Understanding the basic principles of money will provide us with the insight necessary to successfully manage our daily lives, as well as building strength and security for our future!
1. Money is simply a tool for us to trade things – our time and skills for our employer’s money, and our money for things we need and want.
2. Realizing the difference between needs and wants is one of the greatest sources of wisdom in life we will ever achieve.
- Air, water, food vs. oxygen bars, imported water or soda, gourmet food.
- Clothing, transportation vs. designer clothing and luxury cars.
- Consistent income vs. millions of dollars to buy everything we want.
3. Positive cash flow means we spend less than we make, and it is the only way to be financially successful. It’s not how much we earn, but how much we spend that counts!
4. If we manage our money wisely by carefully planning ahead before we spend it, we will be able to form a life where our money can take care of us – we’ll be self-responsible, self-reliant, and have self-respect!
5. The amazing power of having our money make money for us is one of the best opportunities in life we will ever have! The sooner we start saving even a little of our money, the sooner it can start making money for us.
6. There are two ways for us to consistently be able to save money. One is eliminating the impulse buying of our “wants”, and the other is reducing the costs on the expenses of our daily needs. Developing these as life-long habits will dramatically help our ability to be financially secure.
- Using coupons and discounts for items we intend to buy.
- Waiting to buy things until they go on sale.
- Shopping at discount stores.
- Cooking fresh food at home versus eating out.
- Making our lunch for work at home instead of buying it out.
- Drinking regular water versus ordering menu beverages when we do eat out.
- Reducing the use of our utilities at home.
- Asking others about what they do to save money and reduce their monthly expenses.
Effectively managing our money simply means we spend it where we have planned to spend it – we tell our money where we want it to go, rather than wondering where it went.
- Setting short and long-term goals (for both our needs and our wants) will help us to determine a personal spending plan to follow, necessary to achieve those goals.
- A monthly recipe of saving 10% of what we make, sharing or giving away 10% to others who are possibly less fortunate than ourselves, and living on the remaining 80% (covering our needs and our wants), is what many highly successful people follow.
- We need to continually monitor our spending to compare what actually happened with what was supposed to have – staying on the right path if we’re on it and making necessary course corrections when we’re not.
- It is important that we periodically review and revise our financial goals and spending plan to better match the ever-changing circumstances and shifting priorities in our lives.
Knowing where to keep our money, knowing how to spend it (cash, debit or credit cards), and keeping good records are important components of successful money management.
- The wisest place to keep the majority of our money is in the bank (aside from the daily spending money we carry with us).
- Opening a bank account involves a few easy steps and there are several different types of accounts available to meet our needs.
- Spending cash, writing checks, or using debit and credit cards all have very different purposes, advantages and disadvantages. It is common for most people to use more than one method to spend their money.
- Some people find writing checks and using credit cards to be very harmful to their particular financial situation because they lack the discipline and organization to use them correctly. There is no shame in this, only wisdom in being honest enough to know the truth! Once discipline and organization is achieved, then spending methods in addition to cash can be used.
- Recording all of the money we spend and knowing where we stand financially at all times, will help prevent us from spending money we do not have. We will also be able to analyze our spending habits so that we can make necessary adjustments as required.
Credit is the ability to receive something we wish to use, rent or buy, without having to actually pay for it until a later time.
- Types of creditors (those who give credit) include credit card companies, car dealerships, banks, stores, utility and phone companies, and landlords who offer apartments or home for rent or purchase.
- Credit is given to those who have earned it. We earn it by having income from a steady job along with what a credit report says about our history and reliability of paying-off those who have given us credit in the past.
- Credit can be a great tool when used properly. If we are 100% positive that we will have the money to pay our bills in full when they are due, then using credit can be very convenient and helpful to us.
- Credit can also be a huge source of trouble for us if we can’t pay our bills in full when they are due. In this case, expensive finance charges and penalties cause the true cost of whatever we purchased with credit to increase dramatically, along with our credit report being damaged.
- Credit cards, in particular, can be a good convenience tool because we don’t have to carry much cash with us. But, we MUST pay our credit card bills 100% in full when they are due and not fall for the temptation of only paying the minimum amount due.
- Warning! Credit card companies want us to fall into the debt trap (making only the minimum payments) so that we have to pay them high finance charges on our unpaid balances. This enables them to make lots of money at our expense, and has been the financial ruin of many people!
- If we cannot successfully fight the temptation of buying things with credit cards that we’re not 100% sure we can pay for in full when the bill comes, then we should not use credit cards and use only cash or our debit card instead.
Owning a home is an important part of achieving the American dream for many people, and can also be a very important component in building financial security.
- When we buy a home we can receive significant tax savings benefits from what we would ordinarily pay in income taxes, and this is not available to those who rent.
- Most people find that approximately 33% of what they pay during the year for their mortgage and property tax payments becomes a tax savings against what they owe the government at the end of the year.
- Homes tend to increase in value over time, providing homeowners financial profit, financial flexibility, and financial security in their retirement years.
- Ironically, it is quite common for many people to place a higher priority on buying things like cars, electronics, clothes and jewelry, than they do owning their own home. These kinds of things provide no tax savings benefits and they lose significant value as time goes by.
- Owning our own home gives us feelings of Personal satisfaction and accomplishment, comfort, self-respect and pride, and the security of a place to live and call “our home”.
Return to “Scanning the Surface” if you just want to get your toes wet!
- The Purpose of Money
- Understanding Needs, Wants, Peace of Mind, and Preventing Confusion
- Cash Flow: Income, Expenses, Savings, Giving
- Why Do We Need to Manage Our Money?
- When Should We Start Managing Our Money?
- Establishing a Financial Plan for Our Life
- Setting Personal Money Goals
- Developing and Following a Personal Spending Plan
- Monitoring and Revising Our Money Goals
- Ways to save Money!
