Your Credit Card Payment Just Doubled!

Even if you didn’t charge anything last month, your next payment may have just gone up

If you haven’t received your credit card bill yet this month, you may be in for a big surprise, especially if you went a little overboard with your holiday spending. For the estimated 40-million Americans who carry a balance on their credit cards their minimum payment may be increasing anywhere from 40-100 percent. Here’s a look at why, and what to do about it.

Under pressure from federal regulators, credit card issuers are increasing the minimum monthly payment requirement on outstanding balances. The change should help consumers in the long run, but can be painful in the short-term.

Credit card minimum monthly payments have traditionally been set at an average of 2 percent of the outstanding balance. The entire 2 percent would often go towards interest, and cover little or none of the principal. According to Bankrate.com, a balance of $8,000 (the approximate credit card debt carried by the average American) would take almost 54 years, and cost an additional $22,931.52 in interest when paying only the minimum 2 percent each month.

Credit card companies are now required to set a minimum monthly payment that covers interest, plus at least 1 percent of the outstanding principal. Using those guidelines, that same $8,000 would take only 30 years to pay off and cut your interest in half to $11,789.08.

Obviously 30 years is still a long time to pay off credit card debt. Most people will pay off their home loans in less time than that.

All too often, I see people treating their credit cards as an additional source of income. The key is to pay-off your balance each month.

According to a recent study by the American Bankers Association, less than half of cardholders consistently pay-off their balance each month.

The problem usually starts when we have an irregular expense, such as car maintenance, holiday spending, or a vacation. We turn to the credit card to cover the difference, planning to pay it off next month. But when next month rolls around our budget is tight again, and even if we don’t add to the balance, we’re unable to pay it off in full.

The trick is to manage your daily, weekly and monthly spending. Set up a spending plan based on your income and include regular expenses like mortgage, groceries and car payments, but also irregular expenses such as holidays, birthdays, car maintenance and medical expenses. By planning ahead and setting aside a little each month for these irregular expenses, you’ll have enough to cover them when they arise and won’t have to turn to the credit card to cover the difference.

Most people can easily squeeze an additional 10 percent out of their paycheck by simply creating a spending plan and tracking their expenses. Use an online budgeting tool to make setting up your spending plan simple. Mvelopes Personal offers a free 30-day trial. A pen and paper will work, but you have to be disciplined to stick with it long-term.

Credit card spending can throw an extra wrench in a budget. When you make a purchase on a credit card, the money isn’t immediately taken out of your account, as it is with a debit card. By the time the bill comes, you may have already spent the money elsewhere. A program like Mvelopes Personal, which has a credit card tracking feature that automatically sets aside the money from your budget whenever a purchase is made with a credit card, can make credit card spending less abstract.

Even if all you can do is pay the minimum, make sure that you at least do that. Ignoring the problem won’t make it go away. It’s expensive and will take a long time, but by paying at least the minimum each month, you’ll keep the credit scoring folks happy, which can save you thousands of dollars later on.

Steven B. Smith is the author of Money for Life: Budgeting Success and Financial Fitness in Just 12 Weeks! and President and CEO of In2M Corp. www.in2m.com.

9 Financial Resolutions

Earlier this week I wrote about "Nine New Year’s Resolutions to Get Your Finances in Order". Today I would like to expand on some of those ideas. Have your personal finances been a bit of a challenge this past year? According to In2M Corporation’s financial fitness survey conducted this past fall, you aren’t alone!

• Nearly 90 percent of survey respondents are moderately to very concerned about their ability to meet future financial obligations for major items, such as education and retirement.
• Seventy-three percent of respondents said their financial situation is about the same as (40 percent) or worse than (23 percent) when compared to last year.
• Sixty-six percent stated their approach to financial management is either reactive or simply total avoidance. Only a small 34 percent follow a plan of action.
  

Here are 9 suggestions that you may want to consider for this next year. Now is the time to get control of your finances, and take that first step down the path to financial fitness. Why not start this next year off on the right financial foot?

