Reduce Debt Increase Wealth

Personal Finance Basics

July 23, 2023 MIsterchuck Season 4 Episode 175
Reduce Debt Increase Wealth
Personal Finance Basics
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Show Notes Transcript

Knowing the basics about personal finance is necessary for debt reduction. Everyone should understand personal finances to plan and pay bills. This includes savings for future purchases and taking care of basic needs. 

 Article Link:  By Terry Turner

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Charles McDonald:

Hello, I'm your host Mr. Chuck. I retired accountant turned truck driver, I reduce my debt in a relatively short period of time. debt reduction to achieve financial freedom takes commitment, confidence, determination. Personal Finance basics, knowing the basics about personal finances necessary for debt reduction. Everyone should understand the personal finances to plan and pay bills. This includes savings for future purchases, and taking care of basic needs first, before I get started, if there was a week where I didn't issue a new episode, I was because I was on vacation and was unable to get back in time to get it uploaded to my hosting provider. So sorry for that, but keep on moving forward. I have a link in my show notes for an article I'm referring to personal finance personal finances, a term meant to describe managing your finances through budgeting, savings and spending. This involves long term planning and considers potential financial risks, retirement and estate planning investments and how your financial situation evolves over a lifetime, personal finances and corporates how you manage all aspects of you or your family's finances, both short term and long term. That term is also used to describe an entire industry devoted to the services and products designed to help individuals manage their finances and take advantages of investment opportunity. So why is personal finances important? personal finances a vital part of not only managing your day to day financial needs, but also planning your financial future. The sooner you get a grip on your personal finance, the better your long term financial prospects will be for things like investing or planning for retirement. By understanding the elements of personal finance, you can better understand opportunities to improve your finances this understanding can help you budget for current needs while planning for long term financial goals. So what are the five areas of personal finance one income, income as the foundation, naturally, if you don't have income, you're not going to do a whole lot. Number two spending. Spending includes the money for any expenses you have. controlling the amount of money you spend can allow you to set aside money to grow your financial future. So if you spend less, you can save more. Three savings. Savings includes any money from your income that you do not spend, but set aside for the future. It is necessary to provide for potential expenses planned or unplanned. I think another word for that would be an emergency fund. And then for investing, investing is different from savings. real savings are what's left over from you income investments are purchases that allow you to earn future income or savings. investments may include purchases of mutual funds, stocks, bonds, or real estate that you expect to give you a good rate of return. But investments come with risks. And then number five protection, protection from financial risks can be handled through the purchase of life insurance, property insurance, cows, any insurance, health insurance, and things like that. So you have income, you have spending. Everybody probably has that initial two down because that's what they do. You work you make money, you spend money, or they were you may be lacking is the savings. You got to set a little bit aside first and have a little bit of savings to plan for some expenses upcoming or some unexpected, enhanced emergency fund. Then we have investing. Once you get enough money set aside in your savings where you can meet your bills that are coming up in the future. Then you have some money you can invest and then five, protect everything that you have. You need insurance to do that and Insurance is protection. And that's why when you get a mortgage on a home, you they require the lender may require to have mortgage insurance. So if you did have fault insurance or pay them, so that's their protection, then they require you to have homeowners insurance. If something happens to the house, a storm or tree or something, then they know it's gonna get repaired or fixed or some type of settlement. And they will get their money because they're not losing the value of the house. And he have automobile insurance. Same thing, if you're in an accident insurance, either repair your car, or give you money, so to replace the car in the future, so you're not getting stuck with a loan with an asset that is totally destroyed that you cannot use. That's what insurance is for health insurance. It's the same thing. Life insurance, disability insurance, all that is meant to protect you from some future event that may or may not happen, but it's protection, as gives you peace of mind. So we have income spending, saving, investing protection are the five main things and personal finances. The fundamental principles, there's 12, or those there are 12 basic principles of successful personal finance, according to the Jumpstart Coalition for financial literacy, a nonprofit organization that promotes financial literacy education in the US public schools. So number one is know your take home pay Be aware of your income before you commit to any significant spending, such as credit card debt, car loans, or a mortgage. your take home pay is not the same as your gross pay, your gross pay is if you get paid by the hour number hours you worked, overtime included times your rate of pay at equals your gross, then you pay income taxes off of that he may make contributions to a retirement plan or commonly known as a 401 K, he