- How to Open a Bank Account
- Different Types and Purposes of Bank Accounts
- How to Physically Spend Our Money (Cash, Debit Cards, Checks and Credit Cards)
- Keeping Good Records!
- What is Credit? How do we get it? Why is it given?
- Using Credit: Tool or Trouble?
- Using Credit Cards: Advantages and Disadvantages
- The Musts of Using Credit Cards
Basic Money Principles
The Purpose of Money
- Money is simply a source of value which is universally recognized and used to trade things.
- Employers use money to trade for the time, labor, and skills of workers in order to run their businesses.
- Employees trade their time, skills, and labor for money in order to run their lives.
2. Having money enables us to purchase and obtain:
- Things we need.
- Things we want.
- The ability to help others.
- Security and peace of mind.
Understanding Needs, Wants, Peace of Mind, and Preventing Confusion
1. Needs are those things which we must have in order to survive and live reasonably comfortably.
- Air, water, food.
- Clothing, shelter, utilities, transportation.
- A consistent source of income.
2. Wants include things and activities which we do not have to have, in addition to those things that are really excesses disguised as needs:
- Oxygen bars, imported water or soda, organic or gourmet food.
- Designer clothing and jewelry, million dollar ocean-view homes, luxury cars.
- Millions of dollars so that we can buy any and everything we’d ever want.
3. Peace of mind can be realized and strengthened by consistently spending our money wisely and as we have planned to spend it. We can experience the security this provides on multiple levels:
- Financially – because we’ll be in a better position to have money available to us when we need it.
- Mentally – because we’ll have more confidence and make better and more rational decisions.
- Emotionally – because we’ll worry less, be less stressed, and unlikely to live with regret and sorrow from spending our money unwisely and unnecessarily.
4. Preventing confusion between our needs and our wants can be achieved if we discipline ourselves in the habit of thinking and planning before we spend by:
- Recognizing that many influences in our lives (the internet, television shows and commercials, magazine and radio content and advertisements, music and movies, celebrities and our own peer group) do not share our personal best interest when it comes to what we spend our money on. Frequently their only motivation is to get us to spend our money so that it can benefit them!
- Resisting the temptation of immediate gratification, which usually involves the clever camouflaging of a want as a need. We can usually see through this disguise in a fairly short period of time if we don’t give in to impulse spending.
- Remembering that delaying our gratification helps us gain clarity between a want and a need, while also allowing time for the natural progression of our ever-changing moods, tastes and desires to take place. Many things that we think we want and can’t live without turn out to be things we don’t even care about a short time later.
Cash Flow: Income, Expenses, Savings, Giving
1. Cash flow is simply how money comes into our life, how we take care of it while we have it, and how it finally leaves us. There are three primary forms of cash flow:
- Break-even cash flow occurs when we have exactly enough money to pay for all of the things that we need and want during a given time period (a month for example).
- Positive cash flow exists when we have some money left over after at the end of the month after we’ve paid for all of the things we’ve purchased.
- Negative cash flow is when we still have needs left at the end of the month, but we are out of money and not able to pay for them.
2. The actual flow of our cash, or money, takes place within four major categories, which are comprised of unlimited sub-categories.
Money that flows into our life is called income, and we can receive income from a variety of sources.
- Salary/Wages – income that we earn from the job, or jobs, that we work at.
- Businesses we own (self-employment), or partnerships we participate in.
- Savings/Investments – income we earn from using our money to make more money for us.
- Gifts, inheritances.
Money that flows out of our life and that we spend on the things we need, want, or become emergencies and unplanned occurrences, is called expenses.
- Payroll taxes, payroll with holdings, income taxes.
- Food, clothing, and personal care items (haircuts, health and beauty aids, etc.).
- Health care.
- Rent or mortgage – along with the necessary utilities (electricity, water, gas) and insurance.
- Transportation – bicycle, bus, or our own car (which also entails gas, insurance, maintenance and repairs).
- Phone, cable, internet.
- Recreation, entertainment, and hobbies.
Saving and Investing
Saving and investing involves putting a portion of our income (from that which is left over after we’ve paid the expenses of our basic needs) in places that will result in our money actually making more money for us.
- Bank accounts that pay us interest for holding our money there (savings accounts and certificates of deposits).
- Stocks in companies that produce dividends (similar to receiving interest) and whose share prices are likely to increase.
- Bonds (or contracts) with the government, or individual companies, that pay us interest for the use of our money for specific time period.
- Real estate (land, buildings, homes) from which we can earn a profit when the difference in the purchase price and the sale price goes up, as well as from rental income it may generate while we own it.
- Multiple savings and investing accounts for specific purposes. For example, one account to save for expensive purchases like a computer or a car, and another account to save for longer-term expenses like education or retirement.
Experts recommend that we diversify by putting our money in a combination of places when we save and invest, and not “putting all of our eggs in one basket”.
Money we choose to give away by investing in the lives and situations of others and possibly those less fortunate than ourselves.
- Regardless of how much money and income we have, when we give a portion of our money to help others we benefit too! Our attitude, emotion, and self-image are all positively impacted.
- It’s not the amount of our giving, but the spirit of our heart in reaching-out to others that counts.
- Whether we are able to financially give or not, we can certainly give the gifts of our time, emotional and physical help.
Why Do We Need to Manage Our Money?
1. Doing a good job of managing our money by thinking and planning before we spend it, along with making wise choices with where we tell it to go, will allow us to build a life in which our money serves and takes good care of us in return.
- Managing our money wisely will usually result in our having enough of it to take care of the basic needs we’ll have throughout our lives.
- Managing our money wisely will help us to consistently have “leftovers” after we’ve paid the expenses of our basic needs. By continually accumulating and adding to our previous leftovers (our savings), we will be prepared to take care of the emergencies and unplanned expenses that “happen” in our every day life.