1. Spend less than you make.
Just like you can’t loose weight if you take in more calories than you burn… you can’t save money if you spend more than you bring in. Spending less than you make on a consistent basis is the key to reaching financial fitness and financial stability. You can’t increase your savings, make investments, reduce debt or even make wise spending decisions if you’re consistently overspending your income each month. Forty nine percent of respondents, to In2M’s financial fitness survey, said they rarely, if ever, use a budget to manage household spending. No wonder they have so many challenges with overspending, increasing debt and lack of savings.

Put together a spending plan and make it one that works for you and your family!

For a step-by-step process of how to make an effective spending plan, look in the book Money for Life and its companion piece the Money for Life Success Planner. These books walk you through the process and explain the reason behind each step, in a way that anyone can understand. If you’d rather go the paperless route, Mvelopes Personal will help you create an online spending plan.

2. Save more… at least 10% of your income.
Ever hear of the theory of paying yourself first? That’s basically what this is. If you make it a habit to pull out 10% for savings and investments for retirement, before you pay any other bills, you are actively working towards a better financial future for yourself. This 10% can include your 401k account if you have one, but be sure you are maximizing that option! It’s also wise to put an additional amount into savings after your 401k investment is made. Put this money into a money market account, money market fund or CD if possible, so that you get a higher interest rate. According to In2M’s financial fitness survey conducted this past fall, 48 percent of respondents saved nothing in the past 6 months and 31 percent saved less than 10 percent of their income. Don’t be one of the statistics, take action today and start saving!

3. Calculate your net worth.
Do a reality check to ensure you are on the right track. Your net worth should be increasing each year, even if it is just by a small amount. The exercise of calculating your net worth can be very valuable as well… people often discover accounts, investments, etc that they have forgotten about, or need to update.

If your net worth has decreased from the year before, take an honest candid look at where you can make adjustments to improve these numbers. Consider accelerated debt reduction. Consider increased savings. Even consider canceling every credit card you have if it means that you stop overspending and start saving. Be proactive in your efforts to get financially fit!

4. Start an emergency fund.
If you don’t already have an emergency fund, start one today! Your emergency fund should have a minimum of 3 months worth of expenses in it. This is your emergency money for a job loss, emergency repair, medical expense, etc. Keep these funds in a money market account or other high interest, easily accessible account. If ever you have the misfortune of an unexpected job loss, unexpected car repair, unexpected appliance problem… you will be far more prepared to weather the storm if you know you have a little breathing room on your finances, thanks to your emergency fund! That peace of mind makes all the difference.

5. Reduce your debt.
Use the debt roll down principle to quickly reduce your debt. Make a list of all your debts and prioritize them in order of interest (highest to lowest) or in order of the number of payments till payoff (fewest payments at the top). Once your first debt is paid off, roll that payment amount into the next debt on your list. Follow the same procedure when the second debt is paid off. You will not only reduce the number of years you will have payments, but you will also save thousands in interest if you follow this principle until you are completely debt free.

6. Use credit cards for the benefits, not the penalties.
If you use a credit card, only do so when you know that you already have the funds set aside to pay the balance completely when the bill arrives. Do not carry a balance on your card! It wastes money and ends up costing you a fortune in interest and finance charges. Thirty Eight percent of respondents to In2m’s Financial Fitness Survey stated that they never pay off their balance, and 33% only do so part of the time. Are those airline miles really worth it? Not if you aren’t paying the card off every month!

7. Make sure you have adequate insurance.
We’re talking home, life, disability, health, property and even auto. Not too many other things will matter if you have no fire insurance and your house burns down. Thirty Five percent of respondents to In2M’s Financial Fitness Survey stated that they either knew they had too little insurance or that they weren’t sure what their coverage was. Make sure that you, and your family, are covered adequately!

8. Create or update your estate plan and/or your will.
Whether you are single, married, divorced, kids or no kids… you need to have the proper documents to make your wishes known.

• Update your beneficiary info on your retirement accounts, insurance, etc.
• Specify money that you want to give to charity through a trust or gift exclusion.
• When preparing a will reference an addendum in the will where you list who will get your various assets and personal property.
• Make sure all language is clear and as specific as possible so that your wishes can be carried out.
  

