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Guaranteed
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Theo A. Boers
Copyright © 2003
Theo A. Boers
All rights reserved. No part of this book may be reproduced in any form,
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Application Bible for Students: the Living Bible, Copyright © 1992 by
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Three Rules
Guaranteed to Improve Your Finances!
Page 1
Introduction
Part One
Three Rules…
Page 4
Part Two
A Financial Physical
Page 23
Part Three
Diagnosis and Prescription
Page 35
Part Four
Living by the Rules
Page 42
Part Five
Living by God’s Rules
Page 50
Part Six
Addendum and Forms
Page 54
Introduction
Steve and Jessica graduated from college five years ago. Steve had earned an accounting degree and
Jessica her nursing certificate. Since neither of their parents had been in a position to help them
very much financially, they had $35,000 of student debt between the two of them plus about
$8,000 worth of credit card debt when they graduated.
Steve and Jessica married the summer after graduation and they had a great time on their honeymoon in Jamaica. Unfortunately, their credit card balance increased by about $2000.
The first year after graduation Jessica was offered a position at a small nursing home on the edge
of town. Steve went to work for a local grocery store chain. Between the two of them they were
making almost $55,000 so they felt pretty rich. They were even able to take advantage of Steve’s
employer’s 401K plan (Registered Pension Plan in Canada) where the company matched Steve’s
contribution dollar for dollar up to $1,600 per year.
They found an apartment close to Jessica’s work. Since Jessica did not have a car in her college
days and Steve had an old junker that had seen better days, they decided to lease two new cars,
one for Steve and one for Jessica.
Life was good. Since they both had jobs, they were able to make the lease payments on their cars
and the payments on their student loans and the payments on their credit cards and still go out to
eat three or four times per week. After all, they rationalized, we’re both working so who has time
to cook?
About two years later Steve and Jessica figured the apartment was getting a little small and they
began to look for a house. They fell in love with a house that cost about 30% more than they were
planning to spend but everything else looked junky in comparison, and besides everyone knows
that a house is a good investment, so they went for it.
Jessica’s parents agreed to loan them the $15,000 that they needed for the down payment. They
agreed to pay 8% interest every month and repay the principle balance once they got on their feet
financially. They took out a 30 year mortgage to keep the payments as low as possible. Making
the payments was a bit of a stretch but they managed. However, they were no longer able to contribute to Steve’s 401K plan (Registered Pension Plan in Canada) at work. Unfortunately, their
giving to the church also was reduced dramatically.
In the meantime, their new house was looking kind of empty without much furniture, other than
some hand-me-downs from their folks, so they went shopping. Just their luck, Van’s Furniture
was running a sale! No money down, no interest and no payments for six months. The fine print
said something about 23.9% interest retroactive to day one if the loan was not paid off within six
months, but they didn’t think that was a problem. Steve was expecting a raise so they figured
they would be able to pay off that loan before the end of the six-month period. They applied for
the loan. Their credit was good and the living room furniture was delivered the very next day.
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About thirty days after they moved into the house, they found out that Jessica was pregnant.
They had not planned on starting a family quite this soon but those things happen. Jessica was
able to work until the baby was born and then took three months off. She had saved up three
weeks vacation but the rest of the time was without pay. When Jessica went back to work they
had to find someone to take care of the baby. They were shocked to learn that the daycare cost for
one child was $400 per month. In addition, they now needed baby furniture, clothes, and a whole
lot more.
There were a few baby showers, but eventually the gifts stopped coming. They couldn’t believe
how much the kid could eat and he kept growing out of his clothes.
Fortunately, they had another lucky day. Although two of their other credit cards were maxed
out, they received a pre-approved credit card offer in the mail with a $2,500 limit and, according
to the newspaper, Babies R Us was running a sale on baby clothes.
About this time the three-year leases on their cars were up. They turned the cars back in and
bought a $12,000 used car for Jessica which they were able to finance 100% at the local Credit
Union where Jessica was a member. They bought a $15,000 used car for Steve and were able to
finance it at First Bank. They were able to get an advance on their new credit card to make the
down payment.
Early last year Jessica discovered that she was pregnant again. The baby was born in October and
Jessica took six weeks off from work. Of course this second child also increased daycare costs,
etc. This second pregnancy became somewhat of a wakeup call for Steve and Jessica to evaluate
their financial situation. They had begun to notice that financial pressure was beginning to put a
strain on their marriage. Jessica was especially worried that between their credit card bills, student
loans, car payments and mortgage, they seemed to be going backward financially.
Fortunately, their church had a financial counseling ministry so they made an appointment to
meet with a counselor. The first thing the counselor asked Steve and Jessica to do was to complete
the Personal Financial Habit Assessment. He explained that our financial situation is simply a
reflection of the financial habits that we have accumulated over time.
He went on to explain that it was his goal to help Steve and Jessica identify their bad financial
habits and then work with them to develop good financial habits.
(There is a copy of the Personal Financial Habit Assessment in the Addendum of this book. You
may want to take the assessment yourself as soon as you are finished reading this section.)
After meeting with them several times, the counselor helped Steve and Jessica understand their
financial situation by completing a Personal Asset and Debt Inventory and a Personal Cash Flow
Plan.
Don’t let these two forms scare you. I don’t like to complete forms either. However, the only
way to understand your financial situation is to put some numbers on paper. These are the only
two forms we will use. There are copies of Steve and Jessica’s forms in the Addendum of this
book.
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Steve and Jessica’s Personal Asset and Debt Inventory indicated that they had $18,243 more in
assets than they had in debts. That was good. However, the Personal Cash Flow Plan indicated
that they were spending $475 more per month than they were taking in. That was bad.
Steve and Jessica realized that they could not continue on the path that they were on so they
asked the counselor two questions:
1. What did we do wrong that got us into this mess?
2. What do we have to do to get out of this mess?
This book is about the answers to these two questions. Part One deals with the Three Rules. You
might want to think of this as the theory section of the book. Parts Two through Four are the
practical, “how to” sections. Part Two shows you how to give yourself a financial physical. In
Part Three you will learn how to diagnose your financial situation and develop a prescription to
remedy any ailments. In Part Four you will learn how to live by the rules.
The primary tools we will be using to assess your financial situation are the Personal Asset and
Debt Inventory and the Personal Cash Flow Plan. These two forms are just tools to help you
understand your financial situation and to help you follow the Three Rules. I am confident that if
you use these two tools to help you follow the Three Rules you will be well on your way to
avoiding the type of financial problems that Steve and Jessica experienced.
Just for fun, why don’t you go back through the Steve and Jessica story and identify the financial
errors that they made. (Hint - There are at least twelve of them. If you come up short you can
peek at the end of Part One where all twelve errors are listed.)
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Part One
Three Rules…
Someone once said that life is one of those do-it-yourself jobs, and that is correct. You are responsible for you. That means that you are responsible for managing your God-given resources and
one of those resources is money. In this section we will focus on the three rules that are guaranteed to improve your finances. These rules are:
1. Spend less than you earn.
2. Save now! Buy later.
3. Know Debt.
As you will see, these rules are not difficult to understand, but for many people they are difficult
to live by. Violating these three rules will almost guarantee financial problems. Following these
rules will dramatically improve your financial situation.
Rule One –– Spend Less than You Earn.
Most people think that the reason they have financial problems is because they don’t make
enough money. In reality, most financial problems are a result of people spending too much
money.
That’s why we say, “Spend less than you earn.” It sounds so simple and so logical. But many
people don’t do it. They spend more than they earn and as a result many of them end up with
financial problems. In fact, the single biggest reason people end up with financial problems is that
they spend more than they earn.
What happens when you spend more than you earn? The following example tells the story. Let’s
say you make one hundred dollars but spend one hundred and ten dollars. You are now ten dollars
behind where you started. Where did the extra ten dollars come from? You probably borrowed it,
perhaps on a credit card. If you do this continuously you end up with a lot of debt. That, of
course, makes the problem worse because you now have to make payments on your debt. Where
does the money come from to make payments on your debt when you are already spending more
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than you earn? The answer is more debt. So the more you borrow the more you need to borrow
just to make the payments. It’s a vicious cycle that will continue until you decide to stop.
How do you stop? You have to make a decision: a decision to stop spending more than you earn.
That’s not easy to do but it can be done provided you have:
• the desire to stop
• the willingness to make a decision to stop
• the discipline to stop
Having the desire to spend less than we earn is easy. We all have the desire to improve our lives.
Even making a decision to spend less than we earn is not difficult. Where the rubber hits the road
is in having the discipline to spend less than we earn. That’s the tough part. That’s the part where
you could probably use a little help. And that is what this book is all about. In this book we have
outlined some easy-to-understand, common sense approaches to developing the discipline you
will need to successfully manage your finances.
The following are suggestions that will help you develop the discipline that you will need to implement your decision to stop spending more than you earn:
Suggestion # 1 –– Understand your paycheck.
It’s important that you understand your paycheck. If you don’t there is a great probability that
you will spend more than you earn. By way of example, let’s say you make ten dollars per hour.
How many hours does it take to buy something that costs fifty dollars? Your first reaction might
be –– that’s easy, five hours. Would you be surprised to learn that it’s actually more than eight
hours? Here’s the math:
First of all, we need to understand the difference between spendable pay and unspendable pay.
Spendable pay is the part of your paycheck that you can do with whatever you want.
Unspendable pay is money that has already been committed.
Let’s look at where some of your unspendable pay goes.
Taxes:
Before you see a dime, your paycheck will be reduced by at least 20% for Social Security Taxes
(US only), Federal Taxes, State/Provincial Taxes and possibly Local Taxes. That reduces your ten
dollars per hour to eight dollars per hour. This means that the first 20% of your pay is unspendable.
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Giving:
If you honor God’s instruction to give back at least 10% of your income, that’s another 10% that
is unspendable. (For additional insights into God’s perspective on money, see Part Five.)
Saving:
If you want to avoid future financial problems you need to set aside some money for future needs.
That’s called saving. We’ll deal more with that later. If you decide to save 10% of your income
that’s another 10% that is unspendable.
So far we have recognized that 40%, or four dollars of our ten-dollar per hour pay, is unspendable. That means 60%, or $6 per hour, is spendable. So how long do we have to work to spend
$50? Divide $50 by our spendable pay of $6. The answer is 8.3 hours. Once you realize that you
will need to work 8.3 hours to purchase that $50 item, you might not want it as badly as you first
thought you did.
The situation might actually be worse. Let’s say that in the past you borrowed money to pay for
things. Since you promised to repay the money you borrowed out of future income that money is
pre-spent and therefore unspendable.
Perhaps you paid for things with a credit card and now you are in the process of making payments on your credit card balance. If these credit card bills are consuming 10% of your income,
that’s another 10% that is unspendable for new purchases.
Maybe you borrowed money to buy a car and the monthly payment is 10% of your income.
That’s another 10% of your income that is unspendable.
If you own a home and the mortgage consumes 20% of your income, that’s another 20% that is
unspendable.
Let’s add up how much of your income could be pre-spent and therefore unspendable.
Taxes
Giving
Saving
Credit Cards
Car Loan
Mortgage
20%
10%
10%
10%
10%
20%
of gross income.
of gross income.
of gross income.
of gross income.
of gross income.
of gross income.
Total
80%
of gross income.
That means that 80% of your gross income is unspendable.
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Now that we understand how much of our income is in effect pre-spent, let’s recalculate how
many hours we need to work at $10 per hour to buy a $50 item.
If 80% of our income is pre-spent, we only have $2 left from our $10 per hour. When we divide
that $50 item by $2 we learn that we need to work 25 hours, more than half a week, at $10 per
hour, to buy a $50 item.
So the next time you decide to buy something, do the math. How many hours will you have to
work to buy it? Then ask yourself this question: “Is it really worth it?”
Suggestion # 2 –– Can’t afford it? Don’t buy it.
The ads we see on television and in magazines tell us we should buy things because we deserve
them. However, these ads do not have your best interest in mind. Frankly, the advertiser doesn’t
really care whether you can afford his product or not. He just wants you to buy it so that he can
get rich. These ads are designed to do one thing –– to sell the advertiser’s product. Therefore you
have to look out for you. Don’t even consider buying things you can’t afford.
How do you determine if you can afford to buy something? You need to ask yourself the following questions:
1. Do I have the cash to pay for it?
2. Will I need this money for anything else in the future?
If the answer to question one is “yes” and the answer to question two is “no” you can technically
afford the item you are thinking about buying. However, that still doesn’t mean that buying this
item is a good idea. To finalize your “to buy” or “not to buy” decision you need to ask yourself at
least two additional questions:
Should I buy this item or save the money
for something I may want to buy later?
If you decide to buy this item and are therefore deciding to spend this money, there is one last
question you should ask yourself:
Is this item the most pressing thing
on the list of things I’d like to have?
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(As long as you are going to spend the money
you may as well satisfy your greatest need or want.)
By asking yourself these four questions there are times that you won’t spend the money because
you will realize that you can not afford to, and there are times when you will spend the money on
things that you really want or need. You may want to write these questions on a little note card
and put the card in your wallet or purse. Then the next time you are making a spending decision,
take out the card and ask yourself these questions.
(See the section in the Addendum entitled “How to Determine What You Can Afford” for additional insight.)
Suggestion # 3 –– Don’t buy on impulse.
Have you ever noticed that most stores have a lot of low-priced items displayed by the checkout
counter? Those things are called impulse items. The reason they are called impulse items is because the store people know that as you are waiting in line to be checked out you can be tempted
to impulsively buy things you really don’t need.
Sometimes we are even tempted to buy expensive things impulsively. Anything you buy impulsively can contribute to ultimate financial problems. Don’t do it! Before you buy anything ask
yourself the following questions:
“Was I planning to buy this?” If the answer is no, wait at least 24 hours and use the process in
Suggestion #2 to evaluate if you can really afford to buy this item.
Suggestion # 4 –– Biggie size your french fries but not your house and car.
One of the biggest mistakes made by many young couples is to buy more house and more car than
they need and/or can afford. At the time of purchase they may even be able to afford the payment, but as other expenses increase, these locked-in payments begin to put more and more pressure on the family budget.
