HopeIRL

After you have the emergency fund built, you plan to fund three large expenses…your future income (also known as the retirement fund), your kids’ education, and paying off your home. This requires a very disciplined approach to handling your income. In fact, one of my financial mentors, Ron Blue at Kingdom Advisors, says there are only four things you can do with your money: live, give, owe, grow. And how you prioritize these four things will determine how well you manage your finances and your life, and thus your financial freedom and peace.

As a person of faith, I believe the first thing in your spending plan should be giving back to God what is His, this is the first fruits of what I have earned from how He has gifted me with talents and abilities. So 10% of income goes to my local church first.

Next I fund my future income, my retirement plan with 15% of my current income. The magic of compound growth (making financial gains on your financial gains) makes this a no-brainer, you must do this no matter what. You cannot expect the government (through social security and Medicare) or your family to take care of you in retirement.

By the way, did you know that when you retire, you stop working and your paycheck stops too? Thinking about your retirement plan as your future income should help motivate you to put this money away. You will want to enjoy your much freer time more than you do today. You can also anticipate that your future expenses will be much higher than they are today. So you are funding your future lifestyle, or future income, not this nebulous thing called a retirement plan. Your social security check is likely to fund less than 50% of that future lifestyle, and in all likelihood only 30-40% of your living expenses. So now is the time for current income to fuel future income.

Next, if you have determined to help your kids with their post-secondary education expenses, open an ESA (education savings account) or a 529 plan. Do some research on this as every state and financial institution is different and you want as much flexibility as possible should your kids decide not to go to college. Plan to put about 5% of your income in these plans, and start early to take advantage of compound interest.

Lastly is probably the largest expense or investment you will ever make…your home. In your budget or spending plan, the monthly expenses for your home should be no more than 25% of your take home pay, which is likely 2-2.5 times your annual gross salary. Overspending on a home will impact you for years to come. Do not become house poor (all of your money goes to your house payment, leaving no margin for anything else).

If you don’t own a home, trying putting this amount away until you have a 20% downpayment saved. Then purchase a home that will create a mortgage payment of the same amount, including taxes and insurance. Hopefully, this is in a 15-year fixed rate mortgage so that it can be paid off before the kids head to college.

If you already own a home, with a 30-year mortgage, the goal is to pay off the mortgage early. Assuming the mortgage is not more than 25% of your take-home pay, start making extra principal payments every month to avoid costly interest on your mortgage. Not having a mortgage on your home, not having a first-of-the-month payment due every month, provides a great sense of financial freedom and peace.

The smart money, yes pun intended, is learning to live on 45-50% of what you make, at least make that a target or goal. If you analyze your current LGOG pie chart, you can discover the gaps and make a plan to get to the ideal target.

Now, none of this is easy. It will require discipline, perseverance, and focus. You will need to learn to practice delayed gratification when it comes to spending. We all have this tendency to turn wants into needs thinking that buying things will make us happy. You know, “oh, that’s a nice [house, car, cell phone, tv, etc.], I want that, then, I need that, then I must have it,” and we make the purchase and then we repeat that process with the next nice thing. Our friend Carl Richards at BehaviorGap.com likens it to this graphic. And this is exactly the behavior we must defeat if we are to create financial margin, financial freedom, and financial peace.

Have you ever borrowed something from a friend and told them that you would give the item back by a certain time?  

For example, you find a sofa online and contact the person selling it, BUT you don’t have a truck.  So you ask a friend if you can borrow his truck. Your friend says “Sure, no problem.  I just need my truck back by 2:00 so I can pick up mulch at the garden supply store.”   

As you’re driving to pick up the sofa, the seller texts you that their kid’s soccer game is running longer than expected so they won’t be home for another hour.  You think … “ok, I can still make this work.” 

The seller finally gets home and shows you to the sofa … It’s buried in their basement under a pile of boxes filled with old college textbooks. 

You are burning through time, and you need get this sofa uncovered, carried up and loaded into the truck, drive back across town, unload the sofa into your house, and get the truck back to your friend in time.   