- Managing our money wisely in our earlier years will provide us with security, peace of mind, and comfort in our retirement years. Learn from others who are there now – the future comes fast! When it comes to saving money, time can either be our friend or our enemy.
2. If we do not take good care of our money because we consistently make poor choices with where we tell it to go, then we will likely not ever be in a good position for our money to be able to take care of us.
- Poorly managing our money usually results in us never having enough of it, regardless of how much we make! Our world is full of people who make millions of dollars a year, but who become broke or deeply in debt because they consistently spent more than they made.
- Poorly managing our money will prevent us from ever accumulating any significant level of savings. This often results in feelings of insecurity and a lack of peace of mind. This can lead us to experience an extra amount of mental and emotional negativity (far beyond normal) each time we experience the emergencies and unplanned expenses that occur in everyday life.
- Poorly managing our money will likely result in our retirement years being filled with lack of security, worry, regret, and dependence on others for food, shelter and basic care.
3. Managing our money wisely leads to many rewarding and life-long personal achievements in “self”:
- We are in charge and accountable for our own actions.
- We learn from our successes and strive to repeat these.
- We learn from our mistakes and the mistakes of others, and strive not to repeat these.
- We don’t blame others or society for our difficulties, we take steps to overcome them.
- We focus on what we have and what we can do, not on what we don’t have and can’t do.
- We take care of ourselves and our children (if we have any), not looking for the government or others to do this for us.
- We earn this by being self-responsible and self-reliant, not needing the government or anyone else to provide for us.
- We continually make progress, not excuses.
- The personal pride and satisfaction we receive from having self-respect cannot be purchased or given to us.
When Should We Start Managing Our Money?
- Regardless of what point in life we are, the time to start managing our money is now!
- By procrastinating and delaying to take charge of telling our money where we want it to go, we risk forming bad habits (confusing needs and wants) and may end up further behind and in debt.
- The sooner we develop the habit of spending less money than we make, the sooner we can begin saving. Saving some of our money will allow it to take care of us when we need it to, while also helping to make more money for us at the same time.
2. Compound interest is an amazing power whereby our money makes money for us, and is one of the best opportunities in life we’ll ever have.
- “Time” is the key component of compound interest. The more time we give our money to work and care for us, the more money and care it will give us back.
- If we make the choice to act now, we will definitely thank ourselves later. By saving $150.00 per month, or just $5.00 a day (about the same price we pay for a fancy coffee, a blended juice drink, a soda and fries, or a pack of cigarettes), here are the results compounding interest – or our money making money for us! Calculations are based on an annual interest rate of 5%:
|Starting Age||Our $5.00 a Day||What Our Money||Our Total|
|Ending Age||Savings Total||Made For Us||Savings|
|20 to 65||$81,000||$224,232||$305,232|
|25 to 65||$72,000||$157,857||$229,857|
|30 to 65||$63,000||$108,124||$171,124|
|40 to 65||$45,000||$44,699||$89,699|
- If we cannot start with $5.00 per day, start with whatever we can. It may be $1.00 or $2.00 per day that we begin with and work our way up to $5.00 per day, and even more as our income grows. The key is NOT waiting! We lose the extremely powerful effect of compounding interest (our money making money for us) when we wait – time is definitely money!
Effectively Managing Our Money
Establishing a Financial Plan for Our Life
- Effectively managing our money begins with establishing a simple financial plan for our life.
- This plan will focus on the goals and aspirations that we’ll have all throughout our life, and it will be quite common for these to periodically shift and change as our personal situation and priorities shift and change.
- We become educated and exposed to a variety of people, opportunities, interest, and careers that we previously were unaware of.
- Our specific job, career path desires, and income earning potential changes.
- We get married, we have children.
- Our transportation and living requirements change.
- Education opportunities for our children become of interest to us.
- Health care and security during retirement become a concern and a priority for us and our spouse.
3. Monitoring and revising the goals of our plan will be an ongoing and continual process.
Setting Personal Money Goals
- Our goals will usually be split within two areas:
- Short-term goals – which include things within one to three years like buying a computer, a car, paying for a wedding, being able to pay rent for our own place to live.
- Long-term goals – which include things five years and beyond like buying a condominium, a home, saving for our kids’ college and our own retirement.
2. Success with our financial goal setting depends on several key components:
- Be specific. To say, “I want to buy my first home” is not nearly as good as saying, “I want to buy a 1,100 square foot condominium in San Diego for $250,000 or less for my first home.”
- Be reasonable. “I want to be independently rich by the time I’m 40 years old” is not nearly as reasonable as saying, “Within seven years of purchasing my first home, I want to keep it as a rental property to generate income, and purchase another home to live in.”
- Establish a realistic date by which to achieve a financial goal. This will not only serve as a motivating target for us, but it will also help encourage us to remain consistent in making wise spending choices along the way.
- Put our goals in writing and share them with others who we are close to. This helps to motivate and encourage us, to be held accountable for our progress in achieving them, and increases the likelihood that we keep their attainment as a priority in our life.
Developing and Following a Personal Spending Plan
- Regardless of what kind of job and income source we have at any given point in our life, (from an entry-level part-time job while we’re in high school to a career-type position following the completion of our education), developing and following a personal spending plan is a must!
We need to get a clear understanding of what our monthly take home pay actually is. This is the amount of money which we get to keep (our paycheck) once the required taxes have been taken out, and what we must properly manage so that we will have enough to take care of our basic needs and responsibilities.
We need to establish exactly what it will cost us (our expenses) to take care of our basic needs for each month (water, food, clothing, shelter, utilities, transportation, etc.). If we determine that we do not make enough money to take care of our expenses, we have two choices:
- Find ways to reduce our expenses so that our take home pay will be enough.
