Dear girls,
The next step is pretty easy (in theory). This is where you document your income. You need this so you have a concrete idea of the limits of your spending. You definitely should not spend more than you have coming in. That way ends in a really big hole to dig yourself out of.
If you have a regular paycheck, then it's pretty easy. You open your paycheck, note your NET income (this is the amount being deposited into your bank account). And if you get paid every other week, or on the 1st and 15th, then you multiply it by 2. And that's the amount of income you get monthly. We're ignoring 3 paycheck months that occur twice a year if you're paid every other week. Those are windfalls and should go right to savings or paying down debt.
If you're not regularly paid, you're a contractor or work hourly or some other situation where you can't rely on a regular paycheck. I've not been in this situation, but if I was, I'd look back over the last year (if possible), and look at the lowest earning months. I'd take that as your monthly income. Anything above that would be treated as a windfall.
So that's it for this step. By next week's letter, you should be done with both this week and next week (which is by far the greater effort). And you'll be able to define your budget, or at least the categories.
This stuff is not rocket science, and I surely didn't think of it all by myself. But it's the steps I took to figure out the budget. You can't know where you're going without also knowing where you've been.
Love,
mama
Wednesday, July 25, 2018
Wednesday, July 18, 2018
How to start
Dear girls,
A lot of what I've written has to do with the philosophical side of things. Not completely practical, but more of a 'keep these things in mind as you're making decisions' type of advice.
For the practical side of things, we needed a road map, a place to start.
Our original debt payoff was actually my debt payoff. Before dad and I were married, I decided that it was only fair to enter the marriage without any credit card debt. So I added up my debt, and had a mild heart attack. I had about $15k in credit card debt, and not a lot to show for it. I had no idea what I spent money on.
So I sat down and wrote everything out. What the mortgage was, what the utilities were, insurance, etc. All the fixed costs, so to speak. But I had no idea on the discretionary stuff. I didn't think I spent much on clothes, or food, or going out, but I had no clue. So I started tracking. Because you can't know where you're going without knowing where you've been.
I honestly don't remember what I did, but there are really 2 methods of tracking your expenses. One is to download your credit card statements for the last 2-3 months and categorize everything. The other is to start tracking everything you spend going forward. I think both are valuable and would do both, if I didn't already keep track.
By looking behind, you see where your priorities were, if you had them, and what you spent the most money on when you weren't really paying attention to it. By tracking going forward, you become very aware of what you're spending money on. You'll end up having conversations with yourself while you're holding things 'Do I really need this?'.
Once you have this data, you'll build a budget. I love budgets. Then we'll talk about Dave Ramsey and why he's so great for getting your financial house in order.
My hope is to provide you a blueprint to manage your financial life. Even if you don't have debt, tracking your spending is essential for getting things in order. And don't worry, we budget for fun too.
Love,
Mama
A lot of what I've written has to do with the philosophical side of things. Not completely practical, but more of a 'keep these things in mind as you're making decisions' type of advice.
For the practical side of things, we needed a road map, a place to start.
Our original debt payoff was actually my debt payoff. Before dad and I were married, I decided that it was only fair to enter the marriage without any credit card debt. So I added up my debt, and had a mild heart attack. I had about $15k in credit card debt, and not a lot to show for it. I had no idea what I spent money on.
So I sat down and wrote everything out. What the mortgage was, what the utilities were, insurance, etc. All the fixed costs, so to speak. But I had no idea on the discretionary stuff. I didn't think I spent much on clothes, or food, or going out, but I had no clue. So I started tracking. Because you can't know where you're going without knowing where you've been.
I honestly don't remember what I did, but there are really 2 methods of tracking your expenses. One is to download your credit card statements for the last 2-3 months and categorize everything. The other is to start tracking everything you spend going forward. I think both are valuable and would do both, if I didn't already keep track.
By looking behind, you see where your priorities were, if you had them, and what you spent the most money on when you weren't really paying attention to it. By tracking going forward, you become very aware of what you're spending money on. You'll end up having conversations with yourself while you're holding things 'Do I really need this?'.
Once you have this data, you'll build a budget. I love budgets. Then we'll talk about Dave Ramsey and why he's so great for getting your financial house in order.
