normally defined as a loan that is scheduled to take more than five years for us to payoff.  Mortgage loans can come in 15, 20, or 30 year time frames.  Most people will start out with a 30 year mortgage as this allows a lower monthly payment.  My first house mortgage was for 30 years.  Around 3 years later the mortgage companies lowered their interest rates by more than 2 percent of my current mortgage.

I asked a friend who worked at my bank if I would save money long term by refinancing my existing mortgage to a new one with the lower interest rate.  She crunched some numbers and advised me that if I refinanced now for the lower interest, even after paying the refinancing fees, I would still be paying less over the life of the new mortgage and save money. 

That sounded good to me until she brought up another option.  In my case, refinancing my mortgage now, but to a 15 year loan would allow me to get the lower interest rate AND have a shorter time to hold this debt.  The difference in monthly payments for me would be actually raising my amount by only $35 than I was currently paying.

So I had two options to consider, the first being refinance to the lower rate with a 30 year loan and have lower monthly payments, or refinance to the lower rate with a 15 year loan and raise my monthly payment by $35.  Of course, I chose the second option.  They key take away from you is to know your current interest rate and watch for lower ones to come along.  When one does that is 1.5 to 2% lower, you should consult a mortgage specialist to identify all of your new options that will save you money in the end. 

Paying off your mortgage early is beneficial as it will free up that monthly mortgage payment for you to use elsewhere AND you will OWN your house.  Just remember to pay your taxes and insurance on time as you will no longer have the mortgage company doing that for you.

What about the Schedule A tax write off of the mortgage interest?  Some consultants recommend you keep the loan for that benefit.  You will need to determine if that tax write-off is more beneficial to you than OWNING YOUR OWN HOME outright and getting RID of that DEBT!

4. House/Apartment Rent

If you are renting, be aware to take care of the property as it does not belong to you.  Any time you see something that needs repair, you should report it to the lease manager immediately to limit the damage and cost for repair.  Also remember that when you vacate the apartment, it must be in good order or the lease manager will with hold repair and maintenance fees from your initial deposit.

Read your copy of the lease carefully and keep a copy handy.  This is a signed contract agreement between you and the leasing manager.  It is a legal document that spells out the expectations of service and responsible party duties.

Renting a house or apartment is appropriate for the short term.  If you do not expect to live in the same area for more than eight to ten years, then renting may be the way to go.  If you are settled in your favorite area, then you may want to start looking for a house to buy or you will never reach financial independence.  You will keep making monthly payments to a stranger and have no savings or investment as a result.

When you buy a house, your monthly payments go to building equity in your house.  That is money you get back when you sell it later on.

5. Auto Loan/Lease - Short Term Debt

Most auto loans are for 5 years and auto leasing for 3 years.  The important difference between the two options is that after 5 years with a loan, you own the car.  The leasing option is good for those people who always want to drive a car that is almost new.  Since you do not own the car, the mechanical expenses belong to the dealership leasing it.  There are restrictions around leasing, which include a limitation on miles that you are allowed to drive the car during your lease agreement time frame.

Leasing a car can guarantee one thing though; you will ALWAYS have a monthly car payment.  This fact will limit your ability to reach financial independence.  

Buying a car allows you to own a car and have no car payments when your loan is paid off.  I bought my Jeep on a 5 year loan.  The financial guy offered me the lease option.  When I told him no, he asked why. My answer was simple; I want to own the car when the loan is done.

I made extra payments and was able to pay off the loan in 3 years instead of 5.  Because of that strategy I have been able to save the money I was using for the car payment for the past 14 years.  Yes, I still have my Jeep.   On occasion it requires some maintenance, but the money saved over that time period more than outweighs the occasional trip to the auto parts store or mechanic.  I also have money saved in an account towards my next car purchase, whenever that will be.

6. Credit Card Charges - Short Term Debt

I think we all can agree that everyone need s to have at least one credit card in their name for our credit status and credit worthiness for future loans.  This kind of debt is known as cyclical or revolving.  It is intended to be short term debt.  Unfortunately some people carry the debt far too long. 

