How much should you be spending for a car?

Question How much should you be spending for a car?

Answer 15% of your take-home pay.

Complete Answer To clarify the question, “How much should you be spending for transportation?” The answer is the same – 15% of your take-home pay. It is important to understand that transportation is an expense – it is not an investment nor a way of saving. A car is a depreciating asset.

Each month, set aside 15% of your take-home pay into your Transportation Account. Take money out of that account to pay for your transportation expenses. Walk or use public transportation to get where you need to go. If your Transportation Account never grows in value, that is a good indication that you cannot afford a car.

On the other hand, if the money in your Transportation Account continues to grow in value, you can start considering different options for getting around. For most of us, a car is our transportation. “How to” buy a used car or new car, should I lease or buy a car, how to negotiate the price of a car, et cetera, are beyond the scope of this blog. The focus of this blog is how to plan and pay for a car you have selected.

Generally speaking;

  • You should save 15% of your take-home pay until you have enough to pay cash for your first car. It will probably be used car. This will give you the experience of realizing how costly it is to own a car.
  • You should not put yourself in a position of making car payments and car repairs at the same time.
  • In addition to carrying liability insurance, most lenders will require you to carry comprehensive insurance on a car that you finance.
  • Car maintenance is required for all cars – new or used.

I actually know two people who do not nor do they want to own a car. They walk or use public transportation to get around. For road trips, they rent a car. For each, their respective Transportation Expenses are considerably lower than 15% of their take-home pay. Conversely, I know someone who buys a new car every year. He can afford it, that is important to him, and that is how he has decided to spend the money he has earned.

Financial Literacy Knowledge/Skill

Your Transportation Expenses should not be greater than 15% of your take-home pay.

Comments or Questions

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Next week’s topic: How do you get out of  debt?

How much should you be spending for housing expenses?

Question How much should you be spending for housing expenses?

Answer 25% – 35% of your take-home pay.

Complete Answer “How to” rent an apartment or buy a house is beyond the scope of this blog. This post is intended to help you determine if you can afford the rent and/or mortgage for a place to live.

From the post of July 25, 2016, the recommended amount for monthly housing expenses is 30%, it may vary between 25% and 35%, of your take-home pay. Housing Expenses include all the expenses for a place to live. In addition to the amount you pay for rent or a mortgage each month, it includes the monthly cost for utilities, cable/satellite/Internet service, cell phone, insurance, repairs/maintenance, parking, et cetera.

Please Note: Being “homeless” is just as bad as it sounds. In times of financial crisis, your home should be the very last thing that you give up. If you have to live with a friend or family member until you are back on your feet and can find a place of your own, you should offer to pay them 25% of your take-home pay. Most likely, your friend/family member will refuse. If they accept your offer or not, you should keep them informed of your progress of saving money and finding a place of your own and when you plan to move out.

Long-term Goal: If you decide that you want to be a home owner, your long-term goal should be to pay off your mortgage before you retire. Please note, that even if you have a home that is paid off, you will still have property taxes, insurance, and maintenance and repair expenses.

Financial Literacy Knowledge/Skill

Your total Housing Expenses should be between 25% and 35% of your monthly take-home pay.

Comments or Questions

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Next week’s topic: How much should you be spending for a car?

What banking services do you need?

Question What banking services do you need?

Answer A checking account, savings account, debit card, and a credit card.

Complete Answer  As with the purchase of any good or service, shop around for cost, features, and convenience.

Your checking account is your operating capital account. Deposit all monies received into this account. Use this account to pay all monthly bills on time and withdraw spending money, cash, as you need it. You will need a checking account that allows you to deposit money (checks and cash), write checks, both electronically and manually and access to your account using an ATM for both deposits and withdrawals.

The first expense to be paid each month is to you. Deposit 10% of your take-home pay (Pay Yourself First) into a savings account. If you have money left over at the end of the month, put that amount into your savings account. Use your savings account if you must as explained in the posts of October 10, 2016, but always pay yourself back. You will be pleasantly surprised how quickly the amount grows and how much will be in your savings account at the end of the year.