In the area of cars, the best advice is to pay cash. That will certainly limit what you can afford. If
you can’t afford to pay cash, purchase as inexpensive a car as possible and finance it for the
shortest time possible and then pay it off as quickly as possible. Then start saving and pay cash
for your next car. (If you are financing your cars for more than three years you are probably buying too much car.)
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In regard to buying a home, I would recommend that you not borrow more than two times your
annual income. Anything more than that has a great probability of creating cash flow problems
down the road.
(See Addendum “How Much House Should You Buy?” and “How Much Car Should You Buy?”
for additional information.)
Suggestion # 5 –– Think Used!
Almost anything can be bought new or pre-owned: houses, cars, clothes, toys (for kids and
adults). Almost everything that you buy used will be less expensive up front and less expensive in
the long run.
Sure, buying things new is great fun, but there is nothing wrong with buying used. In fact, buying
used is smart because you usually get more value for your money.
Studies have shown that buying used cars can reduce your car expenses by more than 50%. Used
clothes, furniture, toys, etc., either from a second-time-around shop or a garage sale, can save you
more than 70%. So the next time you buy something, think “used.” It can save you a bundle. Remember “a dollar saved is a dollar earned”. (Ben Franklin amplified)
Suggestion #6 –– Pay Cash.
One or two generations ago people paid cash for almost everything they bought. Even houses
were frequently paid for in cash. Today we have the option of borrowing money to pay for almost everything we buy, from dinner at a restaurant to cars and houses and the furniture to put in
them.
Although it may not be realistic to pay cash for a home today, it should be your mind-set to pay
cash for almost everything else and especially for things that you consume.
When we talk about “things that you consume” we are referring to anything where the value disappears or goes down significantly after the purchase. This is obviously true of any money you
spend on food, entertainment, vacation, etc. However it is also true for cars, clothes, and toys.
Again, the banks that are willing to lend you the money to buy these things do not have your best
interest in mind. They have their “interest” in mind. “Interest”: that’s what we call the money
that we have to pay to the banker to borrow his money, and interest can run as high as 24.99%
per year.
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Three bad things happen when you borrow money to pay for the things that you consume.
First, you are probably spending more than you should be. Researchers tell us that people who
use borrowed money (credit cards, consumer loans, etc.) to buy things typically spend 35% more
than people who pay cash. (That’s why merchants are so anxious to “help” you by signing you
up for one of their credit cards.) This is also true when we borrow money to buy a car. Perhaps
we can afford a $7,000 car but the salesman convinces us to buy a $10,000 car because it’s only
$30 more per month.
The second bad thing that happens is that you are adding to your debt, which means you have to
pay interest. Interest is what you pay for the luxury of having something that you can’t afford.
Third, the debt and interest has to be repaid out of future income which means that even less of
your future income will be spendable for the things you need.……………………………...
The only way to avoid this spiral is to pay cash for things you consume. If you can’t pay cash
for a consumable, depreciable item that you want to buy, you probably can’t afford it.
The practical exceptions to paying cash in today’s society might be homes and college education.
We will deal with mortgage loans and student debt later.
What about automobile leasing? Generally leasing is not a good
idea. When you lease an automobile you are making two mistakes. The first mistake is that you
are paying for a new car and new cars are simply more expensive unless you are committed to
keeping the car for a very long time. The second mistake is that you are borrowing money to pay
for the car because a lease is just a variation of a loan.
Suggestion # 7 –– Plan your spending.
Managing money is complicated. Earlier we talked about the fact that a significant portion of your
income is already committed to taxes, giving, saving and debt repayment. So let’s say that you
understand that you only have 50% of your paycheck left to spend on necessities like food,
clothes, utility bills, car expenses, vacation, etc. How do you figure out how much you can afford
to spend in each category so that you do not end up spending more than you should in any category?
The answer is you need a Personal Cash Flow Plan. (See Part Two for how to prepare a Personal
Cash Flow Plan.)
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A Personal Cash Flow Plan will help you separate unspendable income from spendable income.
Once you understand how much spendable income you really have, you can decide how and
where you want to spend it.
These are just some of the suggestions of things you can do to avoid spending more than you earn.
As we’ll see in Rule 2, it’s not only important to spend less than you earn, you should spend at
least 10% less than you earn so that you will have savings to draw on when you need it.
Rule Two –– Save Now! Buy Later.
Merchandisers used to use the phrase “Buy Now –– Pay Later” to induce customers to buy their
products. We don’t hear that phrase much anymore, probably because the “pay later” part
sounds too negative. I’d like to introduce you to my version of that phrase. It’s “Save Now ––
Buy Later.”
Sandy Kelley wrote a book called Two Incomes and Still Broke. In this book she makes an extremely valid point when she says:
“It’s not how much you make –– It’s how much you keep.”
Keeping some of your income to pay for future needs is critical. We all have future needs: another
car when our present car wears out, a new roof for the house, a child’s education, and our own
retirement. If we don’t save some of what we earn today, one of two things will happen. Either
we will not be able to buy the things we would like to buy or we will buy them and use borrowed
money to pay for them.
So, unless you have a savings plan, you will always be living on the edge of financial disaster fostered by debt. Your savings plan should include the following three components:
(a) A savings plan for emergencies.
(b) A savings plan for short-term needs. (The next five years)
(c) A savings plan for long-term needs. (More than five years down the road)
Let’s look at these one at a time.
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Emergency savings
The purpose of an emergency savings account is to take care of the significant unplanned expenses
in your life. For example, there will be car repairs, dental bills and broken refrigerators in your life
-- you just don’t know when they will happen.
To be prepared to handle these emergencies you should set up an emergency savings account and
begin to contribute at least ten percent of your gross pay into this account every payday until it
equals five percent of your annual income. At that point you can stop contributing to your emergency account and redirect your savings to either your short-term or your long-term savings accounts, but if you use some of your emergency account for an emergency you have to replenish it.
You should keep emergency account money in a “no fee” savings account at your local bank.
Many “no fee” savings accounts allow you to write three or four checks per month and still pay
you some interest on your balance.
If you are periodically laid off or experience regular cutbacks in hours or are concerned about your
employment being terminated anytime in the next year you should increase your emergency savings to 10% - 20% of your annual income. This will give you a buffer to get through layoffs, cutbacks or terminations.
Short-term savings
The objective of short-term savings is to allow you to pay cash for the big-ticket items you plan
to buy in the next five years. This could include items like your next car, furniture, a down payment on a house, etc.
How much should you set aside for short-term savings? Again that depends on your goals. For
example –– if it is your goal to be able to pay cash for another car in three years and you plan to
spend about seven thousand dollars, then you need to save approximately $200 per month to
accomplish your goal. (Thirty-six months times $200 is $7,200.) Hopefully there will be some
interest on your savings but to be conservative we will assume that any interest gain will be offset
by inflation.
To understand how much you should be putting into your short-term savings account, list the
items you plan to buy in the next five years, estimate the cost, identify how many months until
the purchase date for each item, and then do the math. Add up the amounts you should be saving
monthly for each item. The total is what you need to put into your short-term savings account
every month.
Where should you put your short-term savings? I would suggest putting it in an interest bearing
account, money market mutual fund or CD (Guaranteed Investment Certificate in Canada) so that
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the money will be there when you need it. Money Market Mutual Funds typically pay a higher
rate of interest than a bank savings account but frequently require a $1,000 - $2,000 minimum
balance. You may want to consider starting with a bank savings account and then opening a
money market account when you have enough savings to meet the minimum requirement. To learn
about your money market account options check out popular magazines like Money or subscribe
to a newsletter like “Sound Mind Investing” (SMI) which is a Christian financial newsletter.
(SMI, PO Box 22128, Louisville, KY 40252-0128 (877)736-3674)
Caution - Don’t even think about short-term savings until you have paid off your credit card and
consumer debt. Why save money at 3 - 6% interest when you are paying 12% - 25% interest on
your credit cards and consumer loans?
Long-term savings
The objective of long-term savings is to help you accomplish your family’s long-term goals. Longterm goals may be to help pay for your children’s education, weddings, or your own retirement,
etc. Again the amount of money you need to set aside for long-term needs depend on what your
long-term goals are.
Once you figure out the amount of money you will need to accomplish your long-term goals and
when you will need the money, the “Savings Calculator” in the Addendum will help you figure
out how much money you need to set aside every month to accomplish those goals.
Where should you put your long-term savings? If you have the option of investing in a 401K
(Registered Pension Plan in Canada), where your employer matches some of your contribution,
that should be your first consideration. The second place to look would be the various IRAs
(Registered Retirement Savings Plan in Canada) for which you may be eligible. The third option
would be one or more well-diversified mutual funds.
The title of this section is “Save now! Buy later.” So how much should you save? There are at
least two answers to this question. Answer one is save enough to fund your emergency account
plus enough to accomplish your short- and long-term goals. Answer two is that overall I would
recommend that you set a goal to save 10% of your gross monthly income and divide that as appropriate between your emergency savings, short-term savings and long-term savings. If at this
time the 10% is not enough to fund all three accounts I would recommend funding the emergency
account first, and then balance the excess, if any, between short-term and long-term.
If you are saving ten percent of your income every month you are well on your way to financial
freedom. If you are struggling in your efforts to save ten percent of your income, chances are that
the culprit is debt and that is what we will look at next.
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(See “Are You Happy with Your Savings?”, the “Savings Calculator” and the “Savings Comparison Chart” in the Addendum for more information about Saving. Also review the “Seven Simple
Investment Rules” in the Addendum.)
Rule Three –– Know Debt
We live in a culture where borrowing money is considered to be normal. The first thing we need to
understand is that this is not true. It’s a myth perpetuated by merchandisers and money-lenders.
It is in their best interest for you to believe that debt is normal. It is not in your best interest because:
• debt is expensive,
• debt can ruin you financially,
• debt can ruin your family.
Does that mean that you should never borrow money? Not necessarily, but it is critical that you
understand the consequences of borrowing money. That is why we say that you should “Know
Debt.”
What we mean by “Know Debt” is that you need to understand debt so that you can manage it.
There are at least four different types of personal debt: credit card debt, consumer debt, student
debt and mortgage debt. We will look at each type of debt, one at a time.
Credit Card Debt is any balance carried from month to month on credit cards. If you pay off
your credit card balance every month you do not have credit card debt. If you make partial or
minimum payments on your credit card(s) you will have a balance and that means you have credit
card debt. Interest rates on credit cards can be as high as 24.99% per year. If you carry a balance
on a credit card you are putting at least one foot in the miry pit of financial disaster.
Consumer Debt consists of loans (generally three to seven years long) used to buy big-ticket
items: furniture, cars, RV’s, etc. Interest rates are generally about half of credit card rates but that
doesn’t make them a good deal. Anything purchased with a consumer loan will generally end up
costing 20 - 30% more, compared to paying with cash.
Generally the things you buy with consumer debt will depreciate. As a result, you could end up
in a situation where what you own is worth less than what you owe -- not a good position to be
in.
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Beware especially of what I call the No, No, No offers. You’ve seen them in the newspapers and
on television. The ad offers to sell you something with no down payment, no interest and no
payments for three, six or even twelve months. My reaction to all these offers is no, no, no. Two
reasons: First of all they are not doing this because they like you. They are trying to sell you
something. You’ll end up paying for the so called “no interest” somehow -- either in low quality
or in over-priced merchandise. The other problem is in the fine print: if you do not pay off the
entire amount by the end of the interest-free period you will be charged a very high rate of interest
retroactive to the date you made the purchase.
Student Debt is used to pay for college and university education. Interest is frequently deferred
until the student is finished with school. This type of debt can be considered an investment but
should only be used as a last resort. There should also be a constant awareness of how much the
monthly payments will be to pay off the student debt once school is finished. A general rule is
that student debt payments should not consume more than 10% of your reasonable anticipated
monthly income once you get out of school.
Mortgage Debt is used to buy a home. Interest is generally about 25% lower than consumer debt.
Although there is nothing necessarily wrong with using a mortgage to purchase a home, there are
at least three caveats to keep in mind. First –– plan to live in the home for at least seven years.
Second –– Don’t buy more home than you can afford; typically you should not borrow more than
two times your annual income. Third –– keep the mortgage term as short as possible (preferably
fifteen years or less).
Managing Debt
Debt is like a cancer that can destroy you financially. Therefore you have to have a plan to control
it and ultimately get rid of it. The following rules will help you do that.
Inventory your debt
Before you can develop a plan to manage your debt you have to understand how much debt you
have. Therefore you need to inventory your debt. The Personal Asset and Debt Inventory form
that we will talk about later will help you to do that.
Pay off your credit card every month
Someone once said, “credit cards have made it possible to buy things we don’t need with money
we don’t have to impress people we don’t even like.”
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If you are a typical American/Canadian, you already own three credit cards and you will receive
twenty-five offers for additional credit cards this year. You are part of the sixty million households who will charge over $1 trillion on credit cards this year. Chances are at least 75% that you
do not pay off your balance at the end of the month. Instead you are opting to pay 12 - 25% interest on your average balance of $7500. That means you are paying an average of over $100 per
month in interest.
Don’t get me wrong. There’s nothing wrong with credit cards. What’s wrong is how people use
their credit cards. I use credit cards all the time. They are a great convenience, but if you are going
to use credit cards I’d suggest that you follow these rules:
Rule One ––
You only need one general-purpose credit card.
You do not need any department store or specialty credit cards. The reason department stores
like Marshall Fields and JC Penney are so anxious to give you one of their credit cards is because
they know that as a result of having their credit card you will buy 33% more at their store. And
then, on top of that, they get to charge you 12 - 25% interest on your loan balance. Not a bad deal
for the store but a very bad deal for you.
Rule Two ––
Don’t use your credit card to buy things impulsively.
Back in the days before credit cards, people needed cash to buy things. As a result, if they didn’t
have any cash, the temptation to impulsively buy things was not as great. Now things are different. Even if we’re flat broke (that’s what we used to call it when we didn’t have any cash), we can
always pull out the plastic. Is it even possible to be flat broke anymore? My advice is to only use
your credit card to pay for things that are budgeted in your Personal Cash Flow Plan. If you only
use your credit card to pay for these things you will have the money to pay the credit card bill at
the end of the month. If you do not have the discipline to do this either cancel your credit card or
leave it at home.