- Find ways to increase our income so that we’ll have enough to cover our expenses.
We must be specific in planning exactly what we will be spending our money on, ensuring we take care of the expenses for our basic needs BEFORE we can consider spending money on anything else. Our goal must always be to maintain a positive cash flow position (meaning we have at least some money left over at the end of the month).
If we find that the expenses for our needs exceeds our monthly take home pay (negative cash flow), then we must immediately make adjustments to prevent this from happening month after month.
- We need to look for ways to decrease our expenses (find a place to live that will cost us less, get a car that gets better gas mileage and costs less to insure, carpool, ride the bus, reduce our consumption of utilities, etc.).
- We can also look for ways to increase our income (work more hours, find a higher paying job, get a second job, etc.).
- The most significant impact to our cash flow is realized when we are able to reduce our expenses, while increasing our income at the same time.
- We should strongly avoid borrowing money or using credit to fix our negative cash flow position, as this is usually just a temporary solution. Both of these options involve paying interest fees (which further adds to our monthly expenses), and often results in making matters worse for us over time.
We need to continually be on the look-out for ways to save money. Two extremely effective ways to save money include eliminating impulse buying (buying things we didn’t plan to buy when we go shopping), and reducing the costs on the expenses of our daily needs. Developing these as life-long habits will dramatically impact our ability to consistently save money over time.
Common examples include:
- Using coupons (available in newspapers, various web site, etc.) provides excellent savings opportunities for both the food and non-food items that we buy and consume each month. It is common to be able to reduce some of our purchases by 25% to 60% if we will simply form the habit of clipping coupons. The key, however, is to use coupons ONLY for the items we’d buy anyway.
- Waiting to buy things until they go on sale.
- Shopping at discount stores (for food and clothing) can be another very effective way of reducing our expenses. We can also save money by “buying in bulk” (large quantities), either storing the extra items for future use or finding another person to split the items and cost with.
- Minimizing the waste of our utilities (tuning off lights in rooms we’re not using, not letting water run unused, not using our air conditioner or setting our heater on a lower setting, etc.).
- Cooking and preparing our meals at home (versus eating in restaurants or fast food) saves a tremendous amount of money, as well as being a much more healthy way of eating in most cases.
- Making our lunch for work at home instead of buying it out every day.
• Drink water! Whether at home or when we eat out, simply drink tap water. Not only is it very inexpensive at home and free at restaurants, it’s far more healthy than soda and many other beverage choices.
- Asking others about what they do to save money and reduce their monthly expenses can be a great way to learn new ideas.
2. Many successful people use the following plan in which to manage their monthly income and ensure that they are saving for unexpected emergency expenses and their future. While we may find it difficult to apply this plan at different points during our lives, it is a proven plan that we should strive to apply whenever we possibly can.
Save/Invest 10% (short-term goals and long-term goals)
Give Away 10% (helping others)
Live on the rest 80% (our day-to-day living expenses – needs first!)
3. Our personal success is totally dependent on the commitment we make, and then our diligence and consistency in following the specific plan of where we have decided to spend our money:
- When we choose to spend our money where we have planned to spend it (making sure that we do not spend more than we make), we are forming an extremely important habit called “living within our means.”
- When we choose to spend our money on things not included in our plan, we’re increasing the likelihood of forming the habit of “living beyond our means” (or spending more money than we make).
- The choices we make are clearly up to us, but the results of these choices (and the habits we form in this area of developing and following a personal spending plan) will have life-long implications – they will either help us immensely, or they will hurt us severely.
Monitoring and Revising Our Money Goals
- Periodically re-visiting and reviewing our financial goals and our personal spending plan is a critical part of remaining effective in managing our money. This is necessary because of the ever-changing circumstances and shifting priorities that occur all throughout our lives.
- Monitoring is the process where we compare what actually happened with what we originally planned.
- Monthly – we need to take a look at the income we received, what we spent (our expenses), what we saved, and what we gave to others. The key is to focus on what adjustments we need to make to ensure we effectively manage our money in the coming months by sticking to our plan.
- Quarterly – we need to review our monthly summaries and make whatever decisions are necessary to achieve our plan going forward.
- Annually – we examine what has happened over the year to determine what, if any, revisions must be made in order to increase the likelihood that we are successful in achieving our plan it in the coming new year.
3. Revising our financial goals and the personal spending plan we established to achieve them, is a very important requirement in remaining effective at managing our money. This will help us to make sure that our goals and our plan are compatible. This involves:
- Re-visiting our goals to see if the recent events in our life, along with those we see that are coming up, will have any affect on our attaining them?
- Assessing our goals. If we have reached any of them, then we should celebrate our achievement and set new ones. If we determine that a goal is unrealistic, then we need to revise it or replace it with what is realistic.
- Evaluating our path, or our spending habits. If we’re on a good path towards success, then we should remain consistent and continue forward. If we find that we have wandered off the path by getting into bad spending habits, then we need to course-correct!
Ways to Save Money! (Course-Correction Helper)
There are two ways for us to consistently be able to save money (or course-correct our spending habits if necessary). One is eliminating the impulse buying of our “wants”, and the other is reducing the costs on the expenses of our daily needs. Developing these as life-long habits will dramatically help our ability to be financially secure.
- Using coupons and discounts for items we intend to buy.
- Waiting to buy things until they go on sale.
- Shopping at discount stores.
- Cooking fresh food at home versus eating out.
- Making our lunch for work at home instead of buying it out.
- Drinking regular water versus ordering menu beverages when we do eat out.
- Reducing the use of our utilities at home.
- Asking others about what they do to save money and reduce their monthly expenses.
Where to Keep Our Money, How to Spend It, Keeping Good Records
How to Open a Bank Account
- The wisest place to keep the majority of our money, (aside from the daily spending money that we keep in our wallet), is in a bank.