Helpful Hint  Through no fault of your own, you could be the victim of identity theft and or bank fraud – unexpected financial emergencies. Because of the threats of identity theft and bank fraud, use two completely different banks (not affiliated with one another) for your checking account and your PYF Savings Account. If an account is compromised, you will still have access to some money from the second bank until the problem is resolved.

With a debit card you do not have to carry a lot of cash. It is an option you have with most checking accounts. A debit card, also known as a check card, may be used to make purchases, pay bills, and make cash withdrawals from an ATM. A debit card is especially handy for making purchases when you don’t know the amount of the purchase in advance, weekly groceries or a tank of gas for example.

In reality, a credit card is a short-term loan to make a purchase. As such, interest is charged for credit card balances that are carried for more than the one month billing cycle. A credit card is ideal for Internet purchases and a must when traveling. In most cases, you will also need a credit card to rent a car. I personally use my credit card for automatic payments, and pay off the balance each month. It gives me a record of the date of the payment and I have more control over the automatic payment process.

Financial Literacy Knowledge/Skill

A checking account, savings account, debit card, and a credit card are the basic banking services you will need to manage your money effectively.

Comments or Questions

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Next week’s topic: How much should you be spending for housing expenses?

Is a credit score important?

Question Is a credit score important?

Answer Yes.

Complete Answer  A credit score is a numerical value based on the information contained in your credit report which is a detailed report of your credit activities. Your credit score, also known as your FICO score, tells a potential lender your credit worthiness, the likelihood that you will pay back a loan. The higher your credit score, the more likely you will pay back the loan, less risk for the lender. Conversely, the lower your credit score, the less likely you will pay back the loan, more risk for the lender.

Credit scores are important because they are used:

  1. To determine if you will be granted credit for a mortgage, car loan, credit cards, et cetera and the interest rate that will be charged. Generally, the higher your credit score the lower the interest rate.
  2. To determine if and the amount of a down payment and/or security deposit will be required for an apartment rental, cell phone purchase, et cetera.
  3. To determine the cost of insurance; car, renter’s, or home owner’s. The higher your credit score, the lower cost of certain types of insurance.
  4. By potential employers who may view a poor credit score as an indication that a person is living beyond their means which could negatively impact your ability to get a new job.

If you follow the three most critical elements of Financial Literacy, knowing your income and expenses, living below your means, and saving, you will have a respectable credit score.

Please Note: You should get a credit report at least once a year and review it for accuracy. The three major credit reporting agencies are Experian, TransUnion, and Equifax. You are entitled to receive a free credit report once a year from each agency.
Contact Information:  Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281; www.annualcreditreport.com; (877) 322-5281.

Financial Literacy Knowledge/Skill

A credit score is important not only because it is an indication of your credit worthiness, but is used to give some indication of your ability to manage your finances in a responsible manner.

Comments or Questions

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Next week’s topic:  What banking services do you need?

How do you fund your retirement account?

Question How do you fund your retirement account?

Answer  Use your PYF Savings account for retirement.

Complete Answer  Although retirement planning is beyond the scope of this blog, the following guidelines will point you in the right direction. If you save 10% of your take-home pay each month, your PYF Savings Account, the following things will happen:

  1. You will have enough money in your checking account to pay all of your monthly bills on time (post of post of October 10, 2016),
  2. You will have money for unexpected financial emergencies (post of October 17, 2016),
  3. You will have money to leverage your buying power for big-ticket goods and/or services (post of October 24, 2016), and
  4. You will have money to fund your retirement.

