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What is a Budget?

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Have you ever tried to budget, did it for a few days but gave up in frustration? If this is you, it is important to figure out why you were unsuccessful. The more effectively you evaluate your situation, the easier and more rewarding the budgeting process will be. You will also be able to able to stick with it for a longer period of time. Just imagine it.

Budgeting may not be as exciting as getting a canary yellow diamond, traveling to an exotic island, climbing Mount Everest or driving a sports car. But it is much more rewarding. Budgeting is important because it helps you navigate the seas of financial turbulence.

One of the main why people unsuccessfully maintain a budget is their lack belief about its importance. If you believe that maintaining strict spending habits is an unpleasant sacrifice, then you are likely to fail at budgeting. On the other hand, if you believe that maintaining strict spending habits helps you achieve your financial goals, objectives and dreams, then you are likely to be effective. Understand that while budgeting may seem like a sacrifice, you are more likely to reach your ultimate goals if you stick to them.

To increase you chances of successful budgeting, work on your belief system.

It is impossible to avoid the thoughts that come into your mind. However, it is reasonable to believe that you can control what stays in your mind. Maintaining the belief that budgeting is negative is a surefire way to fail at the process.

Many people refuse to budget because they believe that the very act is negative, hard and/or uncomfortable. If you believe this way, think of budgeting as a “money management plan” instead of a “budget.” Money management is much more palatable than budgeting because the management process ensures you have productive spending habits. This helps you believe that you can do what you want, get what you want and achieve your ultimate aim only if you manage the process effectively over a period of time.

Why is budgeting important?

Everyone knows that it is impossible to live without money. Having the right perspective on money is critically important, however. Guns, hammers, cars and knives are all tools. Using them as they were intended can assure you that you will be successful. However, using them in a way that they were not intended to be used can cause great harm.

Money is but a tool that is used to help you reach your life’s goals, objectives and dreams. Ineffectively managing your money can be harmful to you over the long-run. On the other hand, managing your money effectively will allow you to succeed. Therefore, you must know the true purpose of money and how to use it to effectively reach your ultimate aim. Budgets or “money management plans” show you how you spend your money and establishes a long-range plan that helps you save for the things that are important to you: a new house, a new car, an exotic vacation, a comfortable retirement, a college education for your children, an inheritance for your children and grandchildren or whatever your dreams may be.

If you have found yourself in a financial bind because your money is gone before the month ends, now is the time for you to establish a budget. Establishing a budget is very important because it helps you to live within your means and plan for the future. It also operates as a motivational tool to help you achieve your financial goals and desires in life.

What should you budget include?

Budgets have common features, but should be customized to fit your needs. It is impossible to stick to a generic, uninspiring budget. You must use common budget categories, but your actual budget must reflect your personality, lifestyle and inspiration. A surefire way to be ineffective at budgeting is to force yourself to adhere to a budget percentage that does not fit. Some may say that you should spend this percentage of your money on this category and that percentage on another category. The normal person will find this restrictive and will fall off the budget wagon in a few short days.

You should use the general budget categories that are described in the Budgeting Classroom. However, the amount of money allotted to each category should be personalized based on what you deem important. It is easy to lose your budget commitment. Doing things the way others suggest will certainly lead to failure. Therefore, stay motivated by budgeting based on your individual interests.

Setting Budget Goals and Objectives

When establishing a budget, it is very important to set goals and desires. Because they are the things you want to do, it will be easier to stick to your budget so that you can fulfill those dreams. For instance, you may find it difficult to forego your daily on-the-way-to-work stop for a latte or some other expensive coffee drink. But, keep in mind that nixing that habit adds up to about $100 a month. The money saved can be used to pay for that trip to Jamaica you’ve always wanted to take.

Often, it is easier to achieve our desires if we differentiate between short term and long term. Goals are quantifiable, meaning they are measured in general terms (e.g., I want to make sure that all of my family’s needs are met. Objectives are quantifiable, meaning they can be measured by a specific number or amount (e.g., I want to have $250,000 in my IRA when I retire at age 62).

Prepare Your Own Budget

In order to complete this section, you will prepare two budgets. Use the first budget to assess how you spend your money right now. Enter the income and expenses that accurately reflect how you spend your current status. Are there any areas where you spend money unnecessarily? Can you save money by cutting down on the amount you spend eating out? It costs about $10 to eat lunch everyday. That’s a whopping $200 per month! And, how necessary is it to have 100 premium cable or satellite TV channels?