How do you feel?  

Anxious?  

Stressed?  

Frustrated?  

Being in debt leads to these feelings.  We want to get our friend’s truck back to them as soon as possible because we want to be the trustworthy friend and don’t want to be embarrassed when we see them next at next week’s neighborhood cookout. 

The challenge with credit cards, student loans, and other sources of debt is we don’t have a relationship with the lender, so our urgency to pay these back, decreases.  We don’t see a person we owe every time we go to the mailbox.  But the underlying feelings of stress and anxiety are there when we are notified that our next payment is due, or worse, past due.  The only person these debts hurt is ourselves. 

Personal consumer debt and credit cards are still relatively new in our economy.  Visa and MasterCard didn’t exist until the late 1950’s and that’s also when student loans started being offered. 

From 1950 to 2020, the average person’s debt increased more than 10 times to over $13,000. 

So how do we start tackling our debt?  

We need to get to the root cause of what makes us want to spend money.  Remember our Beliefs impact our behaviors which impact our results.  

If we believe we will be less anxious and less stressed with less debt, we will implement new behaviors and get different results. 

Sometimes it takes radical thinking and changes in behavior. 

Consider cutting up your credit cards. 

Or put them in a plastic bag, put the bag in a bowl, fill the bowl with water and put it in the freezer. You’ll need to wait until the ice melts before you take the credit card back to the store.  

Or force yourself to wait one hour for every dollar that the item costs.  So wait 50 hours or two days for the $50 item you think you must have. 

How could we save money to put towards paying off debt? 

Lower the thermostat in the winter and layer on more clothes. 

Up the thermostat in the summer. 

Cut back on dining out.  (Bonus tip, food is a huge budget buster, and you’ll probably make healthier choices in the process.) 

Drop some streaming services.   

Consider a smaller cable package or get rid of cable all together. 

Scale back that vacation. 

Do those sound hard?  How badly do you want freedom from debt?  How important is less anxiety and less stress?  Think about the opportunity cost and what you’re giving up now and in the future by taking on new debt.  What is truly most important to you? 

Now I know you want that freedom, so you make some of those hard choices.  How do you use the money you’ve saved to start tackling your debts?   You can use a debt snowball.  The more it rolls, the more it picks up speed and knocks out along the way.  How do you start a debt snowball? 

First, list all your debt balances from smallest to largest.  Check out the debt record worksheet that can be downloaded from the resource section.  

Second, take the money you have found in your spending plan from those hard choices you made and put that towards your smallest debt first.  Let’s say your smallest debt is a store credit card that you owe $350 on, and you’re making the minimum monthly payment of $15.  If you were able to find $100 a month from those choices you made, you will pay $115 on this store credit card, and within 4 months that store credit debt will be eliminated.  Keep paying the minimum payments on your other debts. 

When you have paid off that smallest debt, you then start working on the next smallest debt with the minimum payment PLUS the money you now have from paying off the store credit card.  Let’s say the next smallest debt is a $500 medical bill and you are paying the $20 minimum monthly payment.  You now pay $20 PLUS the $115 you have from paying off the store credit card for a total of $135, and that medical bill is paid off in 5 months.  Keep paying the minimum payments on your other debts.  

You just keep replicating that process, growing that debt snowball one debt at a time until all your debts are paid off. 

What are some ways you can stay out of debt and avoid accumulating new debt? 

First, keep $1,000 in an emergency fund.  Think of this emergency fund like debt insurance… That $1,000 is there when the unexpected happens so you don’t have to reach for the plastic. 

Second, pay cash as much as possible.  If necessary, use a debit card.  We gain awareness when we see that money is leaving our pocket.  You may say, “Oh I can use a credit card and not have any issues.” But when a credit card is used  

• for groceries you are likely to spend 30% more,  
• fast food purchases increase by nearly 50%, and
• your spending on non-essential items more than doubles. 

Having an emergency fund and no debt gives you confidence and moves you towards a life of freedom.   