Let us do a quick comparison between credit and debit cards.  Debit cards are to be treated as electronic checks.  The money charged against them is immediately taken from your existing funds in your bank's checking account.  If your debit card information is ever stolen and used by a nefarious person, you have to go to the bank to fill out a stolen debit card form.  Then you have to check all the charges and identify the false ones, hoping that those charges did not cause your real charges to bounce and inter additional insufficient funding fees from the bank and the business which did not get their payment.

Credit cards are designed differently.  If a nefarious person steals your credit card information and places false charges against your account, you may be notified by the credit card's fraud department first.  If not, and you see the false charges show up on your account, you call the hotline and report the false charges and that your card has been compromised.

The credit card agency will review and remove the false charges in almost all cases and send you a new card and change your account number.  The false charges never actually hit your real cash at the bank, unless you already paid your credit balance before you noticed the false charges.

We use our debit cards for the same purpose we used to write checks for.  We use debit cards for local groceries, gasoline, dining, and shopping.  We use our credit cards for all online shopping and travel related costs.  After we receive our products purchased online or return from traveling, we logon to our online credit card accounts and confirm every charge.  Then we pay the credit card charges in full.  We do not carry charges from month to month as that only adds interest payments to our accounts.

A note:  when traveling or using your credit card for a special purchase (like one time furniture buy), it is good practice to call your credit card's fraud department to let them know that your charging behavior is going to be different.  This will help prevent the unintentional disabling of your card while traveling due to the strange charges flagging your account as potentially compromised.

7. Student Loan - Long Term Debt

Student loan debt is much the same as mortgage debt as it is long term debt.  The intention is to pay off this debt slowly over several years.  Most student loans carry a smaller interest rate than other loans, but we are still legally responsible to pay them off as scheduled, if not before.  Again, like the mortgage loan, this loan debt is normally a one-time debt that once paid, it is GONE.

If you have more than one student loan at the time you graduate, you will want to consolidate them all into a single monthly payment.  The single payment will be more manageable for you.  There is a grace period after you graduate before you start making payments, usually around 6 months.  During those 6 months you are expected to get a job and start settling in to your new life.  Not everyone gets a job during that grace period, but the rules are the same. 

When you were in high school, you most likely started looking at colleges and scholarships in your junior year.  You were being proactive and a planner.  The same should be done before you graduate college.  You should be looking around for your target employer and finding out what the hiring requirements are.  You need to check out at least 5 potential employers and visit their websites often to learn as much about the companies as possible.  

Your college may already have an agreement with employers to provide internships to college seniors.  Discuss these with your college guidance office so you know what employment options are available to you now.  Make your plan.

8. Saving/ Investing

You remember the monthly leftover Bonus money from your budget?  Your bank offers savings accounts.  These are accounts that you contribute money into and receive a small interest payment each month in return.  These accounts are a good tool to help you start saving money for various reasons.  You may need to save money for a down payment on a car, a new house, or an upcoming trip.

You can have more than one savings account at your bank.  You should have a separate account for upcoming expected large purchases, such as a car, motorcycle, or new boat.  You will also need one for unexpected emergencies. 

The third type of savings account you will need is your employer sponsored retirement account and/or Individual Retire Account (IRA).  These accounts are essential for your retirement planning.  I have dedicated a webpage for that on this site too. You can click here to navigate to it.

Investing accounts are different.  You contribute your money directly to this account with the intention to purchase shares in companies (also known as stock), or groups of companies (also known as funds).  These investments are normally held for over 1 year to avoid the higher taxes charged on short term investments.  If they are held more than 1 year, they are considered long term and have a smaller tax.  People can also buy corporate or municipal bonds.   

The goal of investing your money in stocks or funds is to grow your money when the stock prices rise and when the companies pay dividends back to the owners of the stock.  Not all companies pay dividends, so your growth is driven by the profits earned by the companies.

I have authored a book and dedicated a page on this site to help with dividend growth investing.  You can click here to navigate to it.

Ebay also has several "Dummies" books for more educational resources.  I found books to help so added a RSS feed here.  Just click one of the results in the feed below to find them all.