9. Manage your portfolio.
If you have any 401k accounts from former employers, be sure you roll them over into an account that you control. Consolidation can also make your retirement accounts easier to manage, however, in doing so make sure you don’t jeopardize the diversification. Tools like Mportfolio, from the makers of Mvelopes Personal, can help you manage all your investment accounts from one spot, quickly and easily.

Take advantage of the New Year and get on the path to financial fitness!

Using the Envelope Budgeting Method in Today’s Cashless Society

Traditionally the envelope budgeting method used cash and actual paper envelopes; however, in today’s high-tech and often cashless society, that would be a little unrealistic. Some expenses simply cannot be paid in cash and, therefore, we need to find ways to use these tried and true principles of envelope budgeting, in today’s world.

The major problem with many budgeting systems has been that they provide after-the-fact information, meaning you create a plan in advance and determine the amount you will spend in each spending category. At the end of the month, you then run a report, which tells you all the categories in which you have overspent. With this approach, the information is not real time—in other words, you did not have the information you needed at the time you were making a purchase decision. Systems like this do not tell you how much is left to spend. An envelope budgeting system provides this critical information.

Even with the significant advantages of the envelope budgeting system, it is only as good as your determination to use it. Meticulous tracking will only prove successful if you are prepared to guide your spending decisions based on the information the envelope system is providing you.

Success will ultimately come from persistent and consistent execution of the success cycle and the envelope budgeting principles. Let’s quickly review the envelope method of budgeting:
¨ Set money aside in advance of spending requirements
¨ Spend from how much is left
¨ When you run out money, you must make a choice
¨ At the end of the period, what’s left is savings
Of course these steps above pre-suppose that you have made the commitment to spend less than you make. Without that, the envelope principles don’t work.

When you partner envelope budgeting with the success cycle, you will have a system that really works. The success cycle is made up of four steps:
¨ Plan
¨ Track
¨ Compare
¨ Adjust

Your Monthly Spending Plan is the part of the envelope method that coincides with the first step of the Success Cycle – Plan. Your Monthly Spending Plan has defined budget categories, or envelope spending accounts. The next step is to track all of your transactions so that you can compare that information with your plan. You will want to use your plan, along with your tracked transactions, to make informed spending decisions; if you know how much you have spent, how much you have left to spend and how long it has to last, you can make appropriate spending choices that won’t limit your options in the future.

How do you realistically track every transaction? Yes, It does seem daunting at first, but it’s actually not as hard as it sounds with the help of the right tools. The right tools can make this task simple, even automatic.

The most critical component to successful tracking is the proactive decision to actually do it. Once you have made this decision, you can begin reviewing the variety of implementation tools that are available to help you in your task; and then find the one that is right for you.

There are a variety of implementation tools available that you can use with the envelope budgeting method. Among the options are:
¨ Cash-based
¨ Paper-based
¨ Spreadsheet
¨ Software
¨ Online System
¨ Combination of the above

Choosing an envelope budgeting system.
Finding out which tool is right for you is important to ensure your long-term success. The correct implementation tool must assist you in successfully tracking all expenses and maintaining the balance information that is necessary to make informed spending decisions on a daily basis. Above I mentioned several types of tracking tools, lets review them in 4 basic categories:

1. Cash
2. Paper ledger or computer spreadsheet
3. Computer-based envelope system
4. Combination of these

Choosing the correct implementation tool for you and your family is a matter of personal preference and lifestyle.

Cash-based envelopes.
The most basic approach to implementing the envelope principles is using a cash-based system. Income allocation and tracking your spending are both very straightforward with cash. Because of these advantages, many people have opted to use the cash system. However, because it is more difficult and inconvenient to make all payments with cash, many people combine a cash-based envelope system with a system that can handle the management of non-cash transactions as well.

Tracking all of your spending is quite simple with a cash envelope system, as every transaction is automatically subtracted from the balance remaining in a particular spending envelope, or account. For example, when you make a clothing purchase, you take the clothing envelope with you and pay for the purchase from the clothing envelope. Let’s say you have $100 left in your clothing envelope, and you are making a $60 purchase. When you hand the cashier the $60, you will have $40 left in the envelope. Simply write down the transaction on your envelope or place the receipt in the envelope so that you can look back at where your money was spent during the month. When you count up the cash left in the envelope, you will know how much you have left to spend and how long it will need to last.