Study this assessment budget for areas to cut and SLASH, SLASH, SLASH!

The second budget is your baseline budget. After you enter your income, enter your new budget which reflects your new expenses. You might be pleasantly surprised to see that you have more income than you thought. Now the hard part begins. It may hurt now but the benefits will far outweigh the pain once you accomplish your goals. Work hard to stick to your budget every month. If you fall off the wagon, don’t throw in the towel. Get back up and continue forward.

Saving and Emergency Funds

It is also very important to remember to establish a savings/emergency fund. Studies show that most Americans are only a couple of paychecks removed from being homeless. If job loss, disability or the death of a loved one would leave you with no resources, how would you survive? Never overlook the importance of maintaining adequate savings. Simply stated, if you do not save, you will not have money for the future. Plan, plan, plan. It is important to be responsible with what you have.

Your savings/emergency fund should cover your expenses for three to six months. After you have established and stuck to a budget, it is surprising to see how quickly that amount multiplies. After you have saved a year’s worth of expenses, it is a good idea to convert half of that amount into a retirement nest egg, a college education fund or some other investment account that will make your money work for you. Then, start the process all over again.

Why You Need One, How Much You Need, and Where to Keep It

Life is filled with challenges. Things happen. Because they often happen unexpectedly and require money, it is important to money set aside to address these situations. An emergency fund, typically equal to six months of income to take care of basic living expenses, is an appropriate sum of money to have to address any shortcomings. If you fail to maintain this amount, you are living on the edge. It is important to get started right now because we never know what tomorrow holds.

Success in building an emergency fund depends on financial discipline and your ability to resist the urge to spend the money on necessities or wants that are non-emergencies.

Why You Need an Emergency Fund

An emergency fund is a necessity to insure against financial hardships or downfalls. Too often citizens are faced with layoffs, family illnesses, disabilities and other emergencies that exhaust your typical savings. Being without work for an extended period would place undue pressure on many families, especially those who do not have large sums of money reserves or families with significant resources. Therefore, an emergency fund can defray the high costs associated with long bouts of illness, disability and unemployment.

The failure to have an appropriately funded emergency fund may force you into an uncompromising position such incurring credit card debt, taking out expensive payday loans, pawning valuables and using other fringe financial services. These are not viable alternatives to maintaining a well funded emergency fund.

How Much You Need in Your Emergency Fund

It is important, given the fluctuations of employment and the changing economy, to have at least six months of income to take care of your basic living expenses. The suggestion to hold six months or more of income is based on the consideration of how difficulty it will be to find a new job, address potential family emergencies and provide for other emergencies.

It’s best probably better to open a new account, potentially a savings account, that will keep these funds away from resources used to address daily expenses. These funds should be placed in an account that is hard to access so you won’t be tempted to tap into it to buy that new dress, pair of shoes, watch, car, tools, etc. Keeping your purposed funds separate makes life easier.

How does credit affect my life?

Credit is a very necessary commodity in today’s world. It is extremely difficult, if not impossible, to operate without credit. Of course, we all know that we need credit in order to make major purchases such as a home or automobile. But, are you aware that you also need credit to purchase insurance, establish most cell phone accounts and connect utility services in your residence? Additionally, more and more employers check potential employees’ credit and use it as a determinant in deciding who will or will not be hired for a job. Imagine you are a young high school graduate who has just gone off to college. Once you reach campus, you are bombarded with credit card offers. At this point in your life, credit is easy to get and hard to resist.

Being a starving student, it is quite easy to “charge it” when the pizza arrives. Or, perhaps you had to purchase books or other class supplies because you were short on funds. Now, fast forward to college graduation. After years of studying and hard work, your sacrifice has paid off and your dream job is in the bag – almost.

You’ve aced two interviews and the company has offered you the job. The only thing remaining is for human resources to verify your references (no problem there) and check — your credit. Oh, no! My credit! You’re not surprised when the phone call comes. Although they really liked you, they’ve decided to hire someone else with a more stable background. Or, perhaps you’re older and have attained the American Dream – job, family, nice home n the suburbs. Then, a medical tragedy strikes your family and you’re left with thousands of dollars in medical bills that your insurance company refuses to cover. Before you know it, you’re behind on all of your bills and your credit is ruined. No matter what the situation, it is highly likely that you will be forced to rely on credit, many times over, during your lifetime.