- Keeping our money in the bank increase protects it from being lost or stolen. In fact, our federal government insures our money (up to $250,000 per account) in case our bank was to go out of business.
- Keeping our money in the bank also provides us with the opportunity for our money to earn more money for us. This comes in the form of interest that our bank pays us each month for keeping our money at their bank.
- The interest rate that we can receive from our bank varies from time to time, and is dependent upon certain economic conditions and the duration in time that we are willing to keep our money in the bank.
- We will always have access to our money any time we need it, or want it.
2. Opening a bank account is an easy process and involves a few necessary steps. This may involve visiting the bank, phoning the bank, or going online. It’s always wise to check with each individual bank first, but the following is a general guideline of how it’s done and what we’ll need:
- When we enter the bank we go to the area marked “new accounts”, or simply ask any of the bank employees to direct us where to go to open a new account.
- Most banks in most states will require that individuals who are under age 17 have a parent or legal guardian on their bank account as a custodian.
- For those of us age 17 and older, two forms of identification will be required. Our primary picture identification must be in the form of a driver’s license, passport, or state identification. Our secondary identification can also be one of the primary identification options (example – a driver’s license as the primary and a passport as the secondary), along with other secondary identification choices such as a school identification, a pay stub, or a utility bill with our name on it that is dated within the last 60 days
- We will also need to provide the bank our social security number.
- Lastly, we will need to deposit money into our account, which means we give the bank our money to safely keep for us.
3. Every month we will receive a statement from our bank, either in the mail or online, recapping everything that has gone on with our money in our bank account for the previous month. This includes what we have taken out of the bank (withdrawn), what we have put in (deposited), and any interest we have earned.
Different Types and Purposes of Bank Accounts
1. There are several different types of bank accounts which we can choose from in order to best suit our needs.
- This is the most common account type and is primarily used for our day-to-day living expenses.
- Most banks will require a minimum deposit of $25.00 to open this type of account, but will not require a specific minimum account balance thereafter.
- Whenever we have cash or checks paid to us that we would like to put into our debit card account for safe-keeping and to use for our daily expenses, we can simply go to the bank and deposit them.
- Many employers will offer the service of directly depositing our paychecks into our debit card account electronically. This prevents us from having to go to our bank personally to deposit each time we are paid by our employer.
- Instead of having to carry around cash, we will be able to use our debit card to pay for things that we wish to purchase from all types of stores, gas stations, and most any other kind of business.
- Once our debit card transaction is processed, the specific amount we spent is then electronically transferred from our debit card bank account just as if we had paid for our transaction with cash.
- We can also write checks to pay for things with the money that is in our debit card account. Most banks will charge a small fee to provide us with checks that we can then use as we need to. Once we write a check to someone, or to some business, the amount of the check is then electronically transferred out of our account once the party we wrote the check to deposits our check into their own bank.
- We can transfer money online to pay bills and make purchases, both of which simply gets deducted from our account.
- This is an account used to hold money that we setting aside to use for something other than our day-to-day living expenses. Examples include saving for a bicycle, a computer, a car, college expenses, a place to live, and so on.
- Saving accounts receive interest from the bank (our money making money for us), which is based on how much money we keep in our account and the specific interest rate the bank is offering. Interest rates fluctuate from time to time, and they are linked to status of our national economy and certain interest rates set by our government.
- Most banks will require we deposit a minimum of $25.00 to open a savings account, and we will not have to keep a specific minimum balance thereafter. However, most banks will charge a monthly service fee for savings accounts if the balance goes below $300.00 at any point during the month.
- It is wise to periodically check with other banks to be sure we are getting the best interest rate possible on our money. If we do find that there is a significant interest rate difference between banks, there is no reason we cannot close our account and open another one with a new bank.
Certificate of Deposit Accounts
- A Certificate of Deposit account, or CD, is an account that offers a higher interest rate on the money that we deposit and maintain in our account as compared to a regular savings account.
- We must meet certain requirements to be able to take advantage of the higher interest rates that CD accounts offer. These include depositing a minimum amount of money into a CD account, and also agreeing to keep our money deposited in this account for a specified minimum amount of time.
- Minimum CD account amounts range from $1,000.00 to $10,000, and the specified time required ranges from 6 months to 60 months. The higher the dollar amount and time range, the higher the interest rate we will earn.
- We will always have the ability to withdraw the money we have in a CD at any time, however penalties may apply and we will forfeit the higher interest rate earnings as a result.
2. Each of the above options has a specific purpose, and it is quite common to have more than one account at a time. In addition, there are State and Federal Consumer Protection Laws which protect all consumers in a variety of ways who deposit their money in banks (information disclosure, fees charged, interest rates earned, terms and conditions, etc.).
How to Physically Spend Our Money (Cash, Debit Cards, Checks, and Credit Cards)
1. The most common way for us to physically spend our money on the day-to-day living expenses we encounter is with cash, a debit card, a personal check, or with a credit card (which will be covered in the section entitled “Making Sure We Get and Keep Good Credit”).
- Using cash requires a bit more forethought than using our debit card, or writing a personal check, because we need to make sure we have enough with us to cover the expenses we will encounter.
- Having cash with us always carries the risk that we could lose it (by losing our wallet or purse), as well as having it taken from us if we were to be robbed.
- Unlike debit cards, checks and credit cards, paying with cash often has a much more “real” feeling and greater impact on us. Physically taking out our hard-earned money, counting it, and giving it to someone else can often result in us thinking twice about spending our money and considering whether or not we’re addressing a need or a want.
- Unless we do a good job of keeping our receipts and consistently keep written records, using cash can make it difficult to keep good track of how much money we have spent and what we have spent it on.
- Using a debit card allows us not to be concerned about having enough cash with us each time we need to cover our expenses, as we can easily access our bank account balance (or money we have available to spend).
