Archive for the ‘Budgeting’ Category

Goal Setting: Ending up where you want to go

January 18, 2013

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Written by: Joan Reid, Family & Consumer Sciences Extension Agent, Granville County, North Carolina Cooperative Extension, North Carolina State University

Do you remember the following passage from Lewis Carroll ‘s “Alice in Wonderland”?  Alice came to the fork in the road. “Which road do I take?”, she asked.  “Where do you want to go?”, responded the Cheshire cat. “I don’t know” Alice answered.  “Then,” said the cat, “it doesn’t matter”.

forkintheroad

What do you dream of having and doing? People of all ages dream about how they would like to live, what they’d like to buy and what they will do when they are retired. Smaller, near-term wants are often easier to attain, while, somehow, it seems more difficult to do the planning to reach long-term goals. If we remember that a goal is a dream with a deadline, we might be more inclined to invest the time needed to plan how we will realize at least some of those dreams.

Getting Financially Fit Is A Journey
Being financially fit is a complex process. It’s a journey that takes twists and turns. It takes constant attention to the road, making course corrections, as needed. Think of Dorothy’s goal to see the Wizard of Oz. Oz was her destination, but she didn’t take a magic carpet to immediately arrive. She was counseled to follow the yellow brick road. While following that road, she met with unexpected experiences and derailments. However, she stayed the course, learning along the way, on her journey to her final destination.

Getting Financially Fit Through Goal Setting
Goal setting helps individuals and families become financially fit. While goal setting is an easy enough process to understand, figuring out what stands in the way of getting it done might be the first step to successful goal setting. Of course, that is different for each one of us. How do these factors affect your ability to successfully set and monitor your goals? Are there other factors that get in the way?

• Long ago learned messages about money and spending.
• Your values about money.
• Lack of (or perceived) time.
• Not good with money.
• Don’t know how to set goals.
• Can’t stick to goals once they are set.
• Can’t resist the urge to spend.
• Just want to have some fun now.
• Don’t have enough extra money to make a difference.
• Can’t agree with others in the household.
• Will worry about it later.
• Stuff happens!

Once you have decided what you’d like to be able to do with your money and you are willing to work on it, you can use the goal-setting process to get there.

Luke Erickson, University of Idaho Extension educator, described the process of financial goal prioritization this way:   “Think of budgeting as building and maintaining a boat, something that keeps you afloat. Think of written, prioritized financial goals as a motor you add to your boat to provide motivation, direction, and ‘horsepower’ to get somewhere worthwhile.

Getting Started on Your Journey
How do you get started? You might start with your long-held dreams, like owning your own house, having children or starting a business. You might select goals around life events: children’s needs (education/expected marriages), your own further education, or retirement. Adding items from your “bucket list” (things you want to do before you ‘kick the bucket’) will give you plenty of ideas for possible inclusion.

It’s often easiest to categorize goals as short-term (within one year), intermediate (one to two years) or long-term (three to five years). Beyond financial goals you may include educational, social/relationship, health/physical, and recreational desires. Those goals may or may not require money to accomplish. Before continuing, you, likely, will want to prioritize your goals.

SMART Goals Prevent Derailment
Here’s where we distinguish goals from dreams. In order to keep it real, you’ll need to determine how your goals fit into your budget. If you don’t have a budget, you can use the “Your Financial Action Plan” fact sheet from University of Florida Extension. It contains a goal-setting page, also. Using the worksheets, you will need to identify your monthly income and all of your monthly expenses, organizing them into categories.

Now you are ready to plug some of your high priority goals into your budget. Writing SMART Goals will make them more attainable.

SMART Goals are:

S – Specific – You know exactly what you want
M – Measurable – What is the cost and how much will you need to save each month?
A – Actionable – What actions will you need to take to reach this goal?
R – Reachable/Realistic – Is this something you can realistically reach without getting frustrated and giving up?
T – Time – Achieve by what date?

For example, an ineffective goal:  I want to buy a house.
SMART Goal:  I want to buy a house in my current city with a mortgage of not more than $80,000 within 6 years. I will save $20,000 for a down payment and closing costs by saving at least $277 a month.

Now you can work the monthly amount required to save into your budget. Repeat the process with other goals. What if there isn’t enough money in your budget to set aside for your goals? If money is tight, you’ll need to identify spending leaks (unnecessary expenses). Rework your budget to find ways to reduce current spending to be redirected towards the goals. For example, if you buy lunch out everyday, you might want to carry your lunch most days instead. Calculate how much you will save and divert it to your goals.