Your credit worthiness, or lack thereof, will either work for you or against you. Renewal realizes that just because an individual has bad credit does not mean that he or she is a bad person. However, your credit report represents your financial reputation. Often, it is the only way lenders can judge your credit-worthiness. Bad credit happens to good people everyday. It is a situation which, if left untreated, can spiral out of control. You must learn to make your credit work for you.

What is a Credit Score?

A credit score is a statistical scientific method that is used to assess an individual’s credit worthiness based on their credit history and current credit accounts. Credit scores were developed in the 1950s, but came into increasing use in just the last two decades.

Most lenders use credit scores to determine your credit risk. Consumers have three credit scores, one for each of the three credit bureaus: Experian, TransUnion, and Equifax. Each score is based on information the credit bureau keeps on file about you, which is submitted by your creditor(s). Your credit score changes as the information on file changes.

Your credit score is determined based on the following categories:

  • Payment History (timeliness of payments on accounts)
  • Amount owed (outstanding balances on accounts)
  • Length of Credit (how long you have had credit)
  • Types of Credit Used (revolving, installment, etc.)
  • New Credit (recent accounts or credit inquiries)

The ranges for credit scores are as follows:

  • 760 – 850 – PERFECT
  • 700 – 759 – Good
  • 650 – 699 – Average
  • 620 – 649 – Mediocre
  • 350 – 619 – Major Problems

How do I find out what my credit score is?

Your credit score is only as good as what is in your credit report. By making sure that only your accurate credit history appears on your report, you ensure that the credit score it generates isn’t lowered by inaccurate information. Review your credit reports from all three credit bureaus regularly as well as several months before applying for a loan.

In 2003, the U.S. Congress enacted provisions under the Fair and Accurate Credit Transactions Act (FACTA) that allow consumers to obtain a free credit report every twelve months from each of the three credit bureaus. If you do not already have a copy of your credit report, you can access it online at www.annualcreditreport.com.

You should be aware of many other companies that promise to provide a free credit report often end up charging you a fee or requiring you to subscribe to their services in order to obtain the report. Please note that www.annualcreditreport.com is the only official website that provides this service at absolutely no cost to you. If you do not have computer access or would prefer to use alternative methods to obtain your report, you can do so by calling toll-free, 1-877-322-8228, or by mailing an Annual Credit Report Request Form to:

Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA
30348-5281
www.annualcreditreport.com

The form can be downloaded from www.annualcreditreport.com or from the Federal Trade Commission’s Web site (www.ftc.gov) which provides a wealth of helpful information for consumers. You can also call the FTC’s Consumer Response Center at 1-877-FTC-HELP (4357) to download the form.

You can also request your credit reports directly from the big-three credit bureaus. The contact information is listed below:

Equifax
P.O. Box 740241
Atlanta, GA 30374
800-685-1111
www.equifax.com

Experian
P.O. Box 2104
Allen, TX 75013-2104
888-397-3742
www.experian.com

TransUnion
2 Baldwin Place
P.O. Box 1000
Chester, PA 19022
800-888-4213
www.transunion.com

 

How can I improve my credit?

STEP 1 – Pay your bills on time.

Payment history is the single most important factor in determining your credit score, making up 35% of the total. Late payments, especially on your mortgage or rent, have a big impact on your credit history. A recent late payment has more negative weight than one that was made several years ago. Note that closing an account on which you had previously missed a payment does not make the late payment disappear from your credit report.

When you make a payment by mail, remember that your payment may have to go through several channels before it reaches its destination. Therefore, make sure that you mail your payment early enough so that it will be received and credited to your account before the due date.

If at all possible, consider paying your bills by telephone or online. Many creditors offer this feature for their customers, making it easier to get payments in on a timely basis. Some companies charge a fee for utilizing this service so make sure you find out before you make a payment. Additionally, if you have a checking account, your bank may offer bill payment service, often for free or for a nominal amount. This feature is an excellent way to have your payments automatically debited from your account each month, especially if you have direct deposit.