Retirement Guidelines

  • Start NOW! If you are putting 10% of your monthly take-home pay into your PYF Savings Account for your working life, you will have a substantial amount of money for your retirement. Will that be enough to fund your retirement? Only you can answer that question. A good place to start is to look at your monthly Spending Plan. How much money do you need each month to maintain your current life style?
  • Diversify your retirement funds.
  • Take full advantage of your employer’s retirement and/or pension programs.
  • Only withdraw money from your retirement account(s) as a last resort, then make paying yourself back a priority.
  • Because each of us have unique financial situations, you should seek the help from a trusted, licensed financial adviser.

Financial Literacy Knowledge/Skill

How to fund your retirement account.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Is a credit score important?

 

How do you leverage your buying power to pay for big-ticket goods or services?

Question  How do you leverage your buying power to pay for big-ticket goods or services?

Answer  Use your PYF Savings account to leverage10 your buying power to pay for big-ticket goods or services, then pay it back.

Complete Answer  Although “leveraging your buying power” may sound like a complicated financial concept, it is really quite simple. An example is a gas station offering a gallon of gas a few cents cheaper if you pay with cash instead of using a credit card.

The term “big-ticket” is normally used to describe expensive purchases. For the purpose of this blog, I will use the term “big-ticket” to describe things that cost $1,000 or more and cannot be paid for from a typical monthly Spending Plan.

Example My car insurance for two cars, a pickup, and a scooter all come due the same month each year. The total bill is more than I can pay for from my Auto Expense account in my Spending Plan. I use money from my PYF Savings account to pay the total bill all at once. By paying the auto insurance bill for one year, I take advantage of available discounts. I then amortize the discounted cost of one year of auto insurance over the next year.

Using rounded numbers as an example: The discounted cost of car insurance is $1,200.00. It is more than I can afford in one month from my Spending Plan for Auto Expense. I borrow the $1,200.00 from my PYF Savings account, then divide the $1,200.00 by 12 months and pay back $100.00 a month. This expense is part of my monthly Auto Expense. Please note; my monthly Auto Expense including the amortized auto insurance of $100.00 does not exceed the total recommended amount, 15%, for Auto Expense.

Financial Literacy Knowledge/Skill

How to use a PYF Savings Account to leverage your buying power to pay for big-ticket goods or services.

Comments or Questions

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Next week’s topic: How do you fund your retirement account?

 

How do you pay for unexpected emergencies?

Question  How do you pay for unexpected emergencies?

Answer  Borrow the money from your PYF savings account, then pay it back.

Complete Answer  Unless you are an extremely lucky person, you will have unexpected financial emergencies in your lifetime. Use the money from your PYF savings account to pay for the financial emergency, then pay yourself back. The nice things about borrowing money from yourself (being your own bank) are you will always be approved, no paper work to complete, it is an interest-free loan and you get to decide the terms (amount and frequency of payments) of the loan.

Borrowing money from your PYF Savings Account. You should borrow money from your PYF Savings Account if the emergency expense is more than can be paid for from your monthly Spending Plan. For example: I could pay a $250.00 repair expense for the washing machine from my monthly Spending Plan’s Housing Expense. On the other hand, when my furnace had to be replaced at a cost of $3,600.00, it was more than I could afford in one month, so I borrowed the money for the new furnace from my PYF Savings Account. I amortized the $3,600.00 expense over three years. I paid back my PYF Savings Account $100.00 a month for the next three years.

Helpful Hint  Through no fault of your own, you could be the victim of identity theft and or bank fraud – unexpected financial emergencies. Because of the threats of identity theft and bank fraud, use two completely different banks (not affiliated with one another) for your checking account and your PYF Savings Account. If an account is compromised, you will still have access to some money from the second bank until the problem is resolved.

Financial Literacy Knowledge/Skill

  1. Paying for unexpected financial emergencies.
  2. Amortizing a loan to yourself.
  3. Using two separate banks to help protect yourself from identify theft/bank fraud.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How do you leverage your buying power to pay for big-ticket goods or services?

How should you be using your savings?

Question  How should you be using your savings?