- Not having cash with us will prevent us from losing, or having it taken from us.
- Because it’s so easy to pull out and just swipe, paying with a debit card can make us feel as if we really aren’t spending our money. This can lead to spur-of-the-moment unplanned spending, also known as impulse buying.
- Usage fees may sometimes apply when using debit cards, and it can be a significant hassle untangling unauthorized purchases on our card if they occur.
- Debit cards are electronically tied to our bank account and require us to use our PIN (personal identification number) each time we use our card to help protect against unauthorized usage by someone else. We should never let anyone else know what our PIN is.
- Debit card accounts provide us with quick access as to how much we have available to spend, while also enabling us to easily keep track of our spending activity by checking online, visiting our bank, or reviewing the monthly statements sent to us by our bank.
- Writing checks has some of the same conveniences and protections as using a debit card.
- Like cash, when we have to physically write-out a check, it can cause us to consider the purchase we’re about to make a bit more thoughtfully versus simply having to swipe our debit card.
- Checks also provide us with the same good record keeping abilities as do debit cards, which can be especially helpful if we ever need to show proof that we made a payment. Our bank will provide us with copies of the check we’ve written, as well as keeping an electronic back-up for us if we should ever need it.
- When we run out of the initial supply of checks provided by our bank when we open a checking account, we will have to pay for the new supply of additional checks as we need them (either from our bank or other independent printing companies).
Please see “Using Credit Cards: Advantages and Disadvantages” located in the next section.
2. Most of us use a combination of the above methods for spending our money – we carry small amounts of cash with us to pay for the little things we buy in our day-to-day living (drinks, food from places that only accept cash, etc.), but we use the other methods for paying our bills and larger purchases. In some cases, however, using only cash may be the best practice we can engage in:
- If we determine that we do not have the self-discipline or self-restraint to control our tendency to buy things impulsively, then paying for everything in cash can be helpful because we can purposely only carry enough with us for the specific things we need to buy that particular day.
- If we are not disciplined enough to keep track of what we have spent using our debit card or the checks that we have written (meaning we don’t really know how much money we have in our bank account to spend and may be putting ourselves in the position of using our debit card or writing a check for money we do not have), then using cash until we develop the necessary discipline and habit of good record keeping will serve us best.
Keeping Good Records!
1. Keeping good records of our spending is one of the most important aspects of being financially successful.
- Always record our debit card purchases and calculate our current account balance.
- Always record the checks we write and calculate our current balance.
- Always record our credit card purchases and keep a running total of what we have charged so that we will know how much we will owe our credit card company at the end of the month.
- Always reconcile our debit card and checking account, along with our credit card account, at least once a month. Reconciling involves comparing our records with our bank’s or credit card company’s records to be sure neither of us has made a mistake, and that our account balances match and agree with each other.
2. Keeping good records provides us with important protection and is a very useful tool:
- We will always know how much money we have in our bank accounts and can avoid writing checks or using our debit card to spend money we don’t have (protecting us from having to pay fees and penalties to the bank as a result). We can make sure not to charge more on our credit card than we’ll be able to pay for in full when the bill is due. This protects us from having to pay expensive interest charges for unpaid balances on our credit card account.
- Good records provides us with an excellent tool for evaluating our spending habits so that we can make any necessary adjustments going forward that we need to make (like spending less on certain things, not buying them at all, putting more in savings) and do better at managing our money.
Making Sure We Get and Keep Good Credit
What is Credit? How do we get it? Why is it given?
- Credit is the ability to receive something we wish to use, rent or buy, without having to actually pay for it until a later time. Types of creditors (those who give credit) include credit card companies, car dealerships, banks, stores of all kinds who offer store credit, and landlords who offer apartments or homes for us to live in. Examples of things purchased with credit include:
- Higher priced items such as computers, furniture, cars, apartments and homes.
- Goods and services that we use for a period of time such as cell phone service, cable television and internet connection, utilities for our apartment or home (water, electricity, natural gas).
- Nearly any item we choose to purchase with a credit card instead of using our cash, debit card, or writing a check.
2. We get credit because we have earned it by demonstrating to creditors our ability and reliability to pay for things when our bills are due. Creditors determine our credit worthiness by evaluating:
- The income we earn. This measures not only our ability to repay a creditor for the amount of credit they might give us, but also how long it will take us.
- Whether we already owe other creditors, and the amount we owe them.
- What our credit report says about our history and reliability of paying-off other creditors who have given us credit, and whether or not we made our payments on time.
3. Creditors are eager and willing to give us credit for several reasons:
- They want to entice us to buy something that we would likely not buy if we had to pay for it in full when we actually received it by allowing us to pay at a later time, or to make payments over an extended period.
- They desire to make additional money from us (in the form of interest we must pay them until we completely pay for the item we purchased), over and above the purchase price of whatever it was that we originally bought. This means that we can end up paying considerably more for something than its original price.
- They make money from the merchants (the stores and restaurants we buy things from) when we use a credit card to pay our bill. Merchants typically pay a two to three percent transaction fee to the credit card company whose card we used to make our purchase.
- They view us as individuals who will pay our bills in a timely manner because of our level of income and what our credit report shows about our past. Creditors examine our credit report which shows our credit history and whether or not we have paid our bills in the past, and if we paid them on time or not.
Using Credit: Tool or Trouble?
- Like many things in life when used properly (computers, automobiles, food, medicine, etc.), using credit can provide several benefits and serve as a good tool for us.
- Using credit is a nice convenience in that we do not have to carry and exchange large amounts of cash, as well as receiving things immediately without having to pay for them until later. A few examples include our utilities (natural gas, electricity, water), phone service, and things we purchase with a credit card.