STEP 2 – Check your credit report and remove any errors.

Payment history is the single most important factor in determining your credit score, making up 35% of the total. Late payments, especially on your mortgage or rent, have a big impact on your credit history. A recent late payment has more negative weight than one that was made several years ago. Note that closing an account on which you had previously missed a payment does not make the late payment disappear from your credit report.

STEP 3 – Pay down your debts.

Keep balances low on credit cards and other “revolving credit.” Maxed out credit limits result in major points deduction. Lenders like to see plenty of breathing room between the amount of debt reported on your credit cards and your total credit limits. For a good credit score, your account balances should be below 50% of your available credit. To achieve this step, get in the habit of paying more than the minimum amount due. You will pay off the debt sooner and save thousands of dollars in interest payments in the process. A good plan is to start with your accounts that have the smallest balance. After paying off the small debts, direct the extra money toward your larger balances until you are left with only one or two credit card accounts.

STEP 4 – Pay off debt rather than moving it around.

Moving your debts around or constantly transferring balances over multiple cards will not improve your score. The most effective way to improve your score is by simply paying down the amount you owe. See Step 3 above.

On the other hand, if paying off debt is a step you are unable to accomplish with your current income, you may need to meet with a credit counselor. Do your research and make sure the agency is legitimate and reputable. Often, these agencies will provide counseling to you at a nominal charge. If you can prove your inability to pay, the service may even be free. The U.S. Department of Justice has a listing of reputable agencies that have been approved by the government to provide consumer credit counseling. You can access this information at www.usdoj.gov.

Although these agencies have been approved as a prerequisite to filing for bankruptcy under the recent changes enacted in 2005, they can provide credit counseling to consumers who are not considering bankruptcy as well. Please note that this website is only provided as a source to find a reputable credit counseling agency. Renewal does not suggest or advise any individual to pursue bankruptcy as a means of solving their financial problems.

Also, the Better Business Bureau in your area may be able to provide information about whether an agency has a good track record of providing credit counseling assistance. Contact them at www.bbb.org or consult your local telephone directory.

STEP 5 – Avoid too many inquiries.

Don’t apply for too much credit in a short amount of time. Inquiries are interpreted as a sign that you have been actively seeking credit, and may be in financial difficulties or in the process of overextending yourself. Multiple requests for your credit history (not including requests by you to check your file) will reduce your score. Fortunately, inquiries from businesses from whom you have not applied for credit will not affect your score. These usually come from unsolicited pre-approved credit offers. Inquiries from employers (potential or current) do not affect your score either.

A good rule of thumb to keep in mind when shopping around for a good loan rate is to look within a focused period of time, such as 14 days. Creditors distinguish between a search for a single loan and a search for many new credit lines, based in part on the length of time over which recent requests for credit occur.

Although inquiries remain on your credit report for two years, your credit score is only affected by inquiries within the last 12 months.

STEP 6 – Have credit cards, but manage them responsibly.

In general, having credit cards and installment loans which you pay on time will raise your score. This is especially true for someone who has a shorter credit history. Your credit score takes into account your mix of credit accounts. Installment accounts (such as mortgages and automobiles) have the most weight. Although not a hard and fast rule, an individual who has no credit cards tends to have a lower score than someone who has managed credit cards responsibly.

A good rule of thumb for someone who is just getting back on their feet financially is to have no more than four credit cards. Use them all but do not charge more than 30% of the available balance. Also, only charge what you will be able to pay off completely each billing cycle. Keep the other card for emergency purposes. The sale of the century at your local department or electronics store does not qualify as an emergency!

STEP 7 – Try to keep your earlier accounts if possible.

In general, a longer credit history will increase your score. Approximately 15% of your total score will depend on your credit history. New accounts will lower your average account age, which will have a larger effect on your score if you don’t have a lot of other credit information. If you have older accounts that are in good standing, don’t close them. Purchase something sparingly, every other month or so, to keep the account active. Remember, charge only what you can pay off completely when you receive your statement.

If your older accounts have a few blemishes, contact the creditors to see if they are willing to negotiate with you. For instance, if you have had a department store credit card account for ten years but had a couple of late payments six months ago, contact the creditor.

Because you have been a loyal customer with an overall good payment history, they might be willing to work with you and delete the late payments.

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