In the next video we’ll discuss priorities that can be planned for since we have now started several good practices.  These priorities are having a 3-6 month emergency fund, retirement, buying or paying off a home, and saving for your children’s education.   

Making better decisions will lead you to a life of joy and contentment. 

Have you ever traveled across an extremely high bridge and wondered how did the engineers and builders ever build this bridge?  Where did they even start? They started with a plan. And as the build took place, they referenced that plan a lot.  The plan gave them direction on what areas needed more support and what areas needed a little bit of flex. 

Building a budget is remarkably similar—No two months are the same; which reminds us that a budget needs to be reviewed every month. Some months may need a little flex. If you’re going on vacation, money may need to be reallocated plan for that road trip. Budgets need a little bit of flex.  

If you’re married, when you’re working on your budget together, it works well to have one person that is the engineer and one that is the builder. The engineer is the one that likes to build the worksheet and make modifications to the upcoming month. The builder is the one that may have most of the spending responsibilities, paying the utilities and checks what is flowing in and out of the bank account. Whatever role you have, both are important, and both need to work together. 

Single friends, you will be the engineer and the builder. It is important to have a trusted friend or family member that can be an accountability partner. Because in the beginning of building in financial principles, it is helpful to have someone that is a bit more experienced that you can connect with. 

Ok so let’s get started building a budget! Our four main supports are always going to be:
Housing, Utilities, Transportation, and Food. 

Housing—including insurance and HOA dues should be no more than 25% of your take home pay. This will be discussed more in an upcoming video.  

Utilities—remember to watch what your heat and air conditioning are set on.  Set these a little higher in the summer so that the air conditioning is not constantly running or lower in the winter and bundle up with an extra layer of clothing.  Turn things off when you’re not using them.  Remember little changes, over time, make a big difference.  

Transportation —avoid buying a car until it is absolutely necessary. When you do buy a car, save up for a good used one that you can pay cash for. Other ways to save money on transportation:
-Shop around for car insurance
-Carpool: If you’re married, can you share a car. Especially in today’s world when many people are now working from home. Do you really need two cars? 

Other categories that we need to have in our budget: Giving, paying off debt, clothing, medical, and kids activities. Some of these items will have fixed cost like a mortgage, rent and debt. Others will fluctuate such as medical or food. Food can be a big budget buster so watch it closely.  A family of 4 should budget around $1,000 a month for groceries and eating out…if you’re eating out. 

Budgets are to help us manage and evaluate. They bring awareness to when we’re overspending and moving off course and help us to course-correct quickly—this intention leads to freedom, confidence and less stress.  Anyone can do a budget whether you’re single, married, or living paycheck to paycheck.  You do not need to be a CPA to do a budget.  And to help you with this, we have a sample budget in the resource section.  What I need you to do is to take your spending record and your non-monthly expenses and use these to build your budget.  In the next video lesson, we will learn how to pay off debt. Let’s be done with debt so that we can move that budget category to something fun!  

About 20 years ago, I was a senior leader in a Fortune 500 multinational retail company, living the high life. I had a great salary and a great lifestyle, and suddenly, due to some internal management issues, my level of the organization was designated for elimination and I was out of a job. The biggest challenge was that we were living paycheck to paycheck, with virtually no savings. Fortunately, I was given a generous severance package which lasted until I found work, albeit at a lower salary.

When I got to my new company, a fellow team mate introduced me to a new and different way of handling my income. Different to me that is, as the principles have been around for as long as the world has existed. These principles taught me how to create financial margin in my life, and how to save for the future and plan for life’s largest expenses. And when my job was eliminated for the second time in my career, I was ready and able to continue life without the stress of paycheck to paycheck worries.

You’ve already heard about some of these principles…build a spending plan or budget, eliminate all debt except your mortgage, build a starter emergency fund of $1000, track all spending. If you haven’t, feel free to watch the prior videos in this tract before we proceed.

The next step, however, is to build a fully-funded emergency fund of 3-6 months of living expenses. For most of us, six months of living expenses is the right amount; I know I needed all of that 6 months to find a good job and replace my income both times. Once you have figured out your monthly budget, multiple those living expenses times six and plan to build your emergency fund to that level.