Answer  Use your savings to:

  1. Pay all of your monthly expenses on time.
  2. Pay for unexpected emergencies.
  3. Leverage your buying power to pay for big-ticket goods and/or services.
  4. Fund your retirement.

Complete Answer  Assuming that you have a Spending Plan which includes spending less money than you take home (living at or below your means) and you are saving at least 10% (Pay Yourself First Savings Account) of your take-home pay each month.

1.Pay all of your monthly expenses on time. You will need a checking account that allows you to deposit money (checks and cash), write checks, both electronically and manually and access to your account using an ATM for both deposits and withdrawals. Deposit all monies received into this account. During the month, you will have money coming into this account (income) and money going out (expenses). The important thing to remember and do is you should have 10% of that month’s income left in that account at the end of the month. Do the same thing the next month and the month after and the month after that until you have enough money in that checking account to pay all monthly expenses for one month.

This concept, having enough money to pay all monthly expenses on time, is called operating capital. All successful business do it. It is similar to having money in the cash register at the beginning of the the day. Money comes in, money goes out. At the end of the day you should have more money in the cash register than you started with at the beginning of the day.

Financial Literacy Knowledge/Skills

  1. Have a checking account.
  2. Use savings to help pay for all monthly expenses on time.

Comments or Questions

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Next week’s topic: How do you pay for unexpected emergencies?

 

 

How much money should you be saving?

Question How much money should you be saving?

Answer  Ten percent of your take-home pay.

Complete Answer  At the very minimum, you should be saving 10% of your take-home pay.

The 10% Affect  Saving 10% of your take-home pay may seem like an impossible task. It is if you try to do it all at once. If you do it one pay check/one purchase at a time, it’s not that difficult. I like to think of it as, “Small change equals big bucks.” For example, If you have $10 to spend on lunch, how different would your lunch be if you only spent $9? Instead of spending $100 for clothes, you only spent $90. Could you really notice the difference? That’s “small change”. If you do that for a year, you will have saved 10% of your take-home pay, that’s “big bucks”.

Financial Literacy Knowledge/Skill

Save 10% of your take-home pay.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How should you be using your savings?

How do you save money?

Question  How do you save money?

Answer  If you spend less money than you take home, live below your means, you will have money to save.

Complete Answer  There are many ways to save money, every thing from putting your spare change in a piggy bank each day to money automatically deducted from your pay and put into diversified investments. Do what ever works for you. The important things to remember are:

  1. Start right now! Albert Einstein said, “Compound interest (earning interest on interest) is the eighth wonder of the world. He who understands it, earns it . . . he who doesn’t . . . pays it”9. For example Adam and Alice agree to save $10,000.00 each for retirement which is 30 years away. Alice started right now by investing her $10,000.00. It took Adam ten years to save the $10,000.00 to invest in his retirement. Even though both invested $10,000.00 for retirement, in 30 years, Alice will have $24,568.42. Adam, because he waited ten years to invest his money, will have $18,207.55. They both saved $10,000.00 for retirement. But because Alice was earning interest on interest (compounding) she will have $6,360.87 more than Adam. For this example the interest rate is 3% compounded monthly.
  2. Make savings a priority. The first thing in my Spending Plan is savings. Each month I begin by saving 10% of my take-home pay. That financial literacy concept is called “Paying Yourself First”.
  3. Make it easy. If a task is inconvenient or cumbersome, it’s easy to put off or skip it altogether. Have part of your pay directly deposited to a savings account, have money automatically transferred from checking to savings each month, round up purchases to the next even dollar and then leave that amount in your checking account, or putting your spare change in a piggy bank at the end of each day are just a few ways to save money.

Misconception  A common misconception about saving is some people believe or are led to believe that buying something on sale is saving money. Some people go so far as to believe that buying something on sale is actually investing money. Both concepts are incorrect. When you buy something on sale, you are simply spending less money.

Financial Literacy Knowledge/Skill

Saving money begins with living below your means, make it a priority, make it easy to do, and begin saving now.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How much money should you be saving?