Paper ledger or computer spreadsheet.
Using a paper ledger or computer spreadsheet system allows you to track all types of spending. This approach works much the same way as the cash-based envelope system, with a few adjustments. Obviously, you will not be allocating actual cash to spending envelopes. However, you will be creating spending accounts that are essentially virtual envelopes. Your cash will stay in your bank account, but you will allocate it to your spending accounts for the purpose of tracking your spending and determining the balance remaining in each spending account on a daily basis.

If we use the same example used in the cash-based method above, with the paper-based system, you will need to record the non-cash spending transaction—that is, check, debit card, or other form of payment that you used to buy the $60.00 in clothes—in your bank account register, as well as in your clothing account register and subtract that amount from the $100 balance in the clothing account. The same would be true if you created an account register spreadsheet on the computer.

Computer-based envelope system.
Perhaps the easiest envelope system for most to use is a computer-based or online system. If you are using a fully automated envelope-based computer system, your transaction will be tracked automatically for you. For the example that was used above, you will simply need to download the non-cash transaction and assign it to your clothing spending account. The system will automatically update the balance remaining in that account for you. You will know exactly how much you have spent, how much you have left to spend and how long it needs to last.

In addition to the above, the right system will help you complete each of the following:
1. Create your monthly spending plan.
2. Set up your spending accounts.
3. Create your funding, or income allocation, plan.
4. Set your initial spending account balances.
5. Ensure your spending accounts and bank accounts are balanced.
6. Allocate your income to spending accounts as defined in your funding plan.
7. Automatically track your transactions.
8. Assign your transactions to the appropriate spending accounts.
9. Split transactions between a number of spending accounts.
10. Set aside money for credit card purchases.
11. Complete a monthly review and make adjustments.

An appropriate computer-based system also will generate a number of important reports, including spending and bank account summary reports. These reports can be printed on a daily basis and carried with you to assist with making sound spending decisions. It also should help facilitate the monthly reconciliation process for your financial institution accounts.

Using a combination of these approaches.
Even if you use a paper ledger system, computer spreadsheet, or computer-based envelope system, there may be certain spending accounts for which you would like to use cash. This is not a problem and can easily be done. Most people who use a combined approach use cash envelopes for many of their monthly discretionary accounts, such as groceries, entertainment, allowances, and clothing. They find they are able to exact a higher level of control over these spending areas when they are using cash. If you would like to use cash for some of your spending accounts, you will need to go to the bank or ATM once each month and take out enough cash to meet the funding, or income allocation, requirements for these envelopes.

It’s about choices, not restrictions.
One of the most often-cited objections to the idea of budgeting is the thought that budgets become restrictive and frustrating. The feeling that they cannot make purchases when they would like to can be very disconcerting for many people. However, in reality, as you spend beyond your income resources, your spending choices become increasingly more restricted. Real, long-lasting choice comes from making the decision to live within your means.

That said, there are many times when making a decision to spend beyond the current resources in a spending account is just fine. Let’s say that a desired clothing purchase was $125. You recall the balance in the clothing envelope is only $100. In this case, you have to decide if you would like to put off the purchase until you have more money in the clothing envelope, purchase a less expensive item, or transfer money from another envelope to cover the added cost.

As you can see, the information provided using the envelope system has truly empowered you to make an informed decision. Making the decision to transfer money from another envelope is not a problem, because by transferring the funds, you have made a decision to spend less in that area.

Now let’s say that you did not have extra money in another envelope to transfer to the clothing envelope. In this case, if you are truly dedicated to living within your means, your only option is to either purchase a less expensive item or wait until you have more money in the clothing envelope. Choosing to spend the extra $25 when the resources are not available will limit your choices in the future, because you have just created debt above and beyond your monthly net income resources. This means you will be paying more interest next month and further reducing available resources to purchase the things you want or, more importantly need.

Most people are very successful at making sound purchase decisions when they know how much is left to spend. But ultimately, your success in making smart decisions will depend on your resolve to live within your means.