So if your normal household expenses are $4000 per month, you will need an emergency fund of $24,000. (The only time to consider a 3-month emergency fund is if you are a dual-income, no kids couple, or you are empty nesters with little financial obligations beyond living.)

Do whatever it takes to build that emergency fund, and then don’t touch it except for true emergencies. Work extra jobs, sell stuff, move to lower cost housing, delay any purchases that are not absolutely necessary, stop eating out on the town until that fund is built. Emergencies are not oil changes on the car, vacations in the Caribbean, or a big green egg for the backyard barbecue…those are planned and saved for expenses.

This is a fund where the soul purpose is to have cash on hand should your employment or income cease for a period of time. This is true rainy day money. This is money that will allow you to continue to pay your bills if the unthinkable happens—You want to be prepared and not stressed.

If you are like most people, at some point over the year, you will be faced with unexpected expenses that may bust your budget. Have you ever experienced an emergency where you did not have money set aside to pay for, perhaps a tire blowout, hot water heater repair, fence blown down during a storm, or your dog that gorged on the dark chocolate bar hidden in your child’s Christmas stocking which required an overnight stay at the pet hospital? Unplanned expenses are part of life, because, life happens…

No one expects the unexpected. And when it comes to our finances, unexpected expenses can quickly become a budget buster which leads to us making poor decisions with our money. At some point, we all experience life’s emergencies.

Non-recurring expenses CAN destroy a budget, but they don’t have to. With proper planning, we can face these expenses with peace and a sense of control when they do occur. By building them into our monthly budget, we can reduce the stress and anxiety caused when they occur.

You may be thinking, ‘I can’t plan when my car is going to break down, or will have a medical emergency, or a death in the family that requires purchasing airline tickets for the entire family.’ But, actually you can. You can build these types of non-recurring expenses into your budget so you already have money set aside when they DO pop up.

Let’s think of some non-recurring expense that occur during the year:

– Christmas: it comes around every December 25th
– Back to school – that one comes around every August
– Car Maintenance (Oil changes, tune-ups)
-Car Tax and Registration
-Income Tax owed
-New Tires for the car
– Insurance Premiums that are paid annually or semi-annually
-Vacation

There are also non-recurring expenses that may come around only every 5, 10, 20 years like:
– College tuition
– Replace a Car
– New Roof
– Replace HVAC system
– Daughter’s Wedding
– Dream Vacation

We can plan and save for these expenses so they don’t impact our $1,000 emergency fund. Then, when they happen, the money is there to pay for them.

So, how do we budget for both near term (those coming in the next year or two) and longer term (those 5+ years out) non-recurring expenses?

1. First, you need to identify how much money you will need for each item. Review your checkbook or bank statements for the past year to ensure you capture those expenses you may have forgotten about.

2. Then determine how much you think you need to save for each of those longer dated expenses (like a new car)

3. Next, determine how many months until you need that money. We have a non-monthly expense document that you can download from the Resource section to help you with this.

Here’s an example:
Let’s say we are in January. You know you will need $250 in August for back-to-school expenses. August is 7 months away. Divide $250 by 7 months and you will need to save $36 per month each month until August. When August rolls around, you will have $250 to use for school supplies.

Many people find it best to move these non-recurring budget savings into separate accounts. You may want to have a “Near Term” account for the shorter term non-recurring expenses (car maintenance, Christmas) and another account for Long term expenses (such as new roof or car replacement). These are separate accounts from your regular checking account as most of us spend the amount of money we have in our checking account.

Building non-recurring expenses in our budget helps to:
-break down large expenses into manageable ones
– ensure we can actually afford our lifestyles choices
– have the money available when those non-recurring expenses occur

You don’t have to be anxious about non-recurring expenses. By planning and saving, you can build margin into your monthly budget which will allow you to manage your budget with confidence and freedom from debt.

In the upcoming video, we will learn how to build a budget to help us reach our financial goals.