Rule Three –– Pay off your credit card bill every month.
The banks hate it when you do this. They would prefer that you just make the minimum payment. Usually the minimum payment represents 100% of the interest that is due and a tiny little
bit of principle. Someone once calculated that if all you did was make the minimum monthly
payment on a $2000 credit card balance it could take as much as thirty-two years for you to pay
off the loan. Of course in the meantime you would have paid over $8000 in interest. That’s why
banks love minimum monthly payments.
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Rule Four –– If you don’t pay off a card at the end of the month cut it up. We call it plastic surgery.
If you do not pay off your credit card balance at the end of every month you will get caught in the
interest spiral. The more interest you have to pay, the less you will be able to reduce your principal balance. The higher your principal balance, the more interest you have to pay. It never stops.
Think before you act
Earlier in this book we suggested that before you buy something, you need to make sure that you
can afford it and to not buy things impulsively. This is even more true if you are going to borrow
the money to buy whatever it is you think you need.
Before you take on any new debt you need to ask yourself:
• Do I really, really need this?
• Do I have to spend this much money or can I make do with less?
• What impact will this new debt payment have on my ability to pay my other expenses?
Do not add to your debt unless you have satisfactory answers to all these questions! Every time
you fail to pay the total balance on your credit card you are increasing your debt.
Set a goal to become debt-free.
Do you have a goal to become debt-free? Your reaction to that question may be that in today’s
world it’s not realistic to have a goal of becoming debt-free. I used to believe that. The banks
would certainly like you to believe that, but it’s not true. You can become debt-free if you want
to, but you have to want to and manage your debt accordingly or it will not happen.
Think about the benefits of being debt-free. No credit card payments! No car payments! No
house payments! And most important of all: NO FINANCIAL WORRIES! You will not
experience financial freedom until you are debt-free. This is not a new idea. The writer of the
Book of Proverbs said it well 3000 years ago when he said “the borrower is servant to the lender”.
As long as you are borrowing money you are enslaved. Once you stop borrowing money you will
be free!
Can it be done? Of course it can. I know young couples in their early thirties who are completely
debt-free. No, they didn’t inherit big bucks and they don’t have super high-paying jobs. They
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just made the decision that they wanted to be financially free. They set up a game plan to acquire
a minimum amount of debt and then set up a plan to get out of debt as quickly as possible.
If you are serious about getting out of debt you need to make that one of your financial goals, develop a plan, and then begin to take action. The following action steps will help you accomplish
your goal of becoming debt free:
• Do not take on any new debt!
• Squeeze every possible dollar out of your Personal Cash Flow Plan and add it to your minimum
payments. (The more you pay, the sooner that debt will be history.)
• Once a debt has been eliminated, take the payment amount on that debt and apply it to another
debt until it is paid in full and then repeat that process with your remaining debts.
(See “Are You Happy with Your Debt Situation?” and “How to Get Out of Debt” in the Addendum for more tools and ideas on how to evaluate your debt situation.)
Summary
One more time. The Three Simple Rules for managing money are:
1. Spend less than you earn.
2. Save now! Buy later.
3. Know debt.
Now that we understand the Three Simple Rules it’s time to put it all together. We will do that by
creating a Personal Cash Flow Plan. A Personal Cash Flow Plan will help you understand how to
best allocate your income to your various expense areas while accomplishing your goals in the
areas of saving, giving and debt management.
However, before you turn to Part Two and begin to create that plan, you need to think about
what you have learned and you need to set some personal goals. The best way to do that is to
develop a personal response to the following statements. Initial each goal as evidence of your
commitment to accomplishing that goal. Then list the things that you will do to accomplish your
objectives.
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Steve and Jessica’s Financial Mistakes
1.
Too much college debt.
2.
Financing the honeymoon.
3.
Leasing new cars.
4.
Buying used cars that were too expensive & financing 100%.
5.
Giving is not a priority.
6.
Buying a home too early.
7.
Looking at houses they couldn’t afford.
8.
Buying a house that was 30% over their budget.
9.
Thirty-year mortgage.
10.
Borrowing from parents.
11.
Buying furniture on credit.
12.
Using a credit card to buy clothes.
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1.
I/we are committed to spending less than I/we earn.
(Initials _____ _____)
To accomplish this goal I/we will do the following:
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
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2.
I/we are committed to saving ____% of my/our gross income.
(Initials _____ _____)
To accomplish this goal I/we will do the following:
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
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3.
I/we are committed to managing my/our debt. (Initials _____ _____)
To accomplish this goal I/we will do the following:
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
After you have completed Part Two of this manual you may want to come back to these last
three pages and fine-tune how you will accomplish these goals.
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Part Two
A Financial Physical
Steve and Jessica had a problem. They knew they had a problem because they were frequently
unable to pay their bills on time. This in turn resulted in late payment fees, which of course made
the problem even worse. Sometimes they took an advance on one of their almost maxed-out credit
cards in order to pay the bills that were due. As the counselor explained to them they were just
digging themselves deeper and deeper into a dark hole called debt.
Once they understood the Three Rules they also realized that they had broken all of them.
Steve and Jessica had spent more than they earned but they were not sure how much more.
Steve and Jessica did not have any savings other than the money Steve had been able to put into
their 401K (Registered Pension Plan in Canada) during the first two years of their marriage.
Steve and Jessica had not managed their debt. In fact, they didn’t even know how much debt they
had. They could have added it up, but never did because it was too depressing.
The counselor suggested that the first thing they should do was to develop a Personal Cash Flow
Plan. That would tell them how much they were spending each month in excess of their income.
He put it rather bluntly. “Once we know how much you are spending we can make some adjustments and at least stop the bleeding.”
“Stop the bleeding!” Jessica understood that concept from her nursing training. The first thing a
good medical technician is taught to do is “stop the bleeding.” That makes sense because that at
least keeps the problem from getting worse.
When Jessica related that analogy to the counselor he kind of smiled. “That’s a great analogy Jessica,” he said, “because there are a lot of similarities between how a financial counselor deals with
a person’s financial situation and the way a doctor deals with a person’s physical condition. The
first thing we do is stop the bleeding. Then we do a financial physical and then we prescribe a
solution to the problems we see. In fact, that is what we are going to do next - a financial physical.
And just like a doctor I’m going to ask you some very personal questions, in this case about your
finances, and I can only help you if you tell me the absolute truth.” Steve and Jessica agreed that
that was a fair deal and told the counselor that they were anxious to begin.
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The counselor explained to Steve and Jessica that instead of a thermometer and a stethoscope he
was going to use something called a Personal Cash Flow Plan to help him probe into their financial
health.
There is a copy of Steve and Jessica’s Personal Cash Flow Plan and a blank Personal Cash Flow
Plan in the Addendum of this book. You can also download free copies of Steve and Jessica’s Personal Cash Flow Plan and the blank Personal Cash Flow Plan from our web site at
www.ThreeRules.org.
As you will notice when you look at Steve and Jessica’s Personal Cash Flow Plan, it starts with
money coming in – income. Then it goes on to list each area where money goes out – expenses.
After listing all sources of income and all categories of expenses, the Personal Cash Flow Plan
allows you to subtract the total of expenses from the total of income to see if you have a surplus
or a deficit.
ALL ENTRIES ON THE PERSONAL CASH FLOW PLAN ARE EXPRESSED ON A
MONTHLY BASIS.
Let’s walk through each line of Steve and Jessica’s Personal Cash Flow Plan to make sure we understand the purpose of each line and how to complete it. At the same time, if you like, you could
use a blank copy of the Personal Cash Flow Plan to begin your own financial physical.
INCOME
There are three lines to register gross, monthly income: use one line for each income source. Gross
income is before taxes and other deductions.
Steve and Jessica have two sources of income. They each earn $3000 per month.
List each of your income sources and the corresponding monthly income on a blank copy of the
Personal Cash Flow Plan.
If you are paid monthly this is pretty simple. Just enter your monthly gross income. If you are
paid two times per month, multiply your twice-per-month gross pay by two and enter it into one
of the income lines.
However, if you are paid weekly or every two weeks it gets more complicated.
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If you are paid weekly you will usually receive four paychecks per month. However, there will be
four months during the year when you will receive five paychecks. I’m going to suggest that we
build your budget on the basis of the four paychecks per month. That way when you do receive
that fifth paycheck it can go directly into one of your savings accounts.
Therefore, if you are paid weekly multiply your weekly gross pay by four and enter it into one of
the income lines.
For the same reason if you are paid every two weeks multiply your bi-weekly gross pay by two
and enter it into one of the income lines. (In this case there will be two months per year where
you will receive three paychecks and the third can be deposited directly into one of your savings
accounts.)
If you are not sure what your income will be because your income is sporadic, you have to estimate it on an annual basis as best you can and divide by twelve to calculate your monthly income.
All of the rest of the lines on the Personal Cash Flow Plan deal with money going out. Each
expense item should be dealt with on a monthly basis. In other words, how much money will
you spend on that category per month? Of course there are some expense categories where you
may not spend money every month. In that case you will need to determine your annual expense
in that category and divide by twelve.
You will notice that expenses are divided into three categories.
Category One expenses are expenses that are either outside of your control (taxes) or in effect
pre-spent because of a prior decision you have made (debt repayment, saving, giving). In Part One
of this book we referred to this as Unspendable Income.
Category Two expenses are regular living expenses that typically recur on a weekly or monthly
basis.
Category Three expenses are expenses that typically happen on a quarterly, semi-annual, annual
or sporadic basis.
The reason we separate expenses into three categories will become clear later.
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CATEGORY ONE EXPENSES
Giving
Giving is intentionally listed first because that is what the Bible tells us to do. The Bible refers to
first fruits. God wants us to give off the top, not based on what is left over.
Steve and Jessica used to give 10% of their income, but they don’t anymore. They are now giving
$20 per month.
Enter the amount you give on your Personal Cash Flow Plan.
Taxes
Taxes come next because if you don’t pay them you go to jail. So we have to recognize that a portion of our income needs to be set aside for taxes.
Steve and Jessica pay $600 in Federal Income Tax, $378 in Social Security, $81 in Medicare and
$240 in State Income Tax. Since they live outside of the city limits they do not pay city income
tax.
You should be able to calculate your monthly taxes from a recent pay stub. Calculate the percentage of a recent paycheck that was withheld for each type of tax. For example –– take the total
federal tax withheld and divide it by your gross pay for that pay period. If your federal tax for
that pay period was $40 and your gross pay was $400 then your federal tax rate is 10%. Multiply your monthly total income by 10%. That should approximate your monthly tax for the federal tax category.
Do the same thing for Social Security, Medicare, State and Local taxes.
Debt Retirement
Debt retirement is next because this is money that we have already spent and promised to repay.
Steve and Jessica have a lot of debt. That’s one of the things that got them into trouble in the first
place.
To help them understand their debt situation the counselor introduced them to the Personal Asset
and Debt Inventory form.
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There is a copy of Steve and Jessica’s Personal Asset and Debt Inventory form in the Addendum.
There is also a blank copy of this form for your use. Or you can download free copies of these
forms from our website at www.Three Rules.org.
The right-hand side of this form allows you to list all your debts including the Monthly Payment,
the Interest Rate and the Balance Owed. By listing all their debts and adding up the columns,
Steve and Jessica figured out that they had $148,907 of debt and that making payments on this
debt consumed $2,215 of their monthly income.
This was the first time that they really understood their debt situation and it looked a little scary
but the counselor told them that this was the first step in the process of managing their debt.
After completing the Debt side of the Personal Asset and Debt Inventory, Steve and Jessica were
able to complete the Debt Retirement section of their Personal Cash Flow Plan.
You should now complete the Debt side of your Personal Asset and Debt Inventory.
In the “Payment” column list at least the minimum monthly payment. However, if you are paying
more than the minimum payment, and I hope that you are, list the amount you are actually paying
on a monthly basis.
After you have listed all your debts, add up the “Payment” column and the “Balance Owed” column. Show the totals on the “Total Payments/Debts” line.
The total of the “Payment” column is your monthly debt payment obligation. Steve and Jessica’s
total monthly debt obligation was $2215.
The total of the “Balance Owed” column is your total debt. Steve and Jessica’s total debt was
$148,907.
Now that you have completed the Debt side of your Personal Asset and Debt Inventory, enter
the debt payments you are making in each debt category of your Personal Cash Flow Plan.
Car Loan(s)
If your debt repayment includes car loan payments, enter the total here.
Mortgage Loan
If you are making a mortgage payment, enter it here. If it includes tax and insurance, that’s OK.
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Personal Loan(s)
These are typically loans from relatives or friends. Enter the total of the payments you are making, or should be making, in this category.
Credit Card(s)
Enter the total of the actual payments you are making on credit card balances. If you are making
minimum payments enter the total of the minimum payments. If you are making more than the
minimum payments enter that total.
Student Loan(s)
If you are making student loan payments enter them here.
Other Loan(s)
This might include home equity loans or any other loans that are not counted above. Enter the
payments you are making on these other loans.
The total of your payments on the Personal Asset and Debt Inventory should be equal to the
total of your debt payments on your Personal Cash Flow Plan.
Savings
Savings is next because if we don’t set aside money for savings up front, chances are there won’t
be any money left over after all of our other expenses. That, in turn, will result in no savings,
which will result in financial problems down the road. That is why one of our Three Rules is
“Save Now! Buy Later.”
Steve and Jessica have also been breaking this rule. They are not saving in any of the three categories. That is one of the causes of their financial problems.
Enter the amount you are setting aside for each savings category.
Add up your Category One expenses and show the result on the Total Category One Expense
line. Then divide your Total Category One Expenses by your Total Income. Show the result on
the Category One Percent of Income line. This is the percent of your income that is consumed by
giving, taxes, debt retirement and savings and is therefore unspendable.
Steve and Jessica’s Category One expenses are $3534. That represents 59% of their gross
monthly income. That means they only have 41% of their income left for all other expenses.