may make health insurance payments, you may have had child support come out there. So the amount of money that you deposit in your checking account is your take home pay to is pay yourself first. Set aside money from each paycheck for unexpected emergencies and long term goals before paying your bills, shoot for 5%. If you can't take 5% and put it in a savings account, start saving now ideally, you should start saving for your future. While you're still young. The longer you save, the more interest your savings will earn. The sooner you start, the more you're gonna have later in life pretty basic because of compounding, and let your money work for you. If you don't start saving until you're 55 you're not gonna have much money set aside for retirement. If you start saving at 25 You can might be able to retire early, because you're gonna have plenty of money because of compounding. Compare interest rates, whether it's savings for your future or looking for the right credit card, look for the best interest rate first earn more interest on savings and pay less interest on debt. So for credit cards, you want a lower rate on savings account, you want a higher rate. Be aware shop around remember the rule of 72 to figure out how many years it will take time savings to double divide 72 by the interest rate of your savings. So right now, I'm getting four and three quarters percent interest. If I divide that into 72, it's 15 years, so my money will double every 15 years at that rate of interest. If I had a percent rate of interest, it would be nine years. So it really helps never borrow what you can't repay, make sure you can pay off what you owe. This will improve your credit overall and keep your debt manageable. That's why I talk about those percentages. When I talk about a budget, your mortgage loan should be around 25 to 30%. Your car loan should be somewhere around 10 to 15% of your gross pay. And that's why I do that that helps keep your borrowing under control so you don't get to borrow too much from only for one thing, and then you're stuck. He might be house poor, because 80% of your money is going into paying for your home. But you're not going to do anything else you're going to be barely have enough money to eat and go to work. So that's six, never borrow what you can't repay, treat credit cards like cash. If you don't have the cash to buy something, you don't buy it on a credit card. So you get paid weekly, you pay off your credit card weekly, you get paid every two weeks, he should be able to pay off your credit card every two weeks, treat credit cards, like cash in your wall, stay out of trouble. Don't borrow money, too far in advance, pay too much for a car and go like an eight year loan at $1,500 a month. He really can you afford that? Know what you can afford before you go shopping, if he can afford $800 A month car payment, and you're pretty comfortable with that. And it's not going to put a strain on anything else in your budget. That's what you should shop for somewhere around $800. The bigger down payment you have, then the less you have to borrow, the lower your payments gonna be and the less interest you'll have to pay this a Note Seven create a budget, they say and say that said set up an annual budget of income and known expenses. Use this as a roadmap to build your savings while living within your income. We got to take that farther ahead. You want to set up a monthly budget. So you know your expenses coming up every month for the whole year. So you do January, February, March. And then you also set up your savings, you set up all your credit card payments, you set up all your needs first, housing, transportation and food, then your wants clothing, entertainment, car, new car, whatever your goals, whatever you want to save for a future, those type of things, and know how much you need every month, where it's gonna go. Sign your money to a category, know that it's going to be paid off and try to do it so that you're have the money in your checking account, and July to pay for your August things. And you'll be happy you did so remember that high returns mean high risk, high returns on investment typically means you're going to have to take higher risks. The first define your investments can spread the risk around protecting your investments. The younger you are, the more risk you can take. The older you are, the less risk you're gonna take. But diversification is key to long term investment. Spread your money around don't put everything in one basket. Because if you put everything in one basket and that one thing fails, you lose all your money. If you spread everything around and one thing fails, you're hardly even notice it. Nine, don't expect something for nothing. Be wary of get rich quick schemes, if they are real, everyone would already be doing them. If it sounds too good to be true, it probably is. And get a second opinion, especially when you're talking to a life insurance salesperson, somebody that wants you to buy some type of an annuity or some type of insurance product. Get a second opinion from a different type of financial professional. And don't ask friends, family or neighbors because they may or may not know. Plan your financial future take time to write down your financial goals both short term and long term. Then work out a realistic roadmap to get you to these goals. So say for example, you're saving up and you want to buy your first home. How are you gonna do it, write it down, write down the home you want the neighborhood, the price range, how much down payment you're gonna need and how much you can afford, and then work towards getting your down payment and seeing if everything that you're looking at is reality in real life and may be that your monthly payment may be lower than what you're gonna be able to get. So you may need a bigger down payment as called Planning Ahead Your credit past determines your credit future, your credit record is kept for years by credit bureaus. If you're having trouble paying loans, or credit card debt, that record can hurt your