To find out just what kind of financial shape you’re in, answer the questions in the following Financial Fitness Checklist.1 If you’re married, print this out and take it home so that you and your spouse can work together to answer the questions. Make a note of how many questions you answer yes to.
1. Are you using more and more of your income to pay your debts?
2. Do you make only the minimum payments due on your loans and credit cards each month?
3. Are you near, at, or over the credit limit on your credit cards?
4. Are you paying your bills with money intended for other things?
5. Are you borrowing money or using credit cards to pay for things you used to buy with cash?
6. Do you often pay your bills late?
7. Are you dipping into your savings to pay current bills?
8. Do you put off visits to the doctor or dentist because you can’t afford them?
9. Has a collection agency called recently about overdue bills?
10. Are you working overtime or holding a second job to make ends meet?
11. If you or your spouse lost your job, would you be in financial trouble right away?
12. Do you worry about money a lot?
If you answered “no” to all questions on the Financial Fitness Checklist, you’re the picture of financial health.
One or two “yes” answers, while not necessarily a sign of impending doom, can be a warning sign of potential problems. Before things get any worse, take time now to draw up a realistic budget (including a savings plan) or to revise your spending plan. Cut back on your use of credit cards, and watch closely for other signs of financial trouble.
Three to five “yes” answers could mean that you’re heading for financial trouble. It’s imperative that you get your spending under control right away. If you don’t have a monthly budget, draw one up and follow it. Put away your credit cards and cut out all unnecessary spending until you can answer “no” to all the questions on the Financial Fitness Checklist.
If you answered “yes” to more than five of the questions on the Financial Fitness Checklist, you may already be in serious financial trouble. But don’t despair. Financial counseling can start you on the road to financial recovery.
There are so many things that we teach our children that keep them on the right path throughout life. How to save money is one of the most important lessons that parents teach their children. Teach your children about finances by opening an account and setting money aside. They’ll learn about patience, interest and saving.
It’s easy to forget, or ignore, the need to save. We all too often are saying that there isn’t enough money to put into savings and we’ll do it later. But if there isn’t enough money to put into savings, is there enough money if there is an emergency. By having a savings plan, you can keep an emergency from destroying your finances.
Savings can be anything from a simple savings account to bonds and retirement plans. You may be saving for emergencies, college, a new home or for retirement. Or even for all of the above! No matter what your goal is, there is a savings plan that will fit your needs. Not all types of savings are going to work for you. You have to find the plan that fits your own personal financial needs.
What makes saving money just a wonderful experience is interest. You aren’t just saving your money, your actually letting it grow. Your money is making more money. How does this work?
When you put money in a savings account, certificate of deposit (CD) or money market account, you are basically lending the money to the bank. The bank will use your money to make loans to other customers. They are borrowing money from you and paying you interest, while someone pays them interest on the money they have borrowed from the bank.
Banks charge higher interest rates on loans so that they can pay your interest, plus make their own profits.
Interest can seem like a complicated math problem, but it isn’t hard to understand. Most banks will talk about both “rate” and “yield.”
For example, a $10,000 CD with a 5% annual interest rate (APR) will also have an annual percentage yield number (APY) that is a higher number. The difference between the APR and the APY depends on how frequently the interest is paid, and in what form.
If the interest is paid annually at a rate of 5%, the $10,000 investment with earn $500. Simply multiply the investment amount by the APR to determine the interest paid. When the interest is paid annually, the rate and yield are the same.
The yield goes up as interest is paid more frequently. The interest begins to earn interest along with the original investment. When the 5% CD is paid twice a year, in six months the interest payment is $250. We figure this by multiplying the original investment by the interest rate for half a year, or 2.5%. The $250 in interest will earn $6.25 in interest over the next six months, adding $256.25 at the next six month mark. Compound interest is starting to take over.
In the first scenario, the CD earned $500 in interest in one year. The rate and yield is at 5%. The second CD earned $506.25. The rate is still at 5%, but the yield has increased to 5.06%. It may not seem like a lot, but over time it keeps building up. When shopping around for savings plans, look at both rates and yields.
Credit cards are no more a luxury, they are almost a necessity. So, you would imagine a lot of people going for credit cards. In fact, a lot of people posses more than one credit cards. So, the credit card industry is growing by leaps and bounds. However, the credit card industry and credit card holders are posed with a big problem called Credit Card Debt. In order to understand what credit card debt actually means, we need to understand the workflow associated with the use of credit cards as such.