As we said in Part One when we talked about “understanding your paycheck,” it’s important that
we differentiate between spendable and unspendable income. Spendable income is what we have
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left over after taking care of our Category One expenses. That is the money that is available for
Category Two and Category Three expenses.
Category Two expenses are regular living expenses that typically recur on a weekly or monthly
basis. Category Three expenses are expenses that typically happen on a quarterly, semi-annual,
annual or sporadic basis. Let’s look at Category Two expenses next.
CATEGORY TWO EXPENSES
The following Category Two expenses are not in any particular order. They all fall into the area of
current living expenses. In order to determine how much you are actually spending in each category you may need to review your checkbook for the last few months to see what your monthly
expenses have been in each of these categories.
Housing
Rent - If you own your home and are making a mortgage payment you already listed your mortgage payment in Category One. If you rent your home, enter your rent payment here.
Property Taxes & Insurance - If you pay your property taxes and home insurance premiums as
part of your mortgage payment, they are already included in Category One. If you pay them on a
monthly basis but separate from your mortgage payment show them on their own lines here. If
you pay your property taxes and home insurance premiums other than monthly we will deal with
them in Category Three.
Utilities - Enter your monthly utility bills (electric, gas, water). Although your utility bills
probably vary based on the season, try to estimate what they would be on average per month. If
you do not have good records your utility company may be able to tell you how much you have
paid over the last year and then all you have to do is divide by twelve. (Many utility companies
actually have a budget plan that allows you to pay the same amount each month to help you
budget your utility expenses.)
Garbage Pick-up - If you are paying for garbage pick-up enter your monthly cost here.
Telephone - Enter your average telephone bill per month.
category.
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Include cell phone costs in this
Food
This category encompasses food that you buy at the grocery store and prepare at home. However, you should also include the other things you normally purchase at the grocery store like
cleaning items, paper products, toiletry articles, etc.
Car
Gas - To estimate the amount of gas you need per month think about the number of times you get
gas per month and how much you spend on average. Then do the math.
Insurance - Enter the amount you spend on car insurance per month here if you pay your insurance monthly. If you pay your insurance quarterly, every six months or once per year we will
deal with it in Category Three.
Medical/Life Insurance
Health Insurance - Any insurance premium paid by your employer does not need to be entered.
However, if you pay for some of your medical insurance through payroll deduction or if you pay
it directly on a monthly basis, enter it here.
Life Insurance - If you pay life insurance premiums monthly enter them here.
Entertainment
Calculate your monthly budget for entertainment, eating out and babysitters and enter it here.
Also list your monthly Cable and Internet fees.
Tuition/Child Care
Tuition - If you have private school tuition or college tuition for yourself or your kids enter the
monthly cost here.
Day Care/Child Support - If you are paying for daycare, enter the monthly cost here. If you are
responsible for paying child support, enter it here. If you receive child care support, enter it under
income.
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Miscellaneous
There are a series of regular weekly and/or monthly miscellaneous expenses that we need to take
into consideration. These are things like newspaper subscriptions, prescriptions, lunches (assuming you don’t eat at home and don’t carry a lunch to work), pet supplies, haircuts, cigarettes, etc.
etc. etc. Think about the unique expenses that you incur on a regular basis and account for them
here.
Also listed under Miscellaneous in Category Two is an expense category called “Cash.” This expense item refers to “walking- around money.” Money for incidentals. This is an area that needs
to be managed closely. Part Four “Living by the Rules” outlines some ideas of how to do that.
Add up your Category Two expenses and show the result on the Total Category Two Expense
line. Steve and Jessica had Category Two expenses of $2,346 per month.
Divide your Total Category Two Expenses by your Total Income. Show the result on the Category Two Percent of Income line. This is the percent of your income that is consumed by your
normal monthly living expenses. Steve and Jessica’s Category Two expenses were 39% of their
income.
CATEGORY THREE EXPENSES
We will now turn our attention to Category Three expenses. These are expenses that will happen
sometime in the next year but not necessarily every month. For example, your automobile
insurance company may bill you every six months. That means that two times per year you need
to have enough money to pay the car insurance bill. The same thing is true for clothing expenses,
vacation expenses, gift expenses, etc. You know that there will be expenses in each of these
categories but not necessarily every month. However, it’s important that you set aside some
money every month so that you can pay for these expenses when they occur.
For example, if your six-month automobile insurance bill is $600 we know you have to set aside
$100 every month so that you will have enough money to pay the bill when it is due.
Steve and Jessica have $595 in Category Three expenses. That represents 10% of their income.
One of the reasons they had financial difficulties was that they did not set aside money for future
predictable expenses.
In order to calculate your Category Three expenses you may need to do some math. Follow the
instructions below:
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Property Taxes - If your property taxes are not included in your mortgage and you did not include your property taxes in Category One or Two, compute the monthly cost and enter it here.
Home Insurance - If your home insurance is not included in
your mortgage and if you pay your home insurance other than monthly, compute the average
monthly cost and enter it here.
Home Maintenance - Estimate your average monthly expenses in this category by taking into
consideration your annual cost for lawn maintenance, snow removal, repainting, refurbishing and
repair and then divide by twelve. Big-ticket home maintenance like major furnace or appliance
repair, etc. will be paid out of the emergency savings account.
Car Insurance - If your car insurance is paid other than monthly compute the average monthly
cost and enter it here.
Car Maintenance - This is difficult to estimate but all cars need oil changes, new tires once in a
while, and other preventive maintenance. Enter a realistic estimate for your monthly car maintenance. Again, big-ticket car repairs like new transmissions, etc. will be paid for out of the emergency savings account.
Clothing - You probably do not buy clothing every month but you need a budget for clothes.
Estimate the amount you spend on clothing for her, for him and for the kids, per year, and divide
by twelve.
Doctor - For many people the majority of doctor costs are taken care of by insurance. However,
you may still have regular out-of-pocket costs for doctor visit co-pays. Estimate your annual
costs and divide by twelve. Totally unpredictable doctor expenses will be paid for out of the
emergency savings account.
Dentist - Estimate your annual dentist expenses that are not covered by insurance, divide by
twelve and enter them here. Focus on routine dental expenses. Unusual dental expenses will be
paid for out of the emergency savings account.
Eye Care - Estimate your annual eye care expenses that are not covered by insurance, divide by
twelve and enter them here.
Life Insurance - If you pay for life insurance other than on a monthly basis, compute the
monthly cost and enter the result here.
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Health Insurance - If you pay for health insurance other than on a monthly basis, compute the
monthly cost and enter the result here.
Vacation - Calculate how much you spend on vacations each year, divide by twelve and enter
here.
Gifts - How much do you spend on gifts per year? (Birthdays, Weddings, Baby Showers, etc.)
Divide by twelve and enter the result here.
There is a second gift line to deal with money spent on Christmas gifts.
Other - Are there other expense categories that we have not covered, where you have expenses
other than on a monthly basis? If there are, determine the annual cost, divide by twelve and enter
the result here.
Add up your Category Three expenses and show the result on the Total Category Three Expense
line. Steve and Jessica’s Category Three expenses were $595. This is the amount of their income
that they needed to set aside every month to take care of expenses that happen on a quarterly,
semi-annual, annual or sporadic basis.
Divide your Total Category Three Expenses by your Total Income. Show the result on the Category Three Percent of Income line. Steve and Jessica’s Category Three expenses are 10% of their
income.
Now that you know how much of your money is going to Category Three expenses, the next
questions is how do you make sure that the money is there when you need it? The counselor suggested to Steve and Jessica that they set up a special “no fee” savings account at their local bank.
Many “no fee” savings accounts allow you to write three or four checks per month and still pay
some interest on your balance. You may have to do some research but they are generally still
available.
He also told them that every time they received a paycheck they should deposit the appropriate
percent of their income (10% in their case) directly into their Category Three Expense Account.
That way the money was guaranteed to be there when they needed it.
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TOTAL EXPENSE
We are now ready to calculate the total of our expenses. All we have to do is add Total Category
One Expenses plus Total Category Two Expenses plus Total Category Three Expenses and enter
the result on the Total Expense line. In the case of Steve and Jessica, total monthly expenses are
$6475.
We have now completed the Financial Physical. We are ready to proceed to the diagnosis stage.
This stage will tell us whether you are financially healthy or not.
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Part Three
Diagnosis and Prescription
When Steve and Jessica had completed their Personal Cash Flow Plan their counselor was able to
begin to analyze their financial situation. The first thing he wanted to know was whether they
were following Rule # 1: “Spend less than you earn.” In order to do that he had to calculate
whether they were operating with a monthly surplus or whether they were operating with a deficit.
Surplus/Deficit
To determine whether you have a surplus or a deficit, subtract your total expenses from your
total income. If the number is positive you have a surplus. If the number is negative you have a
deficit. As it turned out, Steve and Jessica had a deficit. Since they were spending $6475 per
month and had income of $6000 per month they had a monthly deficit of $475.
If you have a surplus, congratulations. You have the luxury of deciding what you will do with
your surplus. If you have any debt I would suggest that you use your surplus to retire your debt.
If you don’t have any debt you may want to use some of your surplus to increase your giving and
some to increase your savings.
If you have a deficit you are violating Rule One of The Three Rules: you are spending more than
you earn. If this is your situation you will need to take corrective action; you will need to do
something different. Your expenses can not regularly exceed your income because the result will be
increased debt, increased debt payments and greater deficits all leading to ultimate serious financial
problems.
The reason you have to do something different is because:
If you always do what you’ve always done
you will always get what you always got.
If you want something different
you have to do something different.
Doing things differently will not be easy. No one likes to give things up, but if you have a deficit
you have no choice. The deficit won’t go away by itself and will probably get worse. If it contin-
35
ues you will probably end up with even more serious problems. So you have to take control of
the situation. You have to start doing things differently.
Where do you begin?
Let’s go back to Steve and Jessica. They have a monthly deficit of $475. Their counselor explained to them that if they did not take corrective action their monthly deficit would translate
into an annual deficit of $5,700. That number really got Steve and Jessica’s attention. They now
realized that they were headed for financial disaster unless they did something different.
To figure out what they should do differently, Steve and Jessica asked their counselor if he could
help them.
The rest of this section deals with what their counselor told them.
The counselor told them that the first thing they needed to do was to acknowledge that they were
spending more than they were earning.
The second thing the counselor told them was that they needed to make a commitment to stop
spending more than they earn. In other words, they needed to stop the bleeding. He told them
that if they didn’t, matters would only get worse. He told them that it wouldn’t be easy but that
they really didn’t have a choice. They had to do whatever they had to do to stop the bleeding and
get their expenses under control.
He also told them that there were really only two ways to solve a deficit problem. You either have
to reduce your spending or increase your income. The counselor advised Steve and Jessica to first
examine their spending to see where it could be reduced.
To reduce your spending you have to start by reexamining each one of your expense categories on
your Personal Cash Flow Plan. For every expense category you have to ask the question, can this
expense category be reduced? If it can, write a new number next to the existing number. When you
are done going through all the expense categories, recalculate your total expenses and your surplus/deficit.
If you still have a deficit, go through the above expense reduction procedure again and again if necessary. You need to reduce your expenses - you need to stop the bleeding. Remember, most
financial problems are not a result of not making enough money, they are a result of spending too
much money.
If you have done everything you can to trim your expenses and you still have a deficit, there are
two other areas that may provide the answer.
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The first thing you should do is ask yourself if there is anything that you could sell. If you have
assets that you could sell, sell the asset and use the proceeds to reduce some debt, which in turn
will reduce your debt payments. That in turn will help reduce your expenses and your deficit.
Once you have exhausted this option and you still have a deficit, you need to examine whether
you can increase your income. I intentionally saved this option for last, primarily to make the
point that you need to do the other two first. Unless you get your spending habits under control,
increasing income will not be a long-term solution. That’s why I always suggest that we first look
at reducing expenses and selling assets before we look at increasing income. I’ve seen it too often
where people increased their income to get out of a financial problem and were back into financial
problems a short time later because their poor spending habits had caught up with their new level
of income.
When you get to the point of examining the possibility of increasing income you should evaluate
the following:
• Can you get a raise from your present employer?
• Can you get a job that pays better?
• Can you work more hours at your present job?
• Can you get a part-time job?
If you are married these questions may apply to both spouses.
• If you have children at or approaching working age, can they contribute by working to earn
money for their own clothes and miscellaneous expenses?
If all of the above action steps still do not balance your budget you need to start at the top again
and this time review spending cuts, selling assets or increasing income with a bolder approach. It
may be time for some really drastic decisions. Yes, this could include selling your house and either
renting or buying a smaller one, or selling one of your cars or even your only car and buying a less
expensive one. Ultimately you have to do whatever you have to do to turn around your financial
situation to the point where you are spending less than you earn.
What follows are the steps that the counselor recommended to Steve and Jessica:
1.
Cut up all the credit cards.
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The reason he made this recommendation is because Steve and Jessica had demonstrated that they
were not capable of managing credit cards. He suggested that they review the credit card rules in
Part One of this book.
2.
Reduce expenses:
• reduce telephone expenses by:
• reduce food expenses by:
• reduce eating out expenses by:
• reduce vacation expenses by:
• reduce gift expenses by:
$ 50
$ 50
$ 50
$150
$ 50
• reduce cable/internet expenses by:
• reduce cash expenses by:
Total Savings
$ 25
$100
$475
These reductions would have balanced Steve and Jessica’s budget and brought them into
compliance with Rule One: “Spend Less than You Earn,” but the counselor didn’t stop there. He
knew that just balancing Steve and Jessica’s budget wasn’t enough. He realized that in order to
really help Steve and Jessica they had to pay attention to at least three more areas.
He knew that they were also violating Rule Two: “Save Now! Buy Later.” That was obvious
from the fact that their Personal Cash Flow Plan indicated three big round zeros in the savings
categories. He knew that unless they started a savings program they would probably end up in
financial difficulties again.
He also knew that they were violating Rule Three: “Know Debt.” That was obvious from the fact
that when he first met with them they didn’t even know how much debt they had. He also knew
that if they continued to make just the minimum payments on their credit cards it would take a
long, long time before they would be out of credit card debt because most of the credit card payments were going to interest.
