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Do you have financial stress? Let's develop a plan.

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#1 Jim West

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Posted 14 August 2015 - 09:11 AM

This topic is more geared towards individuals that are finishing their school work and are entering the workforce.  That being stated, this topic could be a refresher for the rest of us that are working...or have even retired.


A few months ago, I enjoyed a beer with my mentor's 25 year old son.  My mentor, who will remain nameless so he can protect his reputation, was my first legitimate boss I've ever had.  I've known him and his family since 1994.  He's a great man, and you couldn't ask for a better family.  Back in May, I dropped by his house in Mebane to shoot the breeze.  During the conversation, they told me that their son had a lot on his mind.  He just came out of college and had entered the workforce.  .  


After talking to these find folks, I contacted their son and invited him to a local watering hole for a beer.  Their son was incredibly stressed.  He had a job making around $32,000/year, but he also had $40,000 of student loan debt, credit card debt, a car payment, and had to make some additional miscellaneous monthly payments.  In addition, he had to pay rent (he's renting a house with one of his friends).  What does he do?


There are two main facets to developing a monthly budget:  budgeting for money that is coming in and budgeting for money that is coming out.  However, before you can start a budget, you have to create your own balance sheet.  What is a balance sheet?  It's merely listing your assets (cash, property, investments) and listing your debts (what you owe).


I'll give you an example of a balance sheet:




Home:  200,00

1st car:  10,000

2nd car:  8,000

Cash:  10,000

Retirement savings:  75,000


Total assets:  303,000




Mortgage: 140,000

Line of credit:  20,000

car debt:  4,000

credit cards:  2,000

student loans:  20,000


Total debt:  186,000


Net worth:  117,000 (net worth is merely subtracting total debt from total assets).


The following is an example of a monthly budget:




Your monthly take home pay:  $3,500

Spouse's take home pay:  $2,500


Total take home pay, per month:  6,000




Home mortgage (including escrow):  $1,100

Line of credit: $200

Car payment:  $300

Student Loans:  $250

Cable/phone/internet:  $200

Cell phones:  $100

Power bill:  $150

Charities:  $250

Food:  $500

Clothes:  $100

Home maintenance:  $200

Gas/Vehicle maintenance $300

Life Insurance:  $100

Car Insurance:  $100

Child care:  $800

Other expenses:  $700

Entertainment:  $500


Total expenses:  $5,850


Savings/month:  $150


Please note that "Other expenses" entails many different things.  It could be pet expenses, maintenance on your heat pump, etc.  These expenses occur periodically, but maybe not each month.    




Where do you start when you join the workforce?  First off, have an emergency fund.  A good initial emergency fund is one months take home pay.  To get that money, you can try to work a second job, sell something that you own, or work some overtime.  This is a  sacrifice, but it's a sacrifice that will take away long-term stress.


Second, let's pay off what I call "bad debt".  "Bad debt" would be anything you owe on credit cards that have lousy interest rates.  Anything right now with double digit interest should be paid off immediately.


Third, I'd try and expand my emergency fund from one month to three months of take home pay.  Some will balk at this idea, but this cash on hand isn't an investment, it's merely insurance.


Fourth, start paying off other debts such as car loans and student debt.  Making accelerated payments will save you money in the long-term.


Fifth:  start placing more money in retirement.  Many companies offer 401(k), 403(B), or other profit sharing plans.  Many companies will make a match, too.  Ideally, you want between 12-15% of your income going into these plans.  This percentage includes your employer's match, so if your employer gives you 4%, you only need to put in 8-11% of your income in the plan.  Some will ask whether to go traditional 401(k) or Roth 401(k).  Personally, I have funds in both.  There's different things to look at for tax implications, but you won't hurt yourself by investing money in a retirement plan.


Sixth:  If you have kids, start saving money for their education.  I place education behind retirement because you can always "catch up" with education, but once you are retired, you are pretty much on your own.  Yes, that sounds cold, but your kids can help out later with the cost of their education.


Seventh:  Expand your emergency fund from 3 to 6 months.


Eighth:  Go ahead and pay off that house!  Think about it:  wouldn't it be nice not to have to make that huge mortgage payment each month?  It's a novel, but very attainable deal.