Credit cards, as the name suggests, are cards on which you can get credit i.e. make borrowings (your credit card debt). Your credit card is a representative of the credit account that you hold with the credit card supplier. Whatever payments you make using your credit card are actually your borrowings that contribute towards your credit card debt. Your total credit card debt is the total amount you owe credit card supplier. You must settle your credit card debt on a monthly basis. So, you receive a monthly statement or your credit card bill which shows your total credit card debt. You must pay off your credit card debt by the payment due date failing which you will incur late fee and interest charges. However, you have the option of making a partial (minimum) payment too, in which case you dont incur late fee but just the interest charges on your credit card debt. If you dont pay off your credit card debt in full, the interest charges too get added to it. So your credit card debt keeps on increasing, more so because the interest rates on credit card debt are generally higher than the interest rates on other kind of loans/borrowings. Further, the interest charges add on to your credit card debt each month to form the new balance or the new credit card debt amount. If you continue making partial payments (or no payments) the interest charges are calculated afresh on the new credit card debt. So you end up paying interest on the last months interest too. Thus your credit card debt accumulates rapidly and soon you find that what was once a relatively small credit card debt has ballooned into a big amount which you find almost impossible to pay. Moreover, if you dont still control your spending habits, your credit card debt rises even faster. This is how the vicious circle of credit card debt works.
Most people, even those without debt, have a hard time saving money.
The plain truth is that most people will spend all of their money every month. They grow to become used to this spending level. It is very, very difficult not to do this.
Financial advisors say it over and over again — you have to pay yourself first. It is the truth. Those of you with 401(k)s don’t miss that money being automatically taken out of your paycheck. You never see it, so you don’t miss it. That is the idea of paying yourself first. If possible, have your employer deposit a portion of your paycheck each month into your savings account. Or perhaps your bank will automatically withdraw that amount from your checking to your savings each month. You never see the money and you don’t have to make any effort to save. It is perfect.
If you pay yourself first, you won’t have a chance to spend the money. When you sit down to write bills out, don’t pay the mortgage first. Pay your savings and then pay your bills. See, most people pay their mortgage, cars and other loans first. Then they pay the electric and water. Then they pay what they can on their credit cards. Whatever is left over is spent on living, gas and food.
Then there is nothing left to save. If you wait to pay your savings last, you probably won’t pay it. You must pay yourself first. Write a check to your savings first, then pay the bills.
We lose a lot of money in just pennies each month. One of the best ways that my husband and I save money is to never spend our change. In fact, every night we dump out our wallets. Anything less than a ten goes in the money jar. It is surprising how in just a month, that money really accumulates. We’ve used the money like a small emergency fund. We grocery shop on it when money is tight or we treat ourselves to a nice evening out. It is an easy way to save.
Another version of this is to put the change you get back from any drive-in in an envelope in your glove box. Do this whether the change is one dollar or ten dollars. When you clean out your vehicle, you will be surprised at how much has accumulated. In fact, it could buy you a tank of gas every once in a while.
When you spend, you can save money as well. Purchase items that grow in value. Extra money lying around? Invest it in the stock market. Invest it in paying off your mortgage early. Use it in ways that make you money. Pay off your debts and invest the rest.
When you save money, the key is to really save it. If you buy something on sale, what happens to the money you saved? You probably spent it on something else. Nothing really went into savings. From now on, when you save $15 on groceries, put that $15 in your savings account. When you don’t buy a new sweater because you know you need to save, put the cost of that sweater into your savings.
Saving money isn’t that hard. It is simply a habit that has to be learned. Experts say it takes two weeks to make an action a habit. So start today, in two weeks it will be easy.
Savings. Pay yourself first. Start now stashing 10% of your income in an Emergency savings. Dont use it for anything but real emergencies. Keep a For Sure savings account for yearly expenses you know are coming and you can estimate (e.g. Christmas, insurance, taxes, etc.). Also have a Buy Stuff account. If you do, youll be able to avoid many financial disasters which will face you, and you can avoid borrowing money from high-rate lenders.
Borrowing. Dont borrow money unless you are willing and able to pay it back. Failure to pay debts on time causes severe financial, emotional, and family problems. Experts recommend you dont borrow for wants, only for needs, or for things that increase in value. Many lenders will loan you money you cant afford to pay back, especially high-rate lenders.
Co-signing. Dont co-sign on a loan unless you are willing and able to pay it back. Often, co-signers end up paying off loans they are unprepared for, and financial hardships follow. Numerous co-signors now have negative credit ratings because a primary borrower paid late. Many lenders do not notify the co-signor before reporting delinquencies or repossessions to the credit bureau.
Compare. Before you decide who to borrow from, compare! Find out who is offering the best deal at that time look for the loan with the lowest rate (APR).