And, he knew that Steve and Jessica were not really happy with their giving. At one time they had
been able to give 10% of their income but now could only afford to give $20 per month. So he
made the following additional recommendations:
3.
4.
Reduce more expenses:
• reduce clothes expenses by:
• reduce entertainment expenses by:
• reduce lunches expenses by:
Total
$ 50
$ 50
$ 50
$150
Reduce even more expenses:
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Steve and Jessica had been spending $700 per month for day care. The counselor suggested that
they check around at church to see if someone might be available for daycare. As it turned out
they found someone who lived closer to their home and only charged $500 per month. That saved
Steve and Jessica another $200.
(For more information about what percent of your income you should budget in each expense
category see “Expense Guidelines” in the Addendum.)
5.
Sell assets:
Assets are things that you own. For purposes of this financial analysis we will only focus on bigticket assets like cars, real estate, recreational vehicles (boats, motorcycles, trailers, etc.), and savings and investments. Selling assets can help you correct your financial situation.
When Steve and Jessica completed their Personal Asset and Debt Inventory they learned that they
had $167,150 in assets. Their counselor explained to them that if they sold an asset that they
owned free and clear they could use the proceeds to pay off some debt and that would help their
monthly expense situation.
He also explained that if they sold an asset on which they still had a loan they could use the
proceeds of the sale to pay off that loan and as a result eliminate that monthly payment from their
strapped monthly payment situation.
He pointed out to Steve and Jessica that they had the option of selling one of their cars and saving
another $400 per month between car payments, maintenance, gas and insurance. Sharing a car to
get to work would be somewhat inconvenient but it could be done. He reminded them that the joy
of getting their finances under control would reward them for the rest of their lives at the price of a
little inconvenience now.
Steve and Jessica decided that instead of selling one of their cars they would sell the fishing boat.
With the $2,500 in proceeds they could pay off Sears, Van’s and Pier One and thereby reduce
their payment expenses by $100 per month.
In order to understand your asset situation, complete the left-hand side of the Personal Asset and
Debt Inventory.
Start by listing your assets: cars, real estate, other assets like motorcycles, boats, RV’s, etc.,
money in Emergency Savings Accounts, Short-Term Savings Accounts and Long-Term Savings
Accounts. A rule of thumb would be to list things that are worth at least $500 but do not list
clothes, home furnishings, garden tools, etc. For each asset indicate a brief description and show
the value. If you are not completely sure of the value, close enough is good enough at this point.
After you have listed all your assets add them up and put the total on the Total Assets line.
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6.
Increase Income:
The last area the counselor looked at was increasing income. Since Steve had an accounting degree
he wondered if Steve had ever considered doing tax returns between January 1 and April 15. When
they took a serious look at that option they decided that Steve could probably earn about $4800
per year doing tax returns. That translated to another $400 per month before tax on an annualized
basis and about $300 after tax.
The savings and after-tax income generated by these last four ideas generated $750 of additional
money per month that Steve and Jessica could use for debt reduction, savings and giving. Steve
and Jessica were really excited about this and decided to save $250 per month, give $250 per
month and accelerate their debt reduction by $250 per month.
The counselor calculated that by adding $250 to their debt payments they could be out of credit
card debt in twenty-three months instead of the sixty-three months it would take if they stayed
with the regular plan. He also told them that they were now well on their way to following Rule
Two: “Save Now! Buy Later” and Rule Three: “Know Debt.”
Our focus in this section has been on creating a Balanced Personal Cash Flow Plan that will help
you to follow Rule One: “Spend less than you earn.”
However, we also want to make sure that you are following Rule Two: “Save now! Buy later” and
Rule Three: “Know Debt.” To do that you need to make sure that your balanced Personal Cash
Flow Plan includes sufficient savings to accomplish your savings objectives and sufficient debt
repayment to accomplish your debt management objectives.
(There are two sections in the Addendum that will help you set your savings and debt reduction
objectives. They are entitled “Are You Happy with Your Savings?” and “Are You Happy with
your Debt Situation?”)
By now you have figured out that a Personal Cash Flow Plan is simply a tool that helps you understand how much you can afford to spend in each of your expense categories (e.g. food, clothing, housing, transportation, etc.). It also helps you understand how much of your income you
should save to help you accomplish your future goals. If you don’t live by a spending plan you
will probably stop spending money when you run out of money. And in today’s society, with
the ready availability of credit cards, we never run out of money and we keep on spending until
we have serious financial problems.
I hope your Personal Cash Flow Plan is now balanced and that it includes allocations to accomplish all of your objectives. If it is, you are ready to start Living by the Rules. Congratulations!
However, we are not done yet. Just because you are ready to live by the rules doesn’t necessarily
mean that you will live by the rules. However, the next part is designed to help you do just that,
Live by the Rules.
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Part Four
Living by the Rules
As we mentioned in the previous section, having a balanced Personal Cash Flow Plan is the
beginning of good financial planning. However, just having a balanced Personal Cash Flow Plan
isn’t enough. You need to manage your money so that you are living according to that plan. That
is why we call this section Living by the Rules. In this section we will deal with how to use your
Personal Cash Flow Plan as a tool to help you make wise daily, weekly, monthly, and periodic
money decisions.
At this point we will assume that your Personal Cash Flow Plan is in balance and that it reflects
your realistic goals in terms of debt retirement, giving, saving and spending. The question now
becomes: how do you implement that plan? How do you manage your money on a daily, weekly
and monthly basis so that you will meet your financial goals while dealing with the realities of
life?
The answer is that we need a system – a system that will help us follow each one of the Three
Rules. The rest of this chapter deals with advice that the counselor gave to Steve and Jessica to
help them follow the Three Rules.
Following Rule One – Spend Less than You Earn
To help Steve and Jessica manage their spending, the counselor introduced them to:
The Paycheck Management System, and
The Spending Management System.
He told them that the Paycheck Management System is designed to simplify the process of setting
aside funds for future expenses. The Spending Management System is designed to help limit
spending in various budget categories. Let’s look at these two systems in more detail.
The Paycheck Management System
The counselor suggested to Steve and Jessica that they operate with three bank accounts: a
General Checking Account, a Category Three Expense Account, and an Emergency Savings
Account.
He suggested that they deposit or ask their employer to direct-deposit the appropriate amount into
each of their bank accounts from each one of their paychecks. He reminded them that if they
didn’t take the money they wanted to save right off the top, chances were that they would not
accomplish their savings goals.
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He also told them that if they didn’t set aside the appropriate amount of money for Category
Three expenses it would not be there when they needed it.
He then told them how to implement the Paycheck Management System in their situation.
Emergency Savings Account
Since Steve and Jessica didn’t have any savings, the counselor suggested that they should put all
of their budgeted savings into their Emergency Savings Account until it equals 5% of their annual
income. He told them that once their Emergency Savings Account was under control they could
begin to work on their Short-Term and Long-Term Savings Accounts.
Category Three Expense Account
The counselor told Steve and Jessica that they should deposit the appropriate percentage of each
paycheck into their Category Three Expense Account. This is the amount that they would need to
pay their Category Three expenses.
General Checking Account
The counselor told Steve and Jessica to deposit the balance of each paycheck into their General
Checking Account. This is the account they will use to pay their Category One and Category Two
expenses.
The Paycheck Management System is a key component of getting and keeping your financial
house in order. It is a simple system that helps you set aside money for things you need rather
than spending it on things you want. Your Personal Cash Flow Plan will tell you how much you
need to deposit into each of these accounts. If you follow the Paycheck Management System, you
will have made a major step in the right direction.
The Spending Management System
Now that your money is safely being deposited into the accounts where it belongs, how do we
make sure that it is used for the right things and that you do not spend more than your Personal
Cash Flow Plan suggests you can afford in any category? That, frankly, is the tough part, but
there are a few tricks you can use to stay on track. This is what we refer to as the Spending
Management System.
First of all, there are many expense categories where we simply respond by paying a bill. This
would be true for our mortgage payment or rent, debt payments, utilities, etc. There is obviously
no temptation to overspend in these categories.
What you need is a plan to prevent overspending in discretionary categories like food, clothing,
entertainment, gifts and cash expenses. These are what we refer to as the Budget Busters. Let’s
look at a couple of these:
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Food: If you are spending too much money on food it may be that you are making too many trips
to the store. Retailers know that if they can get you into their store, chances are that you will buy
something that you were not planning to buy. If you can limit your shopping to once per week or
even once every two weeks you will save money.
It’s also possible that you spend more than you should because your shopping is not organized. If
you make a list before going shopping and then stick to the list you will save money.
One way to discipline yourself to not exceed your food budget is to use the envelope system.
Let’s say that your monthly food budget according to your balanced Personal Cash Flow Plan is
$400 per month. To use the envelope system all you have to do is put $100 in an envelope every
week. When the money is gone you stop spending money on food and make do with whatever’s
left in the pantry. Another way is to open a special “no fee” food checking account and deposit
$400 per month. When the money is gone you stop spending money on food.
Clothing: We all need a clothing budget but controlling this budget is difficult because we spend
our clothing funds sporadically. If you have children, chances are you spend a lot around
September when the kids go back to school. So the question is how do you manage your clothing
budget so that the money will be there when you need it?
First, we will assume that you are depositing your monthly clothing budget into your Category
Three Expense Account. The best way to manage it is to keep a log of how much of the money in
your Category Three Expense Account is designated for clothing and then record your clothing
expenses against that balance as they occur. If that is too complicated I would suggest setting up a
separate no fee checking account just for clothing. That way you will always know how much
money you have that can be spent on clothing without blowing your budget.
Entertainment: Entertainment is a common area of overspending. This can consist of going out
to eat, ordering a pizza or going to a movie. By itself the amount of money you tend to spend does
not seem like much but if you add it up over the period of a month or a year it adds up to serious
money. The easiest way to control your entertainment expenses is to use the envelope system.
Vacation: We all need a time of rest and relaxation. However, vacation can be a budget buster.
There is a great temptation to spend more on vacation than we can really afford. Rationalization
is easy. It seems like everyone is taking cruises, skiing trips and excursions to Disneyland.
Sometimes we even convince ourselves that we, or our kids, deserve it whether we can afford it or
not. Don’t guilt yourself into an expensive vacation that you cannot afford.
By all means take a vacation. They can be wonderful memory- creating times for a family.
However, only spend what you can afford. Plan ahead. Set aside money for vacation. Then limit
your vacation spending to your special vacation savings account!
Gifts: This is a tough one. We all like to give gifts. Even the Bible says it is more blessed to give
than to receive. But it also says that a borrower is the servant to the lender. So, I don’t think the
Bible would agree that it is a good idea to borrow money so that you can give. Yet that is what a
lot of people do. They buy gifts for their spouse, children, extended family and friends because
43
they get caught up in the giving trap. They believe that when someone gives them a gift they have
to give them a gift in return - whether they can afford it or not.
Somewhere this cycle has to be broken and you may have to be the one to break it. If you and
your family or friends are caught up in the giving trap, have an honest discussion. Chances are
some of the others are having the same financial problems you are. Suggest cutting out some of
the gift giving, set reasonable spending limits per gift, draw names rather than having everyone
buy gifts for everyone else, or exchange only self-made gifts from now on. You can have a lot of
fun with some of these alternate approaches and save a lot of money in the process.
Whatever you do, you will still need a gift budget. Again, the easiest way to control your gift
expenses is to keep a log per month and per person so that you will know how much you are
spending. Another idea is to set up a separate “no fee” gift checking account and deposit your
monthly gift budget directly into that account instead of into your Category Three Expense
Account.
Cash Expenses: This is the category where many people blow the budget. They have no idea
how much cash they actually spend. When they run out of cash they run to the ATM machine and
get some more. This is a guaranteed recipe for disaster.
To control cash expenses you first need to decide how much cash you really need per month. Go
to your balanced Personal Cash Flow Plan and use a yellow marker to hi-light the expenses that
you pay in cash. In the case of Steve and Jessica the cash expenses on their balanced Personal
Cash Flow Plan were:
• Food
• Entertainment
• Eating Out
• Babysitters
• Prescription Co-pays
• Cash (Walking-Around Money)
When they added up their monthly budget for these categories it totaled $560. The counselor
suggested that they simply divide the $560 by four to determine how much cash they needed per
week. The answer was $140. He then suggested that they agree to go to the bank one time per
week, withdraw $140 and use it for their cash expenses for the next seven days. He strongly
recommended that they go to the bank on the same day every week, preferably the day that they
normally did their food shopping. He then suggested that they pay for their food shopping trip
with the cash they had withdrawn, use the balance for other cash expenses during the balance of
the week and agree not to go back to the bank for more cash until the next scheduled food
shopping day. Of course that meant that if they ran out of cash before the next shopping day they
had to recognize that they were broke. No credit cards, checks or emergency cash withdrawals to
the rescue. If they had to operate without cash for a couple of days that was just the penalty for
busting their agreed-upon budget. It took a couple of weeks, but before they knew it Steve and
Jessica were successfully stretching their cash from one shopping date to the next.
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Following Rule Two – Save Now! Buy Later
Successfully following this rule requires two action steps. The first action step is to decide how
much to save. The second action step is to exercise the discipline that will result in achieving
your savings objective. Let’s look at these one at a time.
Decide How Much to Save
Your Personal Cash Flow Plan should help you answer this question. When you completed and
balanced your Personal Cash Flow Plan you hopefully thought about how much you should save
to fund your Emergency Savings Account and how much you should save for your short-term and
long-term needs. In effect, you already made the decision of how much to save. Now we have to
make sure that that savings actually happens. That is what we will discuss next.
Discipline to Save
The most successful way to assure yourself that the savings will actually happen is to make
saving an automatic function of every paycheck. Your Personal Cash Flow Plan tells you how
much you have decided to save in each saving category. Divide that savings goal by your total
monthly income. Deposit that percentage of every paycheck into the appropriate savings account.