chances of getting credit in the future. If you have a lot of debt, you probably already know you have bad credit. If you get things under control, and he's make timely payments month in and month out, and you pay off some of your credit cards, your credit score will get better by insurance. That's protection. Health Home auto and life insurance can protect you and your loved ones from financial hardship and the event of accident or illness. That also in there is a disability income. If you're unable to work for due to an illness, you have short term, you have long term, and it's designed to replace your income for either a short period or a long period depending on what's going on. So the more you make, the more you need. Disability Insurance is not because you didn't die, it's is because you're unable to work due to an illness or an injury. And then that would kick in to replace your income they used to make him call protection. And if your underwear unsure of all these things, you should study him up and get to know them and get them memorized. I have a link in my show notes for this article. And it's a great article. The first five things you need is income spending, savings, and investing protection. That's the basics. Know your income, know where your money is going. Save a little bit, start investing soon as you can have protection to protect yourself. Then after that and expands to know your take home pay, pay yourself first, start saving now compare interest rates. Remember the rule of 72 Divide your interest rate into 72. That's how many years will be before your money doubles. Never borrow what you can't repay, create a budget I say monthly. Remember that high returns means high risk, don't expect something from nothing. Plan your future. Your credit past determines your credit future. And a bad credit score is gonna cost you more for insurance, whether it's homeowner insurance, car insurance, health insurance, whatever it is, you're gonna pay more for insurance because they're gonna see you as a higher risk for non payment. As I said, I'm gonna be going on vacation this may or may not be uploaded in time because I right now it's May and I am unable to do it because I have no more minutes left. But I'm going to be out of town for at least six weeks or longer. If I don't get back in time, there may be a couple of weeks left before this episode comes up and you're be able to hear it. But I hope that's not too much of a burden on you. And if you find this podcast useful, please go to my footnotes, I have a link for my subscription plan where you can go there and make a contribution. Or you can go to reduce that increase Click on support and do the same thing. Thank you for all those who've done it in the past. I'll be back in one moment with my final thoughts. If you're interested and learning about an online software that helped myself get out of debt, it does tracking, budgeting, and keeps track of all your assets and all your debt and even tells you how much and when to transfer money into your savings account and how much and when to transfer money to your debt and which debts to pay off in order. First. It's not cheap. It's a one time payment. But it will definitely be an investment something and yourself and an investment in your personal financial life. If you're interested, send me an email at reduce debt increase and I'll send you the information about this online software that works great for me. Income spending, savings and fasten protection. Know your net The income, know where your money is going, say money, and VAs money. Remember the rule of 72, the interest rate that you're receiving divided into 72 gives you the number a year your money will double. But how are we gonna achieve that plan for your future, know what your expenses gonna be in the next three months? Is there anything coming up that you pay semi annual or quarterly, or maybe even once a year, have any clue what those expenses may or may not be and how much they are? Well, in order to understand and get to know these things, and your personal finance in your life, because everybody's different, there's a few things you have to do. And there's one thing you have to do before you can start a budget. Before you can do a monthly budget or a yearly budget, or whatever you're doing it for, I recommend doing it for a month, and do it for January, February, March, April may do it all in a spreadsheet, so you can see it. And then as the months go, by the first year, you'll come up on some expenses that you forgot about. And now you know about are they need it? Can you get rid of it? Can you cancel them. And that's how you start getting your personal finances under control. I gotta say, a lot of people out there, I'm not gonna give a percentage, because I don't know, they go to work, they make money, they make good money, they think they're making pretty good money, they pay their bills every month, they spend all their money, and they don't maybe have $500 in a savings account, if they even have a savings account. They're the only investments they may have a be through work if they have a retirement plan through work. And they may or may not even be utilizing that. And then all of a sudden, they lose their job. Or they get injured and they can't work. And now they have no money to pay their monthly bills because they have no income, and may lose everything because of that. So getting your personal finances under control and knowing what's going on is important. And having that protection, there can help you get through some financial hardships that may come along in your life. It's not when they're not if they're gonna come along, it's just a matter of when, if you can avoid them good for you. But be prepared, prepare for the worst and hope for the best. The first thing you got to do is start tracking your money that's going through their savings to your checking account, your savings account, all your credit cards. So what is tracking? When I was in high school and college, that would have been called a check