- Using credit to create income (running a business where we get supplies and use utilities to sell products and services, or having property that we rent out or fix up and sell for a profit).
- Using credit to build our credit history and worthiness because we pay our bills completely and on time. This will help us to be able to continue to get credit in the future, and to be able to receive larger amounts when we do.
- Paying our credit card bills in full when they are due (instead of paying a lesser amount or the minimum amount due) prevents us from paying interest charges.
2. Using credit can also lead to a lot of trouble for us if we use it incorrectly, or abuse it.
- Using credit to buy things that we do not need and do not have the money to pay for (jewelry, designer clothes, electronic equipment, fancy cars, etc.).
- Using credit to buy things that we are charged interest for and that will go down in value, or be used up by the time we completely pay for them. This results in their cost being much more than we initially paid for them.
- Not paying off our bills in full and on time leads to our credit history being negatively impacted. This makes it more difficult for us to obtain credit in the future, and will also lead to us paying higher interest rates when we can obtain it.
Using Credit Cards: Advantages and Disadvantages
- Credit cards are available through a variety of credit card companies like Visa, Master Card and American Express, as well as through individual stores whose card can be used only in their store (Sears, Home Depot, Target, etc.).
- Credit card companies issue cards to individuals who they have evaluated and feel confident are able to pay their bills in a timely fashion. This evaluation includes looking at an individual’s income level, what the individual’s credit history shows about how they handled any prior credit given to them, and if they already owe money to other creditors (companies who give individuals credit to purchase things with).
- Credit card companies report our activity to credit reporting companies, who then keep a data base on how we pay our bills.
- Credit card companies will start by giving us a small amount of credit referred to as a “credit limit” (usually a few hundred dollars), and then increase the credit they give us if we pay our bills in full and on time.
- Credit card companies may cancel credit cards with individuals who are not responsible for paying their credit card bills on time, or reduce the amount of credit they are willing to offer an individual.
- Most credit cards work on the principle of allowing individuals to purchase things during a given month (from various stores, restaurants, gas stations, etc.) with a credit card, and then paying for these things all at once to the credit card company.
3. Advantages of using credit cards include:
- A fast and easy way to pay for things without having to carry cash.
- An easy way to keep good records by tracking our spending online.
- A helpful way to manage our cash flow by allowing us to buy and receive things without having to actually pay for them until a later time, but being 100% sure that we will have the money to pay for them when the credit card bill is due because we will have received our paycheck and income by then. CAUTION: only individuals who keep good records and are disciplined should engage in this type of cash flow management.
- Some credit card companies enable us to receive cash back, or earn gifts and air travel awards by purchasing things with their credit cards.
4. Disadvantages of using credit cards include:
- There can be a tendency to feel as if we’re not spending real money.
- Can be much easier to be tempted and engage in the impulse buying of our wants, rather than staying focused on a specific spending plan based on our true needs.
- If we are not diligent about keeping good records of our spending and stray from our specific spending plan, then we are likely to end up having expenses that are greater than our income for the month (negative cash flow).
- Once we get into a negative cash flow position, we can easily fall into the “debt trap” where we end up paying a lot of interest charges to our credit card company for our unpaid credit card expenses. Falling into the debt trap can happen quite easily, can quickly become overwhelming, and can take a long time and be very difficult and costly to get out of.
The Musts of Using Credit Cards
- There are a few very critical habits, or musts that we’ll need to consistently follow if we are going to be successful in using credit cards. These habits will prevent us from significantly hurting ourselves and damaging our opportunities in the future.
- We must avoid buying anything that we cannot afford to pay for in-full when we receive our credit card bill.
- We must pay our credit card bill, as well as all other bills we have, when they are due so that we prevent having to pay interest charges, late fees, and damaging our credit history and rating.
- We must keep good track of the total amount of money we have spent during a given month on our credit cards, so that we will be sure not to exceed our income level and ability to pay our bills in-full when they are due.
- We must avoid getting behind in paying our credit card bills in-full because this will result in our having to pay interest charges. This means that we will likely end up paying much more than the original purchase price because of the very expensive interest charges that get added on to the unpaid balances on our credit cards.
2. We must be completely honest with ourselves in determining whether or not we have the personality traits necessary to be disciplined enough to be successful in using credit cards. If we are not honest, then using credit cards will likely lead us into trouble and we’ll end up hurting ourselves in the long run.
3. Many people find that using credit cards does not work well for them for a variety of reasons. We must be extremely wise and not use them if we too find that we fit into this category.
- We must realize that credit card companies and credit cards can be like drug dealers and addictive drugs for some of us. They make it very attractive for us to use their cards by encouraging us to buy things we want and think we deserve right now, while tempting us to pay only a small portion of our total bill so they can then charge us very high interest rates, and have us quickly fall into the debt trap and be “hooked”.
- We must understand that credit card companies want us to get hooked to them at as young of an age as possible, hoping they can make money from us for life. Unfortunately, many problems like falling into the debt trap, being stuck paying high interest rates for a very long time, and having bad marks on our credit report (which negatively impacts our future) are all part of being hooked to credit cards.
- If we honestly believe that we can be successful using credit cards but later learn that we cannot because we find that we’re falling into the debt trap, we must take action immediately. Cutting up and throwing our credit cards away to prevent further using them is the best solution, while also working to paying-off our debt and high interest charges as soon as possible.
- Once we have been successful in getting out of the credit card debt trap, we must then fight the ongoing temptation given to us by the credit card companies who will continually mail us offers to open up new credit card accounts hoping to get us hooked on them once again.
- A loan is a specified amount of money that is temporarily provided by a lender to a borrower. Borrowers agree to repay their loans within a mutually agreed upon time period (loan term) by following a scheduled payment plan (usually monthly), which normally includes interest as part of each payment. Examples of common loans:
- Student loans for education costs, which involve making monthly payments over a 10 to 30 year loan term.