How about:
•A cup of coffee purchased each morning on your way to work? Are you willing to make it at home instead?
•Fast food breakfast every morning? Breakfast at home is much cheaper.
•The candy bars/snack foods/soda you routinely purchase from a work vending machine? Can you bring snacks (healthy ones) from    home? Are you willing to drink water?
•Lottery tickets?
•Non-nutritious foods purchased at the grocery store?
•Your other impulse purchases? Beware of the effect of “chain purchases.”

One important goal is to save money from every paycheck, even if it is a small amount. The habit of regularly saving is more important and beneficial than the amount saved. You can always increase savings once the habit is started. Many successful savers follow the Pay Yourself First philosophy. They contribute to savings before paying the bills.

One barrier to saving is peer pressure from family, friends, and the media to spend. Remembering this quote, “If there is to be any peace, it will come through being, not having” (Henry Miller), can help us focus on what is important.

You’ll need to be vested in your goals to resist the enormous pressure from marketing messages to indulge in fleeting fancies. When you cave in to pressure to spend on items of lesser importance to you, you are giving up future needs to satisfy immediate wants. If you know what you want to achieve and treat financial goal savings as a fixed “expense,” you’ll be more likely to achieve success.

If you truly think you don’t have any money to save, try this exercise: Start with putting a penny the first day in a jar. Each day, double the amount so, the second day, you’ll put in the jar $.02, third day, $.04, fourth day, $.08, fifth day, $.16, etc. Now, if you keep doing that, do you know how long it will take to accumulate $1 million? Since most of us can’t put aside that much, stop when it gets too rich for you and start all over again with one penny. Now you have a nice emergency fund started. You can add that to a savings account or if you don’t have one, start a savings account.

It really is all about choices. We all have to make them and we all have to live with them. Not making a deliberate choice is a choice, too! So use focus and purpose to make yours count! Once you have converted your dreams into goals, all you need to do is follow your plan, like Dorothy following the yellow brick road to Oz, checking on your progress periodically.

Oh, by the way, it takes 28 days of saving as above to surpass $1 million. Can you find the National Financial Management Core Competencies in this blog? Leave a comment on the Core Competencies that you found.

National Financial Management Core Competencies in this blog: Spending, Saving

How to cite this article:

Reid, J. (2013, January). Goal setting: Ending up where you want to go. Dollardecisions blog.  Available at: https://dollardecisions.wordpress.com/2013/01/18/goal-setting-ending-up-where-you-want-to-go

References:

Taylor, D. (2012, March). Chain Purchasing: The Diderot Effect. Dollardecisions blog.  Available at: https://dollardecisions.wordpress.com/category/spending-2/

O’Neill, B. (2011, February). The Importance of Financial Goal Setting.  Available at: http://njaes.rutgers.edu/sshw/message/message.asp?p=Finance&m=174

Your Financial Action Plan: edis.ifas.ufl.edu/pdffiles/FY/FY37300.pdf, 10/09

The Emergency Fund: Borrowing from Yourself Instead of the Bank

September 27, 2012

By Leith Guth, North Carolina Cooperative Extension, FCS Agent, Lincoln County

On the day my husband and I moved out of state for his graduate school, a passing truck threw a rock into our windshield and cracked it.  Thus began our love hate relationship with that car and a brilliant illustration on why everyone needs an emergency fund.

An emergency fund is an accessible account where money is saved for an emergency.   Ideally, an emergency fund would be in a savings vehicle that is earning some interest.   In the past, experts advised one to put enough money to cover three months of expenses into an emergency account.  Today, with unemployment more prevalent and most job searches taking up to six months, advisors suggest having emergency funds to cover six months of expenses.    Emergency funds are for unplanned expenses like car repairs, unemployment, illness or exploding washing machines.  Christmas comes at the same time each year and does not qualify as an emergency!  With an emergency fund, one can pay for unexpected expenses from that fund balance without taking out a loan or incurring credit card debt.  Instead of paying  principal and interest on a loan back to a creditor, one pays the money back to her emergency fund.  One should be able to access her emergency funds within one or two days.  It is not wise for the emergency fund to be accessible by ATM or to serve as the overdraft for a checking account; easy access to these emergency funds can make them disappear easily if you get the spending bug.

Our graduate school car saga demonstrates why I needed an emergency fund.  In those days, we used a credit card as our emergency fund.  In our haste to pay off the credit card, we would pay too much on our credit card, depleting our cash on hand.  Then, another emergency expense would occur, a trip home for a funeral for example.  With no emergency fund and little cash on hand, we would charge tickets on our credit card; it was a vicious circle where interest charges mounted.  With a proper emergency fund of even $500, we would have paid for our car repair from our fund without incurring interest charges.  Then, we would pay back our emergency fund instead of the credit card company.

Nationally known financial gurus insist that everyone make an emergency account a priority in their financial life, before other savings or investments.  Even a small monthly amount deposited into an accessible account that earns interest is a step in the right direction.