If you do that regularly you will accomplish your savings goal. The best and simplest way to
make sure that your money ends up safely in your savings accounts is to ask your employer to
direct deposit the money per your instruction. The principle here is very simple; you won’t be
tempted to spend money that is not easily accessible.
Following Rule Three – Know Debt
Borrowing money is easy. Banks intentionally make it easy because the more money we borrow
the more money they make. Unfortunately, the single biggest cause of financial pain and misery
is debt. Debt is like a disease that destroys our financial health. It starts with minor symptoms,
just like a cold, but before we know it we are dealing with a life-threatening illness. To prevent
that from happening we have to understand debt or as we say, Know Debt. There are five key
components of our debt situation that we need to know. We will deal with each one individually.
Know how much debt you have.
The first step in the process is knowing how much debt you have. Many people have not taken
this first step. It’s possible that they do not want to know. If you completed the Personal Asset
and Debt Inventory you already know how much debt you have. This is an important step
because it forces you to deal with reality. If it is your goal to reduce your debt or possibly to get
out of debt, you first need to know where you are today. That will help you identify what it is
you have to do to accomplish your goals.
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Know the different types of debt.
Once you have calculated your total debt, you should break your debt down into the following
four categories:
Credit Card Debt
Consumer Debt
Student Loan Debt
Mortgage Debt
Credit Card Debt is any balance you carry on one or more credit cards. If you pay off your credit
card(s) in full every month you do not have any credit card debt.
Consumer Debt generally consists of three to five year loans, typically used to finance cars,
home improvements, furniture, appliances, boats, RV’s, lawn tractors, etc.
Student Loan Debt is any debt incurred to pay for your education.
Mortgage Debt is typically a long-term loan used to purchase a home. However, any loan that
uses your home as collateral, like a home equity loan or a second mortgage, is also considered to
be Mortgage Debt.
Since some types of debt are worse than others this allows you to manage your debt starting with
the most critical categories. To evaluate how you are doing in the various debt categories you
may want to compare your situation against the following benchmarks:
Your Credit Card Debt should be $0.
Your Consumer Debt payments should consume less than 10% of your income.
Your Student Loan Debt payments should consume less than 5% of your income.
Your Mortgage Debt payments should consume less than 25% of your income.
If you are at or below these benchmarks in each category, you have achieved level one in debt
management. Congratulations!
Once you have achieved level one, I would encourage you to work toward achieving level two.
Level two requires that you eliminate all consumer and student debt.
Once you have achieved level two, I would encourage you to work towards achieving level
three. Level three requires that you eliminate all of your debt, including your mortgage debt.
Now you are totally debt free and can begin to experience all of the benefits of total financial
freedom and no longer have to worry about the consequences of debt. (See next section for more
details.)
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Know the consequences of debt.
Perhaps you have already experienced some of the consequences of debt. Knowing the
consequences of debt should be the biggest motivator for you to avoid debt.
Debt reduces your future standard of living.
Debt needs to be repaid. Not only does debt need to be repaid, it needs to be repaid with interest.
In some cases, the amount of interest that you need to pay is greater than the amount of money
that you borrowed. Obviously those repayments will come out of your future earnings, thereby
reducing the amount of your income that you can use to support yourself. That is why we say
that debt reduces your future standard of living.
Debt reduces your ability to save.
When debt repayment is consuming a portion of your present income, the amount of money that
you will be able to set aside as savings for future needs will be reduced.
Debt reduces giving.
Many people who are in debt feel the financial pressure caused by debt repayment and conclude
that they just can’t give the way they would like to because of debt pressure.
Debt causes personal frustration and stress.
Knowing that you are behind on the car payment or wondering every time the phone rings
whether it’s another bill collector is frustrating and stressful.
Debt causes marriage problems.
Researchers have told us for years that over half of marriage failure is directly attributable to
financial problems in the family, most of which is caused by debt.
Know the borrowing test.
If and when you do decide to borrow money there are a few questions that you should ask
yourself. Any question to which you answer “yes” is a warning light that should cause you to
reconsider your borrowing decision.
Am I seeking contentment with this purchase?
Am I borrowing money to pay for an impulsive purchase?
Am I borrowing money to pay for a purchase driven by pride/ego?
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Am I justifying my buying decision on the basis that everyone is doing it?
Is the item I am about to buy likely to depreciate?
Is my loan for this item longer than absolutely necessary?
Is there a possibility that I may not be able to make the payments on this loan?
Will repayment of this loan threaten my ability to save?
Will repayment of this loan threaten my ability to give?
Will repayment of this loan threaten my ability to take care of my family?
Am I questioning whether taking out this loan is a good decision?
Does my spouse have any concern about borrowing money for this purchase?
Know how to get out of debt!
The best advice about debt that you will see anywhere is to have a plan to get out of debt. You
will not be financially free until you “owe no man anything.” There is a section in the Addendum
that is entitled “How to Get Out of Debt.” Review it now and then put your plan in place. You
will notice that if you have done what this book has suggested you do in earlier chapters, you
will already be well on your way.
Conclusion
If you follow the advice in this chapter about Living by the Rules, your financial picture will
improve, guaranteed! However, following this advice will in all likelihood require that you
change some habits. Changing habits is tough. People don’t like to change. If you are sincere
about wanting to change some habits to assure a better financial future for yourself and your
family you may want to consider inviting an accountability partner to walk this journey with you.
Sharing your current situation and your goals for the future with a person who is willing to be
both an encourager and an accountability partner will significantly increase your probability of
achieving your goals.
The point of this section on Living by the Rules is that just having a balanced budget is not
enough. You have to learn to live within this budget. Not only do you have to learn to live within
your budget, you need to learn to live within each area of your budget where you have overspent
in the past. If there is a large number of areas where you have overspent in the past you may want
to prioritize them and get them under control one at a time. If the worst offenders are food,
clothing and cash (walking-around money), those are the ones you should concentrate on. Once
48
you have those under control, move on to the others on your list. If you have financial problems,
they didn’t happen overnight and you probably won’t fix them overnight.
However, if you:
• have the desire to get your finances under control,
• make the decision that you will do whatever is necessary, and
• have the discipline to stick with it,
you too will experience the delight of financial freedom.
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Part Five
Living by God’s Rules
This is not a religious book. However, since I am a Christian, I would be remiss if I did not share
the source of much of my thinking about money. Very simply stated, the book that has had the
greatest impact on how I deal with money is the Bible.
Some people are surprised when I say that the Bible has greatly impacted the way I think about
money. After all, the Bible is a religious book. However, even though it may come as a surprise
to you, the Bible has a lot of common sense advice about money, money management and
lifestyle. This is advice that comes directly from God - the God who made us and created our
universe. Think of it as our owner’s manual.
God gave us this advice because he loves us and has our best interest in mind. After years of
involvement in a financial counseling ministry, I have concluded that most financial problems
are a direct result of not following this advice.
The Three Simple Rules that we focus on in this book are firmly rooted in God’s Word, the
Bible.
The Message (MSG), the Contemporary English Version (CEV) and The Living Bible (TLB)
are user-friendly translations of the Bible. I used these translations because they speak to us in a
contemporary everyday language, just like the original version of the Bible did thousands of
years ago.
Let’s review the Three Rules:
Rule One – Spend Less than You Earn
The Bible verse that I like to use to underscore this rule is from Hebrews 13:5 from the
Contemporary English Version of the Bible where it says:
Don’t fall in love with money. Be satisfied with what you have. The Lord has promised that he
will not leave us or desert us.
The key instruction in this verse is that we need to be satisfied with what we have. This doesn’t
mean we shouldn’t work hard so that we can buy what we need, but it does suggest that we not
get ahead of ourselves and borrow money to buy things that we can’t afford. In other words, if
we are driving an older car we should be satisfied with that car until we can afford to buy a
newer car.
The verse also tells us that when we follow this advice we do not have to worry about anything
because God has promised to take care of us.
50
The single biggest reason people get into financial difficulty is that they are not satisfied with
what they have. They buy things that they cannot afford and borrow the money to pay for them.
Rule Two – Save Now! Buy Later
The book of Proverbs was written almost 3000 years ago. It is known as one of the Wisdom
Books. A lot of the wisdom in Proverbs deals with money. Verse 21:20 in the Living Bible
Version of Proverbs deals with saving money and says:
The wise man saves for the future, but the foolish man spends whatever he gets.
That’s pretty self-explanatory. It’s your choice. Do you want to be wise or foolish?
Rule Three – Know Debt
There is also a verse in Proverbs that deals with debt. Proverbs 22:7 in The Message version of
the Bible warns us that:
The poor are always ruled over by the rich, so don’t borrow and put yourself under their power.
The New International Version puts it this way:
The rich rule over the poor, and the borrower is servant to the lender.
When you stop and think about it that is exactly what happens when we borrow money: we
become the servant to whoever loaned us the money. Let’s say you buy a car and borrow the
money to pay for it. You need to make monthly payments. You work to earn the money to make
the monthly payments. Who are you working for? You are working for the bank. No wonder
we’ve all seen the bumper sticker that says:
I owe, I owe, so off to work I go.
There are many other Bible verses that give us solid, practical advice about the financial aspects
of our lives. The following are all from the book of Proverbs.
God wants us to work hard.
Laziness leads to poverty. Proverbs 10:4a CEV
A farmer too lazy to plant in spring has nothing
to harvest in the fall. Proverbs 20:4 MSG
51
Work your garden – you'll end up with plenty of food; play and party– you'll end up with an
empty plate. Committed and persistent work pays off; get-rich-quick schemes are rip-offs.
Proverbs 28:19-20 MSG
God wants us to be generous.
The world of the generous gets larger and larger; the world of the stingy gets smaller and
smaller. Proverbs 11:24 MSG
If you give to the poor, your needs will be supplied! But a curse upon those who close their eyes
to poverty.
Proverbs 28:27 TLB
Honor the Lord by giving him the first part of all your income, and he will fill your barns with
wheat and barley and overflow your wine vats with the finest wines.
Proverbs 3:9-10 TLB
God wants us to be honest.
God cares about honesty in the workplace; your business
is his business. Proverbs 16:11 MSG
Switching price tags and padding the expense accounts are two things GOD hates. Proverbs
20:10 MSG
It is better to be poor than dishonest. Proverbs 19:22b TLB
God warns us about the consequences of debt.
It's stupid to try to get something for nothing, or run up huge bills you can never pay. Proverbs
17:18 MSG
Don't gamble on the pot of gold at the end of the rainbow, hocking your house against a lucky
chance. The time will come when you have to pay up; you'll be left with nothing but the shirt on
your back. Proverbs 22:26-27 MSG
God wants us to be content.
Don’t weary yourself trying to get rich. Why waste your time? For riches can disappear as
though they had the wings of a bird. Proverbs 23:4-5 TLB
52
A leech has twin daughters named "Gimme" and "Gimme more.” Proverbs 30:15a CEV
It's better to live humbly among the poor than to live it up among the rich and famous.
Proverbs 16:19 MSG
Clearly, the Bible has a lot to say about earning money, spending money, and our attitude toward
money. I believe that people who follow this advice will lead happier, more productive and
fulfilling lives. I also believe that it will improve your financial situation. The reason I can say
that the Three Simple Rules are guaranteed to improve your financial situation is because they
are based on God’s Rules. It doesn’t get any better than that!
53
Addendum
Page
Personal Financial Habit Assessment
55
How to Determine What You Can Afford
56
How Much House Should You Buy?
57
How Much Car Should You Buy?
59
Automobile Leasing
61
Expense Guidelines
62
Are You Happy with Your Savings?
63
Savings Comparison Chart
65
Savings Calculator
67
Seven Simple Investment Rules
68
Are You Happy with Your Debt Situation?
69
How to Get Out of Debt
71
What About Debt Counseling Agencies?
72
Some Things to Think About
73
54
Personal Financial Habits Assessment
When you answer these questions, it is important that you do so 100% truthfully. If you do not
answer them truthfully, you are only kidding yourself.
1.
Are you living on a budget?
[ ] Yes [ ] No
2.
Do you know how much debt you have within $1000?
[ ] Yes [ ] No
3.
Are you saving on a regular basis?
[ ] Yes [ ] No
4.
Do you balance your checkbook monthly?
[ ] Yes [ ] No
5.
Are you happy with your giving?
[ ] Yes [ ] No
6.
Do you pay off your entire credit card balance each month?
[ ] Yes [ ] No
7.
Do you make all your loan payments on time?
[ ] Yes [ ] No
8.
Do you know how much cash you spend every week?
[ ] Yes [ ] No
9.
Do you buy things on impulse?
[ ] Yes [ ] No
10.
Do you have more than one personal credit card?
[ ] Yes [ ] No
11.
Are you making payments on automobiles?
[ ] Yes [ ] No
12.
Are you making payments on a boat, RV or motorcycle?
[ ] Yes [ ] No
13.
Do you owe money to relatives?
[ ] Yes [ ] No
14.
Do you ever get a cash advance on a credit card?
[ ] Yes [ ] No
15.
Have you ever taken a cash advance against your paycheck?
[ ] Yes [ ] No
16.
Do you ever use your credit card because you can’t afford to pay cash? [ ] Yes [ ] No
Personal Financal Habit Assessment Results
If you answered “Yes” to questions 1-8 and “No” to the rest, you have a perfect score of 100%.
Congratulations!
If you answered “No” to any of Questions 1-8, that is an area that will need some work.
If you answered “Yes” to any of questions 9-16, that is also an area that needs
some work.
55
How to Determine What You Can Afford
There are several ways to determine if you can afford something. The best way is to use your
Personal Cash Flow Plan. For Example:
If your budget for entertainment is $50 per month and if you have already spent your $50
entertainment allowance for the month you can’t afford to go out for dinner. It’s that simple!
If you have a separate bank account for clothing and there is no money in that account you can’t
afford to spend more money on clothes.
If you want to buy a car that will result in a $300 per month payment when your Personal Cash
Flow Plan calls for a maximum of a $200 per month payment you clearly can’t afford the $300
per month car.
Another way to determine if you can afford something is to see if you have the cash to pay for it.
