The economic news got me thinking that I should put together something about personal finance. I might be adding to this later, but I just wanted to jot down some quick financial tips. This is intended to be an overview. So, is it wrong to talk about use of money on a church website? Not at all. God has given us so much and we do have a responsibility to use his gifts wisely. Finances are important and the basics are really not “above” any of us. I am sticking to a generally accepted mainstream view. It is very basic, and I realize that there are always exceptions. Common sense and prudence go a long way. I hope that at least some of this can be helpful. Even if you already know this and more, maybe it will be an incentive or motivation for you to be even more responsible or help others.
Biggest Expenses:
The three biggest expenses are Home, Auto, and Lifestyle
Home: The largest expense is a home. How much home is affordable? A conservative approach is to keep in mind that house payments should be somewhere around 25% or less of your take home pay. Some will say 40% still works under certain circumstances, but the point is to give yourself some breathing room. If a bank offers a $300,000 loan, step it back so that you have a safety net. Save up as much as you can and make a good down payment. Some advisers say 15 year loans are best, but even if a 30 year is necessary, shoot for a low fixed rate without creative options that might be too much to come up with later on. Shop for good interest rates using the internet as well as local credit unions and banks. Finally, buy smart. Know the area, value, and condition of the house or property you buy. Don’t buy just because you “fall in love” with a house.
Auto: In general, new cars are not a good deal. Depreciation in the first few years is huge. A two year old car has depreciated much more than the portion of the life left in the car. Today’s cars will go a lot farther than before and it is not unusual to get 200,000 miles plus. The longer you hold on to a car, the less it will cost you. Of course there does come a point when safety issues, reliability, and functionality make it desirable to sell. When it comes to loans, 3½ years is max. More than that leaves you vulnerable if you need to sell. Plus, the difference in payment is not as much as you would think. If you need to do a 5-7 year loan to get into a car, it is an indication of it being more than you can really afford. Remember that factory incentives such as lower interest rates are in exchange for what would be a lower priced car. Similar to buying a home, shop for good interest rates using the internet as well as local credit unions and banks. When it is time to buy, do your homework and know the cars’ reliability, worth, and value. Some websites that are good are consumerreports.org, carsdirect.com, edmunds.com,
Lifestyle: Using debt to fund lifestyle creates obligations and pressure and actually makes you poorer in the long run. Make a budget and consider what is really optional or wasteful. Cutting back on many little things makes a difference. For example, maybe you don’t need 200+ cable channels, maybe you could scale back your cell phone plan, or maybe there are other monthly payments that could be adjusted or eliminated. At least once a year get new quotes for repeated expenses like insurance policies. Look also for habits that are expensive in many ways. Alcohol and tobacco are good examples, but even seemingly innocent ones like eating fast food too often adds us. Consider things such as cutting energy costs, combining trips, impulsive buying. Make up a simple budget to start with and see how your spending matches up with what you think you spend. You will probably find that you have a lot of room to cut waste in some areas you don’t think about. If you need help figuring out how to put a budget together, here is a site with basic instructions: http://www.ehow.com/how_4499025_household-budget-expense-layout.html
Saving:
Most Americans on average have spent more than they have earned in the last three years. That means that on average there is more borrowing and debt than savings. Not only does saving increase real wealth for individuals, contrary to popular opinion, a good savings rate also helps the economy.
401k: Some businesses offer to supplement retirement contributions. This is not only good for your retirement, but it is really a pay raise that you should take advantage of.
IRA: For most people, an IRA (usually the ROTH version) is the single best investment they can make for retirement. With a Roth, for example, any investment earnings and eventual withdrawals during retirement are tax free. For 2008 $5,000 can be put aside for individuals. The younger you start the better. A small amount invested in your 20s is worth substantially more than large amounts in your 50s. Wherever you are, start today. When you do start an IRA, consider your age goal of retirement. It will make a difference for the type of IRA you should invest in. For younger people, a long term and low cost plan is best. For older people, it should be more conservative. How do you do it? A couple great resources are: latimes.com/business/(“money library”) and clarkhoward.com (Clark’s Investing Guide). A little self education goes a long way to save you a lot of money and to help you to invest appropriately.
Credit Cards:
Only a third of credit card users pay off their balance every month. The fees and interest rates on credit cards are more than anyone should pay. In addition, people pay on average 20% more when they purchase with credit cards. If you use cards, use them as you would cash. For most people, cash is best. If you do use credit cards, don’t spend if you don’t need something or if you don’t have the cash to buy it. Some cards are better than others. Shop around for the best credit cards (consumerreports.org has ratings) with the goal of using only one or two. Be careful not to switch too much because that does affect your credit score. If you have debt on high interest cards, pay off the highest first until they are all paid off.
Conclusion:
I am going to stop here. If you have additional ideas, let me know. I don’t claim to be an expert, but hopefully this will inspire us to learn what we can to be responsible stewards of what God has given us. Incidentally, when we are personally responsible, it puts us in a position to be able to help others and meet our tithing goals – which in turn offers us further blessings.