APR. The Annual Percentage Rate (APR). It is the standard rate, so we may compare the cost of borrowing. It is the cost of credit expressed as a yearly rate. When you borrow, always beat 13% APR (consider 13 to be unlucky when it comes to borrowing). Some have been illegally stating other rates such as weekly or monthly rates. Compare APR to APR. If you pay your bills on time, and you arent over-extended, you can nearly always find loans or financing arrangements at rates lower than 13%. Beware though, because beating 13% does not always mean you are getting a good deal. For instance: the difference in total interest paid on an 11% versus an 8% 30-year, $100,000 mortgage loan is $64,283 (assuming all payments are made as agreed).
Consolidation Loans. A consolidation loan can result in great savings to borrowers if the new interest rate is significantly lower, and if you dont run-up debt similar to what was just consolidated. But beware, because consolidation loans usually result in substantially more money out of your pocket into the lenders. For instance, mortgage loans usually involve closing costs. They increase the total debt. Many refinances involve reducing the monthly payment, but increasing the length of payback, which substantially increases the total interest paid. Borrowers, who refinance unsecured debt (e.g. credit cards) into a home mortgage, also increase their risk of losing their homes. Also, remember to keep all of your payments current until the old debt is paid off. Too many people have damaged credit ratings, and are in bad financial condition because they counted on money which didnt come when they expected it. Expect delays when applying for loans, especially consolidation loans. Dont spend money before you get it.
Desperation. Dont get desperate for money. The more desperate you are, the less likely you are to get a good loan.
Auto insurance. Keep your auto insurance current. If you fail to keep your insurance up-to-date, you could end up making loan payments for years after your car has been totaled.
Establish good credit. To avoid bad credit, don’t borrow too much, and do pay your bills on time. Inexpensive ways to establish good credit: (1) Obtain a good credit card. When you charge things, pay off the balance each month on time and pay no interest. (2) Establish a revolving line of credit (an empty loan) as an overdraft protection against bounced checks, and dont use it as a loan. (3) Get a loan to buy a car, or furniture, or etc.) and pay it off within a few months.
Late fees. To avoid late fees (which multiply the cost of borrowing), pay early, or at least on time.
Repossessions. To avoid repossessions and associated fees, pay early or on time, and keep your insurance current.
Extra principal less interest. To pay less interest on loans, pay more than the minimum required payment. Even small amounts of extra principal, can significantly reduce the total amount of interest you would otherwise pay over the life of the loan. Before doing this, however, make sure your lender accepts extra principal payments, and find out what particular procedure you need to follow to ensure your extra principal is properly applied.
Bi-weekly payments. If you get paid weekly, or every other week, paying bi-weekly is a very convenient (almost painless) way to reduce your loan term and interest. For instance, if you make of your required monthly payment every 14 days (a bi-weekly period), you pay the equivalent of 13.052 payments in an average year. If you dont get paid bi-weekly, or if your lender doesnt like biweekly payments, you can pay the equivalent amount in monthly installments. If you pay 1/12 of the sum of 13.05 payments each month, you will match the bi-weekly advantage (minor rounding differences).
Contrary to popular belief, the frequency of paying payments bi-weekly doesnt accomplish much, the real advantage is paying the extra principal (13.05 payments, or more, each year) which reduces the term and the interest paid. If you are considering signing up for a bi-weekly program, pay close attention to the cost. Some servicers have large set-up fees and transaction fees. Also consider the credibility of any company handling your money, some have diverted payments into their own pockets, leaving borrowers to make payments twice (once to a corrupt servicer, and a second time directly to the lender).
The reasons for mortgages or loans are because of the high spending rate of the people in USA. According to the news agency USA TODAY there seems to be a reduction in the saving rate of the people. The cash flow, which is quite slow, is one of the reasons and increase in the spending habit of the people. Another reason is that people having been borrowing against their assets But the biggest reason for our poor savings rate is that people have been borrowing against assets mainly their homes to get their hands on spending money. The median price of a home rose 24.5% from 2001 through 2004. The real boom period was 2005: The median home price half cost more, half cost less soared to $206,600 from $184,100 in 2004. Due to reasons and to tap the potential there has been an increase in the number of Lenders in the last few years.
The reasons of increase in the spending habit of the people is because of more gadgets and more luxury in order to get into more luxury people are using all their money into gadgets which ensures luxury. Increase in awareness and trying to ape the rich i.e. trying to get costlier clothing and accessories to feel good. The spending of the people is not in accordance with the income that they earn but is also eating into their savings. In a recent study it has been found that many people havent saved for their rainy day. There is very less or no emergency fund among people. The people who have retired have found that they have no fund to spend rest of their lives. The savings rate has drastically come down.
As said above to lay their hands on spending money, for emergencies, for building a house (without enough finance in hand) and for education that the there has been an increase in need to borrow money and hence increase in the lenders. Though reasons like building a house or education loan is quite understandable in nature and is also repayable within the fixed period of time. It is only the increase in the loan for emergencies and spending money that is worrying a lot of economist. This increase can only be tackled when the people learn to live within their income.