For example: Let’s say you want to buy a “big ticket” item: a boat, motorcycle, RV, etc. Do you
have enough savings so that you can buy that “big ticket” item without robbing your emergency
savings account and still have enough savings to pay for the other purchases that you have been
saving for? If you don’t, you can’t afford it.
56
How Much House Should You Buy?
The chart on the following page demonstrates two house-buying scenarios. Ralph buys a home
for $120,000 and finances it for 30 years at 8.5%. Bill buys a home for $70,000 and finances it
for 7 years at 7.5%. They both put down $20,000. Their payments are approximately the same.
After 7 years Bill’s home is paid in full and he sells it and buys a $120,000 home with $70,000
down. He again finances the balance for 7 years at 7.5% so his payments stay the same.
At the end of 14 years both Bill and Ralph own a $120,000 home. Bill owns his home free and
clear. Ralph still owes $80,557.
From year 15 through year 30 Bill no longer needs to make a mortgage payment, so he invests an
amount equal to the mortgage payment he used to make, at an average return of 7.5%.
At the end of 30 years both Ralph and Bill own a $120,000 home free and clear. However, in
addition to his home, Bill has an investment account of $283,174. The only “penalty” Bill had to
pay to accomplish this was to live in a $70,000 house for 7 years while Ralph lived in a $120,000
house.
(Although both homes probably appreciated during this time period we kept the values constant
to make the illustration simpler.)
57
Two House-Buying Scenarios
Year 1
Ralph
Bill
Purchase Price
$120,000
$70,000
Down payment
$20,000
$20,000
30
7
8.5%
7.5%
$768.91
$766.91
$93,079
$0
Term in Years
Interest Rate
Monthly Payment
Year 8
Payoff Balance
Purchase Price
$120,000
Down payment
$70,000
Term in Years
7
Interest Rate
Monthly Payment
7.5%
$768.91
$766.91
$80,557
$0
$120,000
$120,000
$0
$283,174
Year 15
Payoff Balance
Year 30
Assets (House)
Investment Account
58
How Much Car Should You Buy?
The following page will help you answer that question. It outlines three car-buying scenarios.
Ralph, Tom and Bill each bought a car.
Ralph bought a new car for $20,000, paid $2000 down and financed the balance for 5 years at
9.75% interest.
Tom bought a used car for $12,000, paid $2000 down and financed the balance for 3 years at
10.5% interest.
Bill bought a used car and paid cash.
Even recognizing that Tom and Bill will have more repair costs over the years, our illustration
indicates that Ralph’s cost per year is almost two times Bill’s cost. That doesn’t even include the
fact that Bill’s cost to insure a $12,000 used car will be a lot less than Ralph’s cost to insure a
$20,000 new car.
Your initial reaction to a savings of $2000 per year might be that it isn’t that significant. That all
depends on how you look at it. If Bill were to invest that $2000 annual savings he would have
over $200,000 in an investment account after 30 years.
59
Three Car-Buying Scenarios
Ralph
New
Tom
Used
Bill
Used
Financed
Financed
Cash
Purchase Price
$20,000
$12,000
$12,000
Down payment
$2,000
$2,000
$12,000
$18,000
$10,000
$0
60
36
0
9.75%
10.5%
0.0%
$380.24
$325.02
$0.00
$0
$1,500
$1,500
Loan Balance
after 3 years
$8,179
$0
$0
Resale Value
after 3 years
$12,000
$6,000
$6,000
Net Cost
$11,868
$7,701
$6,000
$3,956
$2,567
$2,000
Amount Financed
Term in Months
Interest Rate
Monthly Payment
Repairs over 3 years
Cost per Year
Notes:
Used cars assumed to be 3 years old
Net Cost = Down payment + Total Payments + Repairs + Payoff – Resale Value.
60
Automobile Leasing
On the prior page we identified that financing a new car is twice as expensive, over time, as
buying a late model used car and paying cash.
There is one other way to pay for a car that is typically even more expensive than buying and
financing new and that is leasing. The reason that it is typically the most expensive way is that a
lease is basically a long-term rental agreement. With a typical lease you make a down-payment,
agree to a certain number of miles per year, use the car for a while; typically 2 – 3 years, make
monthly payments and then you give it back.
Both the down payment and the payments may lead you to think that leasing is similar to buying
but it isn’t. The down-payment in a lease transaction is really prepaid payments. Your monthly
payments are actually the rent you pay for the use of the automobile.
In a lease you make monthly payments but you build no equity. In fact, if the car shows more
wear than normal, or if you drove more miles than agreed upon, you may owe the leasing
company money when you bring the car back at the end of the lease term.
The dealer might tell you that leasing is smart because you only pay for the part of the car that
you use. That may be true but remember, you will be paying finances charges on the full value of
the car for the full term of the lease. Also, don’t forget to read the fine print about the early
termination penalties!
Leases have their advantages; less money tied up in a vehicle and no hassle when it comes to
selling or trading in, but they come at a price. If you are operating on a tight budget there are
better options.
61
Expense Guidelines
People frequently ask what percent of their income they should budget in each category of their
Personal Cash Flow Plan. That is not an easy question to answer because there are so many
variables.
The first variable is your income range. Obviously, if you earn $100,000 per year you can afford
to spend a greater percentage of your income on vacation than if you earn $30,000.
The second variable is income tax. Taxes vary not only by income range but also from one part
of the country to another.
A third variable is your debt repayment situation. If you have a lot of debt you will need to cut
back in other areas.
Another variable is whether you are spending a lot of money on tuition, either for yourself or for
your children. If you are, you may have to cut back in other areas of your budget.
Another area might be medical expense. If you are responsible for significant medical expenses
you may not be able to spend as much in other categories.
Having said all that, I would suggest the following guidelines:
Give at least 10% of your gross income to people who are less well off than yourself.
Do not spend more than 25% of your gross income per month on housing costs, including taxes
and insurance.
Do not spend more than 10% of your gross income per month on other debt outside of your
mortgage.
62
Are You Happy with Your Savings?
One of our three rules is “Save Now! Buy Later.” Earlier in this book we talked about the
importance of savings. We also talked about how to budget for your savings. In this section we
will deal with how to get from where you are to where you want to be relative to your savings
goals.
If your emergency savings account (See Personal Asset and Debt Inventory) is equal to or more
than 5% of your annual income you are in good shape. If it isn’t, you will need to take the
following corrective action:
If you do not already have one, open an emergency savings account.
If you are not already contributing to an emergency savings account on a monthly basis, modify
your Personal Cash Flow Plan and start now. This will probably mean that you will have to cut
back in some other areas, but if you do not start saving you will always have financial problems.
I would recommend that you designate all of your savings, up to 10% of your income, to your
emergency savings account until the amount in this account is equal to at least 5% of your gross
annual income.
If your short-term savings account (See Personal Asset and Debt Inventory) indicates you are
on your way to being able to pay cash for the big-ticket items you plan to buy in the next five
years you are in good shape. If it isn’t, you will need to take the following corrective action:
(The following assumes that your emergency savings account is fully funded and that your credit
cards and other consumer debt are paid off.)
Calculate how much you need to invest in a short-term savings account so that you can pay cash
for the big-ticket items you plan to buy in the next five years and adjust your Personal Cash Flow
Plan accordingly.
For example - if you plan to buy a car in 48 months and you plan to spend about $10,000 you
will need to be saving $200 per month to accomplish your goal. ($10,000 divided by 48 months.)
Although you may be earning some interest, that will basically go to offset inflation.
If your long-term savings accounts, CD’s, IRA’s, 401K, (GIC’s, RRSP, RPP in Canada) and
other investments indicate you are on your way to accomplishing your long-term goals, you are
in good shape. If they don’t, you will need to take the following corrective action:
(The following assumes that your emergency savings account is fully funded and that your credit
63
cards and other consumer debt are paid off.)
Calculate how much you need to invest in a long-term savings account so that you can
accomplish your long-term goals and adjust your Personal Cash Flow Plan accordingly.
The Savings Calculator on the next page can help you figure out how much you need to save per
month to accomplish your savings goals.
64
Savings Comparison Chart
(Assumes 10% Return)
Ralph and Bill are the same age. They both believe in saving. However, Ralph decided to start
saving at an early age. Bill decided to wait until he could afford it. Ralph saved $1200 per year
for ten years. Bill waited for ten years and then started saving $1200 per year and continued for
30 years. Even though Bill contributed $1200 per year to his savings account for 30 years he
never caught up to Ralph.
That is why the time to start saving is now!
Year
Ralph
Value of
Savings
Account
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,260
$2,646
$4,171
$5,848
$7,692
$9,722
$11,954
$14,409
$17,110
$20,081
$22,089
$24,298
$26,728
$29,401
$32,341
$35,575
$39,132
$43,046
$47,350
$52,085
$57,294
$63,023
$69,326
$76,258
$83,884
$92,272
$101,500
$111,650
$122,815
$135,096
$148,606
65
Bill
Value of
Savings
Account
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,260
$2,646
$4,171
$5,848
$7,692
$9,722
$11,954
$14,409
$17,110
$20,081
$23,349
$26,944
$30,899
$35,248
$40,033
$45,297
$51,086
$57,455
$64,460
$72,166
$80,643
32
33
34
35
36
37
38
39
40
$163,466
$179,813
$197,794
$217,573
$239,331
$263,264
$289,590
$318,549
$350,404
66
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$89,967
$100,224
$111,507
$123,917
$137,569
$152,586
$169,105
$187,275
$207,262
Savings Calculator
This Savings Calculator will help you to determine how much you need to save per month in
order to accumulate a savings account of $10,000 based on a specified time period and expected
rate of return.
For example, if you wanted to have a savings account of $10,000 in 10 years and you anticipated
an average interest rate return of 5% you would need to save $64.40 per month.
Once you know what you have to do to save $10,000 you can quickly calculate how much you
need to save monthly to accomplish any savings goal.
For example, if it is your goal to save $20,000 all you have to do is multiply the monthly savings
amount for $10,000 by 2.
Interest Rate
10 Years
20 Years
30 Years
40 Years
5%
$64.40
$24.33
$12.02
$6.55
6%
$61.02
$21.64
$9.96
$5.02
7%
$57.78
$19.20
$8.20
$3.81
8%
$54.66
$16.98
$6.71
$2.86
9%
$51.68
$14.97
$5.46
$2.14
10%
$48.82
$13.17
$4.42
$1.58
11%
$46.08
$11.55
$3.57
$1.16
12%
$43.47
$10.11
$2.86
$0.85
68
Seven Simple Investment Rules
1.
Don’t invest in stuff you don’t understand.
Don’t be stupid and believe all you hear; be smart and know where you are headed.
Proverbs 14:15(a) CEV
2.
Don’t expect to get rich overnight.
Steady plodding brings prosperity; hasty speculation brings poverty. Proverbs 21:5 The
Living Bible
3.
If you are going to invest in individual stocks as opposed to mutual funds make sure you
know more about that company than the experts on Wall Street.
Fools think they know what is best, but a sensible person listens to advice.
Proverbs 12:15 CEV
4.
Exercise discipline and patience vs. reaction and panic.
5.
Invest regularly.
6.
Never invest solely on a tip. Most “inside” information is old, wrong or illegal.
A good reputation and respect are worth much more that silver and gold.
Proverbs 22:1(a) CEV
7.
Diversify! DIVERSIFY!! DIVERSIFY!!!
68
Are You Happy with Your Debt Situation?
The third of our three rules is: “Know Debt.” In Part One, we talked about why it was important
to manage your debt. In this section we will deal with how to figure out what you have to do to
get from where you are to where you want to be in the area of debt.
If your Credit Card balance is “0” (See Personal Asset and Debt Inventory) you are in good
shape. If it isn’t, go back and review the four Credit Card Rules in Part One of this book.
If you have no Consumer Debt (Installment loans) you are in very good shape. If the payments
on your Consumer Debt consume less than 10% of your monthly income you are within the
normal range, but I would suggest that you set a goal to reduce it to 0%. If the payments on your
Consumer Debt consume more than 10% of your gross monthly income you may be approaching
the danger zone. You will need to take the following corrective action:
• Tighten up your spending and apply all available cash to Consumer Debt repayment.
• Sell assets and use the proceeds to reduce Consumer Debt.
• Don’t take on any new Consumer Debt!!!
If your Mortgage Balance is less than two times your annual income you are in good shape. If it
isn’t, you will need to take the following corrective action:
You may have too much house. If you are experiencing financial problems your mortgage
payment could be a serious contributing factor. Unless you can compensate by reducing other
areas of expenditure you may have to consider selling your house and buying a less expensive
one.
Another important indicator of your financial health is your Debt to Asset Ratio. You can
calculate this ratio by dividing your total debt by your total assets. For example, if your total debt
is $60,000 and your total assets are $100,000 your debt to asset ratio is 60%.
If your debt to asset ratio is less than 50% you are in reasonably good shape. However, I would
still encourage you to create and follow a plan that will get you totally out of debt.
If your debt to asset ratio is over 80% you should:
• Tighten up your spending and apply all available cash to debt repayment.
• Sell assets and use the proceeds to reduce debt.
• Don’t take on any new debt!!!
69
If your debt to asset ratio is over 100% you have more debt than assets. This is not good. Having
more debt than assets is one definition of being bankrupt. In this case you have no choice but to
take immediate and serious corrective action and do every thing you can to reduce your debt!
70
How to Get Out of Debt
The following eight steps will help you get out of debt. Read each line and think about it. If you
agree with it, put your initials in the bracket as a commitment to yourself that you will follow
this plan to accomplish your goal of getting out of debt.
1.
Stop accumulating new debt. (Get rid of the credit cards. Resolve to not take on any new
debt.)
I/We agree to stop accumulating new debt. (
2.
)
Figure out where you are. (Personal Asset/Debt Inventory)
I/We have completed a Personal Asset/Debt Inventory. (
3.
)
Set a goal for debt reduction.
It is our goal to eliminate $______________ of debt by ____________(date).
4.
(
)
Create a Personal Cash Flow Plan and look for expenses that could be reduced. Apply
this money to debt repayment.
I/we are committed to reducing expenses by $_________ and using the money to reduce
debt. (
)
5.
Identify assets that could be sold to reduce debt.