My hope is to provide you a blueprint to manage your financial life. Even if you don't have debt, tracking your spending is essential for getting things in order. And don't worry, we budget for fun too.
Love,
Mama
Wednesday, July 11, 2018
July Status and the good debt
Dearest monkeys,
Below is the new amounts for our debt. It went down (yay) but not by more than the minimum payment - interest (boo). If we stay with only paying the minimum payment, we'll end up paying $23,254 in interest. Even with the hopefully accelerated schedule, we'll still be paying more than what the item is worth. And that's a crazy and really, ultimately, a bad decision, because none of these debts make any money. And that's not even counting the mortgages (you end up paying for half an extra house...roughly).
There's this concept out there of good debt and bad debt. Good debt is things like mortgages, and sometimes student loans. The theory is that these debts get you something, earn something for you. With a mortgage, house prices tend to trend upwards, so paying for a $100k house with an $80k mortgage, you'll end up selling it for more than $100k and earning the difference. And that difference is typically more than the interest paid. The end equation would look like this:
Sale price of house - closing costs/commissions - interest on mortgage - mortgage balance - down payment = revenue from house
So in our example of a $100k house selling for something more than that, we'll say $120k, and assuming you lived there for the average of 6 years, it would look like this:
$120k - $10,800 - $20,495.86 - $71,310.79 - $20,000 = -$2,606.65
amortization calculator from bankrate.com
This assumes the following: 20% increase in house value over 6 years, 9% closing costs/commissions, 4.5% mortgage interest rate and 20% downpayment
As you can see, your house is not actually an investment. You'll end up losing money, even if you get a check at the closing table (that'll be your down payment getting refunded).
So your house isn't good debt. It's a place to live. That's not saying you shouldn't buy a house, just don't call it good debt.
What about student loans? Student loans are getting more and more seemingly necessary as the cost of college goes up (at an astonishing rate). The interest is typically low, and there are programs that will offer loan forgiveness if you stay in a certain professions (teacher, americorps, etc). The theory here is that getting a college education will enable you to get a good job to pay off your student loans quickly. But that's not usually the case. A shocking number of people end up getting a job outside the field they have a degree in. And are saddled with student loans for a really long time. So the return here is less simple to calculate than the mortgage example, because there's so many variables. One of the most valuable ways you can set yourself up is to graduate from college with no debt.
The moral of this story is that in reality, there is no good debt*.
Love,
Mama
*There actually is good debt, but only in reference to investment assets.
***********************************************************************
Below is the new amounts for our debt. It went down (yay) but not by more than the minimum payment - interest (boo). If we stay with only paying the minimum payment, we'll end up paying $23,254 in interest. Even with the hopefully accelerated schedule, we'll still be paying more than what the item is worth. And that's a crazy and really, ultimately, a bad decision, because none of these debts make any money. And that's not even counting the mortgages (you end up paying for half an extra house...roughly).
There's this concept out there of good debt and bad debt. Good debt is things like mortgages, and sometimes student loans. The theory is that these debts get you something, earn something for you. With a mortgage, house prices tend to trend upwards, so paying for a $100k house with an $80k mortgage, you'll end up selling it for more than $100k and earning the difference. And that difference is typically more than the interest paid. The end equation would look like this:
Sale price of house - closing costs/commissions - interest on mortgage - mortgage balance - down payment = revenue from house
So in our example of a $100k house selling for something more than that, we'll say $120k, and assuming you lived there for the average of 6 years, it would look like this:
$120k - $10,800 - $20,495.86 - $71,310.79 - $20,000 = -$2,606.65
amortization calculator from bankrate.com
This assumes the following: 20% increase in house value over 6 years, 9% closing costs/commissions, 4.5% mortgage interest rate and 20% downpayment
As you can see, your house is not actually an investment. You'll end up losing money, even if you get a check at the closing table (that'll be your down payment getting refunded).
So your house isn't good debt. It's a place to live. That's not saying you shouldn't buy a house, just don't call it good debt.