- Car loans which typically extend for a 3 to 5 years term.
- Home loans which are normally a 30 year term.
2. Lenders use several criteria to evaluate and determine if they will lend to a particular borrower and, if so, how much they are willing to lend them. This criteria includes:
- The borrower’s income level and likelihood that they will remain employed.
- What the borrower’s credit report says about their credit history – do they already have a loan or owe money on credit cards, does their track record show they make their payments on time or late, have they ever failed to repay a loan?
- Does the borrower have any other assets (a motorcycle, car, home, etc.) that they own which can be used as security – meaning if the borrower doesn’t pay the lender as agreed, then the borrower must give these assets to the lender towards repayment of the loan?
- Is there a co-signer or guarantor who will share the repayment responsibility to the lender for the money borrowed ?
3. Lenders want to be sure that borrowers pay them back, and view borrowers in terms of their “credit risk”.
- Those who have a stable job and income, whose credit report shows they have a good credit history, and who may have valuable assets and a cosigner or guarantor, will be able to borrow larger amounts of money at lower interest rates.
- Those who do not have these strengths may not be able to borrow money at all, or may have to pay high interest rates for the money they borrow.
- We can always rebuild our credit worthiness and improve our credit risk if we have made mistakes in our past. This may take several years to create a clean and positive track record, but we can do it!
Realizing Our Own American Dream
Why Should We Want to Own a Home?
- There are several excellent reasons why owning our own home, town-home or condominium, is a goal we should seek to achieve as soon as we possibly can.
- We’ll always need a place to live.
- It makes more sense to make a payment for something that we get to live in and own, than making a payment for something we only rent while we’re living there and we never get to own.
- In most cases, the value of a home significantly increases over time (20+ years). Owning a home can be a form of forced long-term savings, and a way to help create some security for retirement.
2. Banks, as well as our state and federal governments, provide us with significant financial opportunities to encourage and help us with owning a home.
- Banks have a variety of different loan options that we can select from to best fit our individual situation.
- Most home loans extend for a period of 30 years, with this longer payback period designed to help keep our monthly payments as low as possible.
- Each year we are allowed to deduct both the interest we pay on our home loan and our property taxes from the taxes we owe to our state and federal governments.
- Assume one individual rents an apartment for $1,100 per month.
- Assume another individual borrows approximately $180,000 at a 6% interest rate for 30 years to buy a home. This individual’s total monthly payment will be approximately $1,571, which includes the home loan payment, the required property tax payment, and the required mortgage insurance payment.
- Because the second individual gets to deduct the interest and property taxes from their yearly income taxes owed to both the state and federal government (approximately $5,652 for the year, which equates to $471 per month), both individuals end up paying approximately the same monthly payment of $1,571. However, one individual (the home owner) will receive the benefit of their home increasing in value over time, while the other will not receive be able to receive this benefit (the renter).
Life-Long Rewards of Owning Our Own Home
- Over time, and with stable economic conditions, the value of a home will increase which is why it is commonly referred to as an appreciating asset. For this reason, along with the financial flexibility owning a home can provide during our life and the security they give us in retirement, it is extremely wise for us to have home ownership as one of the top priorities in our life.
- Ironically, it is quite common for many people to place a higher priority on things like cars, electronics, clothes, etc., than they do owning their own home. Not only do these kinds of things not increase in value, but they actually lose significant value (and are referred to as depreciating assets) nearly immediately after they are first purchased and used.
- When homes appreciate they provide us with financial flexibility and opportunity. As our needs and wants change over time (we may add children to our family or desire to live closer to where we work), we can use the appreciated value of our home (referred to as equity) to move into a different home of our choice.
- Assume an individual, or a couple, purchases a home, town-home or condominium, for $200,000. They will likely have to use $20,000 of their own money (banks typically require that borrowers have at least 10% of their own money to put towards the purchase of a home) with a bank lending them the other 90% of the purchase price of the home, or $180,000, to be repaid over 30 years.
- During stable economic conditions, it is very possible that in just 8 years this $200,000 home has appreciated to a value of approximately $307,000 (based on a 5.5% per year average appreciation rate).
- This home’s value has appreciated, and the equity (which is the difference between what the value of the home is and what the borrower owes the lender) is more than $100,000.
- A homeowner’s equity grows from two sources – one is the appreciated value which increases over time, and the other is from the monthly payments toward repaying the loan from the bank.
- If the homeowner needed to or wanted to, they could now purchase a more expensive home because they would have $100,000 of their own money to use as compared to the $20,000 they originally had.
Retirement Security Example:
- Assume an individual, or a couple, purchases a home, town-home or condominium, for $200,000, and they use $20,000 of their own money and $180,000 borrowed from a bank to be repaid over 30 years to complete the purchase.
If they stay in this home for 30 years, its value will have likely appreciated to a level of $1,000,000 (assuming a 5.5% per year average appreciation rate). At this point, the homeowner will have repaid the bank and no longer have to make monthly bank payments.
The homeowner will have the security of completely owning their home, meaning their equity will equal the full value of the home, or approximately $1,000,000.
Wonderful options now exit for this homeowner – they can choose to stay in their existing home if they prefer, or they can choose to sell their home and move into a less expensive home, or apartment, which may better fits their needs and wants at this point in their life, and use rest of the money from the sale of their home to comfortably live on!
2. Home ownership can also provide our life with some extremely important benefits that are not financial:
- Owning our own home can give us a strong and very comforting sense of pride, personal accomplishment and contentment, each and every time we pause and think about what we have.
- The satisfaction that comes from having succeeded in purchasing our own home can become a powerful catalyst that fuels us with self-encouragement and motivation to continue making wise choices and decisions in all aspects of our life.
- Having our own home makes us feel secure and contributes greatly to our overall well-being.