I/We have identified $_________ worth of assets that can be sold to reduce debt.
6.
7.
(
)
I/we will increase income by $__________ and use the money to reduce our debt. (
)
Increase income and apply to debt repayment.
Snowball debt repayment. (Apply all extra money to your smallest debt. As soon as that
debt is paid off apply that debt’s payment and all extra money to your next smallest debt.
Keep doing this until all or your debt is paid off.)
I/we are committed to using the snowball method to getting out of debt.
8.
(
)
Don’t give up.
I/we are committed to seeing this process through until we have accomplished our debt
reduction goal. (
)
71
What about Debt Counseling Agencies?
You may have seen advertisements from debt counseling agencies in newspapers, in direct mail
offers, on the radio and on television. Unfortunately, many of these organizations are just fronts
for people in the debt consolidation and refinancing business.
If you do contact one of these agencies it is important to ask specific questions about their
services. You may want to ask:
1. Are you a non-profit organization?
2. Are there fees for their services?
3. How do you get paid?
Most legitimate debt counseling agencies are non-profit and do not charge a fee. If a fee is
charged it is often very moderate and based on an ability to pay. Many are sponsored by a
church. Others are sponsored by creditors like credit card companies who are interested in
preventing bankruptcies.
If you are looking for a counselor we would suggest that you:
1. Check with your church. If they do not have a Debt Counseling Ministry ask your pastor to
check out www.ThreeRules.org.
2. Contact Crown Ministries at 1-800-722-1976. They can give you the name and contact
information for a local volunteer counselor. Visit their website at www.Crown.org for more info.
3. Contact a member of the National Foundation for Credit Counseling (NFCC)™, Inc. NFCC is
the nation’s largest nonprofit credit counseling network. NFCC members offer free or low-cost
confidential services. Call toll-free 1-800-388-2227 or on-line at: www.nfcc.org
72
Some Things to Think About
Hell is the state of not having what we really need because we are totally focused on what we
think we want.
What’s more important –– money or time?
If it’s true that time is money is a person who has lots of time rich?
Conventional wisdom suggests that having a lot of money will make all your problems go away.
Conventional wisdom is frequently wrong.
What does your attitude towards money say about you?
For many people the accumulation of stuff is the purpose of their lives. What is your purpose?
God provides food for the birds of the air but He doesn’t throw it into their nests.
God provides the wind but man has to raise the sail.
What would you do if you inherited a million dollars? How much would you give away?
Why is a $5 bill worth five times as much as a $1 bill?
If you can’t afford to give, what would you do if you had to take a 10% pay cut?
“Those who give should never remember, those who receive should never forget.” Talmud
73
Forms
Steve and Jessica’s Personal Cash Flow Plan
Steve and Jessica’s Personal Asset and Debt Inventory
Personal Cash Flow Plan (Blank)
Personal Asset and Debt Inventory (Blank)
Steve and Jessica’s Personal Cash Flow Plan
You will notice that Steve and Jessica’s Personal Cash Flow Plan (next page) starts with money coming in – income. Steve and Jessica
each earn $3000 a month (before taxes).
Then it lists each area where money goes out – expenses. Expenses are divided into three categories:
Category One expenses are in effect “pre-spent” since taxes, debt repayment, giving and saving are all based on prior decisions. Steve
and Jessica have $3,534 of Category One expenses each month. (59% of their income)
Category Two expenses are regular living expenses that typically recur on a weekly or monthly basis. Steve and Jessica have $2,346
of Category Two expenses each month. (39% of their income.)
Category Three expenses are expenses that will happen sometime in the next year but not necessarily every month. Steve and Jessica
have $595 of Category Three expenses each month. (10% of their income.)
After listing all sources of income and all categories of expenses, Steve and Jessica learned that they have a deficit of $475 each month.
PERSONAL CASH FLOW PLAN
INCOME (PER MONTH)
STEVE
JESSICA
INCOME 3
TOTAL INCOME
CATEGORY 1 EXPENSES (PER MONTH)
GIVING
CHURCH
OTHER
TAXES
FEDERAL TAX
SOCIAL SECURITY (US ONLY)
MEDICARE
STATE/PROVINCIAL TAX
CITY TAX
DEBT RETIREMENT
CAR LOANS
MORTGAGE LOAN
PERSONAL LOANS
CREDIT CARDS
STUDENT LOANS
OTHER LOANS
SAVINGS
EMERGENCY ACCOUNT
SHORT TERM SAVINGS
LONG TERM SAVINGS
TOTAL CATEGORY 1 EXPENSES
CATEGORY 1 % OF INCOME
$3,000
$3,000
$6,000
$20
$600
$378
$81
$240
$679
$795
$75
$241
$425
$0
$0
$0
$3,534
59%
CATEGORY 2 EXPENSES (PER MONTH)
HOUSING
RENT (SEE CAT 1 FOR MORTGAGE)
PROPERTY TAXES
INSURANCE
UTILITIES (GAS, ELEC, WATER)
GARBAGE PICK-UP
TELEPHONE/CELL PHONES
FOOD
FOOD
CAR
GAS
INSURANCE (IF PAID MONTHLY)
INSURANCE
HEALTH (IF PAID MONTHLY)
LIFE (IF PAID MONTHLY)
ENTERTAINMENT
ENTERTAINMENT
EATING OUT
BABYSITTERS
CABLE/INTERNET
TUITION/CHILD CARE
TUITION
DAY CARE/CHILD SUPPORT
MISCELLANEOUS
SUBSCRIPTIONS
LUNCHES
PET SUPPLIES
HAIRCUTS, ETC
CIGARETTES
MISC
MISC
MISC
CASH (WALKING AROUND MONEY)
TOTAL CATEGORY 2 EXPENSES
CATEGORY 2 % OF INCOME
$120
$45
$126
$100
$350
$100
$75
$40
$40
$100
$100
$50
$50
$700
$40
$100
$200
$2,336
39%
CATEGORY 3 EXPENSES (PER MONTH)
PROPERTY TAXES *
HOME INSURANCE *
HOME MAINTENANCE
CAR INSURANCE *
CAR MAINTENANCE
CLOTHING/HIM
CLOTHING/HER
CLOTHING/KIDS
DOCTOR
DENTIST
EYE CARE
PRESCRIPTIONS
LIFE INSURANCE *
HEALTH INSURANCE *
VACATION
GIFTS (BIRTHDAYS, ETC.)
GIFTS (CHRISTMAS)
OTHER
OTHER
OTHER
OTHER
$50
$25
$50
$50
$50
$40
$30
$10
$200
$50
$50
$605
$6,475
TOTAL CATEGORY 3 EXPENSES
* Leave blank if included in prior column.
TOTAL EXPENSE
(Category 1+2+3)
($475)
10%
SURPLUS/DEFICIT
(Total Income - Total Expense)
CATEGORY 3 % OF INCOME
Steve and Jessica’s Personal Asset and Debt Inventory
You will notice that Steve and Jessica’s Personal Asset and Debt Inventory (next page) has their assets listed on the left side and their
debt listed on the right side.
Steve and Jessica began on the left-hand side of the form by listing their assets. They listed a brief description of each item and its
estimated value. By adding up the Value column, Steve and Jessica learned they had $167,150 in assets.
Next, Steve and Jessica moved to the right-hand side of the form to learn about their debt. They listed all of their debts including the
Monthly Payment, the Interest Rate and the Balance Owed. By adding up the columns, Steve and Jessica figured out that they had
$148,907 of debt and that making payments on this debt consumed $2,215 of their monthly income.
Finally, Steve and Jessica subtracted the Total Debt from the Total Assets and learned that their Net Worth. Steve and Jessica’s Net
Worth was $18,243.
PERSONAL ASSET AND DEBT INVENTORY
Payment
9.00%
Rate
$8,170
Balance Owed
DEBT (What we owe)
$375.00
STEVE AND JESSICA
ASSETS (What we own)
Car # 1 Loan
Description
$11,250
Value
Steve's
$6,595
Description
Car # 1
10.00%
$99,000
$304.00
8.50%
$4,700
Car # 2 Loan
$795.00
8.00%
$9,000
$75.00
$2,500
Jessica's
Mortgage Loan
Parents
18.00%
$2,500
Car # 2
Personal Loan
$50.00
18.00%
$2,000
Short Term Savings
CD's
$138,000
Personal Loan
Visa
$50.00
21.00%
$1,500
Real Estate
Credit Card
Discover
$50.00
21.00%
$800
IRA, 401k etc.
$0
$6,400
Credit Card
Personal Loan
Motorcycles
Credit Card
Babies R Us
$31.00
23.90%
$200
$2,500
RVs
Credit Card
Sears
$43.00
23.90%
Mutual Funds
Student Loans
Fishing Boat
Other
Credit Card
Van's
$17.00
Boats
Emergency Savings
Credit Card
Pier One
$20,942
Stocks, Bonds, etc.
Other
$18,243
$148,907
8.00%
Cash Value Life Ins
Other
$2,215.00
$425.00
Other
Net Worth -- Assets minus Debts
Total Payments/Debts
$167,150
Other
Total Assets
Personal Cash Flow Plan
A Personal Cash Flow Plan (next page) will help you understand how to best allocate your income to your various expense areas while
accomplishing your goals in the areas of saving, giving and debt management.
It begins with money coming in – income, and then goes on to determine where money is spent – expenses.
The expenses are divided into three categories:
Category One expenses are expenses that are either outside of your control (taxes) or in effect pre-spent because of a prior decision
you have made (debt repayment, saving, giving).
Category Two expenses are regular living expenses that typically recur on a weekly or monthly basis.
Category Three expenses are expenses that typically happen on a quarterly, semi-annual, annual or sporadic basis.
To complete your Personal Cash Flow Plan, review your checkbook for the last few months to see what your monthly expenses have
been in each of these categories.
PERSONAL CASH FLOW PLAN
CATEGORY 2 EXPENSES (PER MONTH)
CATEGORY 3 EXPENSES (PER MONTH)
INCOME (PER MONTH)
INCOME 1
INCOME 2
INCOME 3
TOTAL INCOME
CATEGORY 1 EXPENSES (PER MONTH)
CATEGORY 3 % OF INCOME
TOTAL EXPENSE
(Category 1+2+3)
TOTAL CATEGORY 3 EXPENSES
* Leave blank if included in prior column.
PROPERTY TAXES *
HOME INSURANCE *
HOME MAINTENANCE
CAR INSURANCE *
CAR MAINTENANCE
CLOTHING/HIM
CLOTHING/HER
CLOTHING/KIDS
DOCTOR
DENTIST
EYE CARE
PRESCRIPTIONS
LIFE INSURANCE *
HEALTH INSURANCE *
VACATION
GIFTS (BIRTHDAYS, ETC.)
GIFTS (CHRISTMAS)
OTHER
OTHER
OTHER
GIVING
CHURCH
OTHER
TAXES
FEDERAL TAX
SOCIAL SECURITY (US ONLY)
MEDICARE
STATE/PROVINCIAL TAX
CITY TAX
DEBT RETIREMENT
CAR LOANS
MORTGAGE LOAN
PERSONAL LOANS
CREDIT CARDS
STUDENT LOANS
OTHER LOANS
SAVINGS
EMERGENCY ACCOUNT
SHORT TERM SAVINGS
LONG TERM SAVINGS
Future Needs:
TOTAL CATEGORY 1 EXPENSES
SURPLUS/DEFICIT
(Total Income - Total Expense)
CATEGORY 2 % OF INCOME
TOTAL CATEGORY 2 EXPENSES
HOUSING
RENT (SEE CAT 1 FOR MORTGAGE)
PROPERTY TAXES
INSURANCE
UTILITIES (GAS, ELEC, WATER)
GARBAGE PICK-UP
TELEPHONE/CELL PHONES
FOOD
FOOD
CAR
GAS
INSURANCE (IF PAID MONTHLY)
INSURANCE
HEALTH (IF PAID MONTHLY)
LIFE (IF PAID MONTHLY)
ENTERTAINMENT
ENTERTAINMENT
EATING OUT
BABYSITTERS
CABLE/INTERNET
TUITION/CHILD CARE
TUITION
DAY CARE/CHILD SUPPORT
MISCELLANEOUS
SUBSCRIPTIONS
LUNCHES
PET SUPPLIES/VET
HAIRCUTS, ETC
CIGARETTES
MISC
MISC
MISC
CASH (WALKING AROUND MONEY)
CATEGORY 1 % OF INCOME
Personal Asset and Debt Inventory
The Personal Asset and Debt Inventory (next page) is designed to help you understand your debt situation.
The left side of the form allows you to list your assets. Assets are things that you own. For purposes of this financial analysis we will
only focus on big-ticket assets like cars, real estate, recreational vehicles (boats, motorcycles, trailers, etc.), and savings and
investments.
Start by listing your assets. A rule of thumb would be to list things that are worth at least $500 but do not list clothes, home
furnishings, garden tools, etc. For each asset indicate a brief description and show the value. After you have listed all your assets add
them up and put the total on the Total Assets line.
The right-hand side of this form allows you to list all your debts including the Monthly Payment, the Interest Rate and the Balance
Owed. In the “Payment” column list the amount you are paying on a monthly basis.
After you have listed all your debts, add up the “Payment” column and the “Balance Owed” column. Show the totals on the “Total
Payments/Debts” line.
To compute your net worth, subtract your Total Debt from your Total Assets.
PERSONAL ASSETS AND DEBT INVENTORY
ASSETS (What we own)
DEBT (What we owe)
Description
Value
Description
Car # 1
Car # 1 Loan
Car # 2
Car # 2 Loan
Real Estate
Mortgage Loan
Boats
Personal Loan
Motorcycles
Personal Loan
RVs
Personal Loan
Other
Credit Card
Emergency Savings
Credit Card
Short Term Savings
Credit Card
CD's
Credit Card
IRA, 401k etc.
Credit Card
Mutual Funds
Credit Card
Stocks, Bonds, etc.
Student Loans
Cash Value Life Ins
Other
Other
Other
Other
Total Payments/Debts
Total Assets
Net Worth -- Assets minus Debts
Payment
Rate
Balance Owed
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