register. Nowadays, the banks are online, you can go in and look at your bank balance. So if you're unsure how much money you have in your checking account, you go online and you look, oh, I have $1,500 I can buy this for$500 that by doing that, did you consider some things you need to pay in the near future, like rent, utilities, gas for the car, food, things like that? Probably not. Because you were just focused on buying that one item. And he was just checking to see if you had enough money to buy it. But that is not the way to go. So you need to track everything and by tracking you will know your net income, your take home pay, because that is what you're gonna see going in your checking account. And then when you pay your bills, your rent your utility, your car payment, all your credit card bills, your groceries, your food, groceries, your dining out your gas for the car, insurance for the car, homeowners insurance, life insurance, whatever instruments you have, when you pay those, you'll be aware of what you have to pay, and to generally a good idea of how much you're gonna pay. I know that my homeowner's insurance is due in September and it's somewhere around 1000 bucks, plus or minus a few 100 depending on what the insurance company does. I know my Real estate taxes are due in January, and June on the 20th every year, and it's about $2,600, a half, or about $3,200 a year, that goes up or down depending on what people vote for, or whatever expires, I know that I have some things I pay once a year at the first of the year, I know I have some things I pay throughout the year at different times of the year. And I account for it and I budget for but the only way I know that is because I was tracking. And tracking nowadays only means you have an app, an application that you can log into, you don't even have to download it, you can do it online, and you put in your checking account. And all the transactions that go through it, you put in your savings account and money that you transfer to it both ways transfer out of it. And your credit cards, if you have five credit cards that you have a balance, you should be tracking five credit cards, because at the minimum, you should be making a payment and then need to know how much you owe. You don't need to know the details of your mortgage or your car loans, or the balance, you just need to know how much the monthly payment is. That is the basic that is the start of getting your personal finances under control. I've talked about that in detail. Under episodes I call tracking. If you see an episode with the tracking title somewhere in the title, that's what I'm talking about. The next step after you've done that for at least 30 days, is creating a budget. Tracking is what happened in the past. A budget is what's gonna happen going forward in the future. Get in the habit of looking at your budget before you spend money. If you budget $1,000 for groceries, and you keep that up to date on your actual, you'll know what your balance would be for groceries. So when you go before you go to the grocery store, know how much money you have put aside for groceries and try to stay in that limit at the beginning. If you may go over the limit, you can move money from one category that is less important, and to groceries so that you're not overspending. That is what a budget is for is for you to plan for the future. And for you to look at as you go throughout the month. Know how much money you've put aside for that category before you spend the money. I've talked about allocating money, every time you get paid, and your checking account, course you're going to enter that in your tracking. And then in your budget software in your budget spreadsheet, have a column call it money allocated money that you set aside to only be used for this particular purpose. That's given your money a job to do so every time you get paid. If you get $1,000 A week, you put $1,000 at the top income. Where are you gonna spend that money? You're gonna put 200 towards rent and 100 towards utilities and whatever balance towards gas and groceries and maybe some clothes. Fine. You got then before you spend the money, come back and look. How much money have you allocated for that category. So you know, you don't go over that is keeping you on track and control your money, then you need to plan for protection. Have you have all the correct insurance, homeowners insurance, auto insurance, health insurance, life insurance if you have a family, children involved? Because if you lose your life due to an accident, you need to replace your income for your spouse or how are they going to survive? Disability Insurance. If you get disabled due to an accident and you're unable to go to work. You need to replace your income. That's is called protection. You're protecting yourself For some bad event that may or may not happen, plan for the worst, hope for the best. And savings. Build up a savings account for your emergency fund. And just don't put it in a savings account and say, I have$5,000 in saving for the emergency. What's an emergency? Category? Is that in a spreadsheet? What $5,000 How much are you going to use it for what event that may happen? Maybe $1,000 for car repair, maybe $2,000 For replace appliance that goes bad, maybe$3,000 for health care for doctor bills, and cases an accident and one yet your child children, maybe breaks an arm or whatever that categorize your emergency funds so you know what you can use it for and how much you have there. You can shift things around in the event something happens. That's okay. But give yourself an idea. What are you going to use it for? As what is the emergency, you're going to take that money out for us. And once you have an adequate enough money and savings, and then you go to investing, Investing is for long term financial goals, your retirement, maybe your children's education and they want to go to college, maybe they don't. You can save money and invest it and it'll grow much faster because you usually get a higher rate of return and you'll be glad you did. So