What about student loans? Student loans are getting more and more seemingly necessary as the cost of college goes up (at an astonishing rate). The interest is typically low, and there are programs that will offer loan forgiveness if you stay in a certain professions (teacher, americorps, etc). The theory here is that getting a college education will enable you to get a good job to pay off your student loans quickly. But that's not usually the case. A shocking number of people end up getting a job outside the field they have a degree in. And are saddled with student loans for a really long time. So the return here is less simple to calculate than the mortgage example, because there's so many variables. One of the most valuable ways you can set yourself up is to graduate from college with no debt.
The moral of this story is that in reality, there is no good debt*.
Love,
Mama
*There actually is good debt, but only in reference to investment assets.
***********************************************************************
The total last time was $155,888.27. Current total is $154,740.05. We paid off $1,148.22.
Amount
|
Payoff
|
%
|
Min. Pmt
|
Notes
| |
Car Loan
|
$16,797.71
|
3 year - 12/2020
|
2.24%
|
$ 541
| |
401k
|
$33,223.03
|
20 year - 5/2032
|
3.25%
|
$ 227
|
Must pay off in full
|
T Alaska Visa
|
$18,426.89
|
10/2018
|
0.0%
|
$ 210
|
0% until 10/2018
|
HELOC
|
$74,503.45
|
10 year 2027
|
3.99%
|
$ 357
| |
Al Alaska visa
|
$12,299.49
|
5/2019
|
3.99%
|
$ 150
|
Wednesday, July 4, 2018
Rich vs Wealthy
Dearest monkeys,
Happy 4th of July!
A month or so ago, on the way home from gymnastics, eldest asked if we were rich. I don't remember what led up to the question, although I think it had to do with you wanting to do gymnastics every day, and I said how expensive that was. You were newly 7, and I had to think about how to respond at a level that would make sense to you. Whatever I answered seemed to work, because we moved on to other subjects, but I wanted to make note of it, because there is a difference between being rich (which we probably are) and being wealthy (which we are definitely not). And it's important to understand it (and strive to become wealthy, not rich).
Being rich, in my opinion, means you earn a lot of money and can buy a lot of stuff. Your buying power is great. We definitely qualify for that. If dad has his way, our family car would be a Hellcat. We go on vacations every year and you guys don't really want for anything. But we're not far off from living from paycheck to paycheck, and we have a crapton of debt and little in the way of security if something goes wrong.
Being wealthy, on the other hand, might mean all those things too, as far as buying power goes. But it also means that you have security. You're not relying on the paycheck to make ends meet, and a layoff won't cause huge blips. It's not necessarily about numbers, it's about how the money is used.
I've just started a book called The Thin Green Line and the first chapter or so talks about this idea and how the line is narrow, but there. And it all involves your relationship with money.
According to the IRS, in 2014, the top 1% of incomes in the US was $465,626 (this is adjusted gross income). We're definitely not there, but even if we were, that would not define us as wealthy instead of rich.
Love,
Mama
Happy 4th of July!
A month or so ago, on the way home from gymnastics, eldest asked if we were rich. I don't remember what led up to the question, although I think it had to do with you wanting to do gymnastics every day, and I said how expensive that was. You were newly 7, and I had to think about how to respond at a level that would make sense to you. Whatever I answered seemed to work, because we moved on to other subjects, but I wanted to make note of it, because there is a difference between being rich (which we probably are) and being wealthy (which we are definitely not). And it's important to understand it (and strive to become wealthy, not rich).
Being rich, in my opinion, means you earn a lot of money and can buy a lot of stuff. Your buying power is great. We definitely qualify for that. If dad has his way, our family car would be a Hellcat. We go on vacations every year and you guys don't really want for anything. But we're not far off from living from paycheck to paycheck, and we have a crapton of debt and little in the way of security if something goes wrong.
Being wealthy, on the other hand, might mean all those things too, as far as buying power goes. But it also means that you have security. You're not relying on the paycheck to make ends meet, and a layoff won't cause huge blips. It's not necessarily about numbers, it's about how the money is used.
I've just started a book called The Thin Green Line and the first chapter or so talks about this idea and how the line is narrow, but there. And it all involves your relationship with money.
According to the IRS, in 2014, the top 1% of incomes in the US was $465,626 (this is adjusted gross income). We're definitely not there, but even if we were, that would not define us as wealthy instead of rich.
Love,
Mama
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