National Competencies: Saving, Borrowing

Using “Auto-Pilot” to Start Budgeting

February 3, 2012


By Carolyn Bird with Molly Herndon

At the end of last year, a freelance reporter contacted me with a request to provide “steps that disorganized, messy, resolution-proof people can take to shore up and improve their financial situations.” In the reporter’s language, the information “is for people who are unlikely to make — much less keep a real budget.’

Here are some effective strategies to help your clients manage and improve their financial situation in the New Year. By investing a little time to put some systems in place, a person can save time and money throughout the year.

First, check to see how much money is coming in and how often. A good place to start is with “take home” pay. This is the amount that your client or her employer deposits into the client’s bank account.

Second, sort the bills into those that have the same amount due every month and those for which the amounts vary. The payments that do not change are called “fixed expenses” and include bills such as rent or mortgage payments. Some utilities may fall into this category as well, such as: cable television, Internet provider service, cell phone contract amount (if you stay within your plan). Even the electric and other utilities can be a fixed dollar amount each month if the provider offers a “budget plan” that averages annual usage over 12 months. Suggest that your clients check with their gas and/or electric service provider to see if a budget plan is available.

Third, if your client is paid more than once per month, decide which bills will be paid during each income period. Clients may need to allocate half of the amount from two pay periods during the month to pay the larger bills such as rent or mortgage.

Fourth, encourage clients to use the electronic bill pay service offered at their financial institution. Using the information on the company’s invoice or bill, clients can set up payment for each of the fixed payment bills. The key is to be sure to select a payment date so the payment will arrive on time. One final check after setting up accounts for payment is to remember to verify that each bill is accounted for in its income period. This will help avoid overspending for an income period.

Fifth, clients can use a calendar and mark “online dates” for paying bills. These dates will likely be close to the client’s payday. For example, if your client will be paid on February 1st, then February 1st or 2nd might be good days for an online date. On the selected date, your client can log into his account and approve the bills for payment. It is possible to set payments for automatic processing on a certain date, but I suggest that those new to budgeting use the manual processing procedure. Manual processing provides one more opportunity to double-check the numbers, and if there is an error, to avoid over-spending. Using this method will reduce the time needed to manage monthly finances and it will help the client avoid fees from late payments or bounced checks. For example, if your client carries a credit card balance, setting up an automatic payment for at least the minimum amount due will avoid late fees. Additional payments can always be made in the same or a different pay period.

If the due dates are too close to pay dates to allow the payments to arrive on-time, your client can contact each company and ask for a later due date. Be aware that it may take one or two billing cycles for the due date change to take place. Another technique to avoid account overdraft is to establish an account dedicated to bill payments. This is particularly useful for clients who don’t keep a running balance for the checking or transaction account. A separate bill-payment account can reduce bill-paying stress. Each pay period, the necessary amount of money to cover the bills or the amount of money to be allocated against a bill (like rent or mortgage) is transferred to the bill-payment account. This way, a forgotten ATM transaction will not jeopardize the ability to pay bills. A dedicated bill-payment account can be an effective way for dual income couples to contribute to and manage household bill payments.

Now that your client has identified how much income is devoted to fixed payments, the balance can be allocated across variable expenses.

Other tips for managing money on the go:

  • Set up an alert for notification when a deposit is made to an account.
  • Set up an automatic transfer from checking to savings; start with what you can afford and increase it overtime. This can be $5 or $10.
  • Set up an alert for when the account balance falls to a certain amount, it might $100, $50 or whatever number is meaningful for your client. What the alert means will be individual to your client. But in any case it is a signal to seriously consider each financial transaction.  How your client responds will vary from curtailing eating out, skipping an outing with friends, or resisting a clothing purchase. The important thing is for your client to decide what will help him to live within his income and to tailor the alert accordingly.

Lastly, these strategies are great steps toward establishing a budget. The budget is a tool that helps identify where the money goes each month. It offers an opportunity to decide if your money is really being spent the way you would like. The budget works for your client to help him meet financial goals. It may be useful to provide your client with a spending tracking tool, like this one .

A budget can also remind us that while a cost is fixed in the short run, it is variable in the long run. This means that if a utility expense (such as cell phone, cable, Internet, etc.) is too high, it may not be possible to reduce the rate right now but your client can shop for a better rate when the contract nears renewal. Or your client may decide to do away with a service for a while. Similarly, your client can look for a more reasonable place to live or one that is closer to work to reduce the cost of housing or transportation. By highlighting spending choices that may not be working so well, a budget can be used as a comparative tool when considering spending alternatives.

This blog focuses on the national core competency of “spending.” The competency behaviors discussed included: tracking spending and living within your means.

Are your clients or program participants using automatic banking features to help them better manage their finances? What tips and techniques are they using?