Nine New Year’s Resolutions to Get Your Finances in Order

1. Automate your finances. If it’s not easy, most of us simply won’t do it. Make it easy on yourself by using a secure online budgeting system, like Mvelopes Personal, to track and categorize your expenses. Use online bill pay to save time and money.

2. Create a spending plan. Determine how much you plan on spending, and where you want to spend it. Give yourself some flexibility to allow for some of those impulse buys without ruining your overall plan. Spending management is simply proactively budgeting your money.

3. Save at least ten percent of your income. If you don’t pay yourself first, there won’t be any left over at the end of the month to save. Set up an automatic transfer to a savings account to make it easy.

4. Pay at least the minimum on your credit cards, and pay off all that you can. Making at least the minimum payment on time accounts for 35 percent of your credit score. Paying off the entire balance each month can save you hundreds in interest.

5. Contribute enough to your 401(k) to get the maximum company match. Your kids can get help to pay for college, but no one will help pay for your retirement. If you’re not taking advantage of a company match, you’re turning down a yearly bonus from your employer.

6. Review and readjust your portfolio. Make sure that no single stock comprises more than five percent of your portfolio. As your different investments perform differently, your distribution will become skewed. Readjust your holdings to match your desired distribution.

7. Start an emergency fund. You should have three to six months’ worth of expenses set aside in an easily accessible account to cover mortgage, food, car payments and other necessities in an emergency. Keep it separate from other funds to avoid spending it.

8. Check your credit reports. You’re entitled to one free copy of your credit report from each of the three credit-reporting agencies at your request. Stagger the reports, receiving one every four months to keep an up-to-date view of your credit throughout the year.

9. Review your insurance policies and update as needed. Review your life, health, home, auto and disability insurance policies. Make sure you have cost replacement coverage on home and auto insurance, as well as good liability coverage. Make sure your home insurance reflects the current value of your home.

10 Questions to Check your Financial Health for the New Year

With the New Year quickly approaching, millions of Americans are preparing to make resolutions to improve both their waste line and their bottom line. If you’re looking to improve your financial fitness this year, it’s important to first understand how you’re already doing. The following quiz, taken from my Money for Life Success Planner, will help you understand how you’re doing financially, and where you can improve.

1. What percentage of your income do you save each month?
   a. 10 percent or more
   b. Less than 10 percent
   c. None

2. How often do you use a monthly budget to track and plan your spending?
   a. Almost always
   b. Sometimes
   c. Never

3. When you make a purchase using a credit card, how quickly do you usually pay off the entire balance?
   a. Immediately or before the end of the month
   b. Between one and three months
   c. I usually carry a balance from month to month

4. How many times during the last six months have you paid a bill late?
   a. None
   b. One to five
   c. Six or more

5. Most of your major purchases are…
   a. planned in advance, with money set aside to cover them
   b. planned even though the funds aren’t always there to pay for them
   c. unplanned or spontaneous

6. If you needed to come up with money quickly to pay for a major home repair or an emergency, what source would you use?
   a. Funds already on hand
   b. Funds from available credit
   c. No funds available without establishing credit

7. If you lost your job or main source of income, how long could you provide for your basic needs and meet your financial obligations?
   a. Three or more months
   b. One to two months
   c. Less than one month

8. The insurance I have to cover the loss of major assets including real estate, autos and personal property is…
   a. enough to cover replacement costs
   b. less than enough to cover replacement costs
   c. unsure or don’t have coverage

9. When was the last time you reviewed and adjusted your retirement plan?
   a. Within the last year
   b. In the last five years
   c. I don’t have any savings for retirement

10. When you think about your ability to meet future financial obligations, you feel…
    a. completely at ease
    b. moderately concerned
    c. very concerned

Give yourself five points for each time you answered “a,” three points for each “b,” and one point for each “c,” then total your score. If you scored between 40 and 50, you’re in great financial shape. If you scored between 20 and 39, you are off to a good start, but could still address some weaker areas. If you scored below 20, you need to rethink your financial plan, and make some big changes.

Regardless of how you scored, now is a great time to sit down and examine your financial situation. Write down your financial goals, and develop a plan of how to accomplish each one.