Should I use credit cards or a debit card?  Personally, I use a credit card which is opposite of what most pundits will tell you.  However, I do things differently than most:  I pay off our credit amounts on the 15th and 30th day of each month.  I also have developed a system where I've budgeted money that will be used to pay off the credit cards.  I use the credit card for two reasons:  to help me keep good credit and because I'd rather deal with contacting the credit card company on a fraudulent transaction than I would having to find out after the fact that someone has depleted my bank account.  For those of you with no discipline, try and use cash in lieu of a debit card.  That's a good plan.


Finances are a burden for most of us.  However, we need to accept this necessary evil so we don't share our financial burdens with friends or family members.  For example, if a $1,000 bill comes your way, let's not try and borrow money from a family member.  It can be very awkward.  


The good news is that over time, you will see your salaries rise.  Some will tell you that what you make, won't matter with budgeting, but I totally disagree.  While money won't buy you happiness, it will allow you to buy some Advil if you have a headache.  Having salary increases will help alleviate some of the financial stress in terms of budgeting.  What hurts most people is that when they get a 4% salary increase, they increase their spending by 5%.  


Just remember, this isn't a sprint, but this is a marathon.  Show financial discipline by trying to avoid the urge to blow your money on something that won't give you happiness, but will later on give you stress.

#2 Chris Hughes

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Posted 14 August 2015 - 09:33 AM

You must be bored! Or either that's the CPA coming out in you ;)


Thanks for sharing your knowledge with everyone, maybe someone can pick up some pointers and change their outlook. 

#3 Jim West

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Posted 14 August 2015 - 09:42 AM

With the title of "CPA", many think I have a lot of training on personal finances.  I didn't have any instruction about finances until I went back to school so I could take courses to become a CPA.  No one in elementary school or high school taught me how to even balance a checking account.  In college, no one even mentioned how to come up with a financial plan.  It wasn't until I became a student at Durham Tech that I had any instruction about personal finances.  This is one of the many reasons why I'm a big advocate of the Community College system.


Most of my knowledge comes from my own personal experience.  I've taught 6 semesters of Dave Ramsey's Financial Peace University course.  I don't follow Dave's specific advice, but I still have a plan that works fine for me.

#4 FHS1985


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Posted 22 August 2015 - 11:03 AM

I looked at this thread because just the other night a very good friend, who had called me for relationship advice (actually just to vent, but I hope I helped) revealed to me that he is in trouble financially and that a great deal of this is due to his divorce.  He is not the first friend to tell me something like this, another good friend told me years ago that he had to cash in a pension fund to get out of debt after his wife left him.  So, I guess where I am gong with this, is this-work hard on maintaining your relationship as well.  Relationships are hard work, and my wife and I have had our problems, but we have made it for almost 18 years now and the fact that we have a stable relationship makes our life a lot easier in lots of ways.  We both married later than most young couples (after 30 for both of us), and our relative maturity doubtlessly helped us get through some tough times, but choosing a mate will probably be the most important choice a young person will ever make and will impact their lives in many ways that young couples probably can't imagine when they set out.  Make sure you get a good one or you will almost certainly have problems down the road.

Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.”

― C.S. Lewis

#5 Jim West

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Posted 22 August 2015 - 11:30 AM

FHS1985, you are exactly right.  When married, both spouses must be on the same page when dealing with finances.  One can be a financial genius, but if the spouse shows no responsibility with money, the expenses will overtake the revenues.  


I also state that unless you are willing to give money away, don't "loan" any money to family or friends.  Give it as a gift if you must, but we aren't a lending institution.  When I give money to someone in need, I treat it as a gift and I let them know it is a gift.  If they pay me back, that's fine, but it is with no strings attached.  When you loan money out, when the other party doesn't pay back, I've seen countless times where relationships are ruined.

#6 Footsoldier


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Posted 23 August 2015 - 04:26 PM

I've got a big ol' box of bearer bonds. I'd say about 3XL too. It's fun going to the bank.

#7 Jim West

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Posted 23 August 2015 - 04:59 PM

I've got a big ol' box of bearer bonds. I'd say about 3XL too. It's fun going to the bank.


Especially when you own that bank, right Foot?