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Making Money Work: A Christian Guide For Personal Finance WelcomeDebt Management Copyright 2008 Willie Glenn Page, Inc. Debt Management “Live within your income even if you have to borrow money to do it”—Josh Billings, Humorist 1818-1885 (Charles J. Givens, Wealth Without Risk, Simon And Schuster, Copyright 1998 by Charles J. Givens, page 97). Debt Management While God does not prohibit borrowing, God does discourage it. Proverbs 17:18—“A man void of understanding striketh hands, [and] becometh surety in the presence of his friend” (KJV). “Surety is simply taking on an obligation to pay later without a certain way to pay it”—Larry Burkett, The Financial Guide For The Single Parent, Copyright 1997 by Larry Burkett, Moody Press, Chicago, page 218. Proverbs 22:7–“The rich ruleth over the poor, and the borrower [is] servant to the lender” (KJV). Copyright 2008 Willie Glenn Page, Inc. The Associated Press Poll Stresses Of Being Buried Under Debt (1,002 adults, taken 3/24/08-04/03/08, +/or - 3.1% margin of error) 60% 51% 50% 44% 40% 31% 29% 27% Low Debt Stress 30% 23% High Debt Stress 20% 15% 8% 6% 10% 4% 4% 3% 0% Muscle Migraines Severe Ulcers Severe Heart Attack Tension (Headaches) Anxiety (Digestive Depression (Back Pain) Problems) Which of the following illnesses and other health problems, if any, have you had in the past 12 months? Copyright 2008 Willie Glenn Page, Inc. Debt Management Principal = borrowed money. Interest = the amount you pay on principal (borrowed money). Interest = Principal x Interest Rate x Time. Copyright 2008 Willie Glenn Page, Inc. Debt Management Cardinal rules: Borrow as little money possible at the lowest interest rate possible and for the shortest timeframe possible. Live within your means. Establish an emergency fund to avoid debt—e.g. $1,000 then 3-6 months expenses and then 6-9 months expenses. Practice delayed gratification—save for items and pay cash. Credit cards—pay the balance off in full each month or consider canceling the cards in order to control your deficit spending. Understand the difference between “Good Debt”—helps to build your future net worth—and “Bad Debt”—diminishes your future net worth. Avoid “impulse buying”—understand the difference between needs, wants and desires. Copyright 2008 Willie Glenn Page, Inc. Differentiating Between Needs, Wants And Desires Need Want Desire To drink: Water Bottled Water Cola To tell time: Use free available clocks An inexpensive watch-- An expensive watch-- Timex Rolex Transportation: Use public Used car New car—Rolls Royce transportation Copyright 2008 Willie Glenn Page, Inc. Can Drinking Tap Water Make You A Millionaire? Copyright 2008 Willie Glenn Page, Inc. Understanding “Opportunity Costs” For Needs, Wants And Desires MayoClinic.com, The Institute of Recommended Oz.'s (1.057 quarts = Medicine Beverages/Day 1 liter) x Total Oz.'s Men 3.0 liters 33.824 3 101.472 Women 2.2 liters 33.824 2.2 74.4128 Average: 87.9424 Copyright 2008 Willie Glenn Page, Inc. Understanding “Opportunity Costs” For Needs, Wants And Desires Recommended Oz.'s of Beverages/Day Days/Year Years In Life Gallons Oz.'s (128 oz./gallon) Cost Cost/oz. 87.9424 365 76 Cost Per Day Cost Per Year Cost Per Lifetime Household Water Bill--Includes Tap Water 8,000 1,024,000 $91.03 $0.0000888965 $0.0078177702 $2.85 $216.86 Local Grocery Store: Per Case Oz.'s Cost Cost/oz. Cost Per Day Cost Per Year Cost Per Lifetime Bottled Water 24/9 oz. 216 $5.99 $0.0277314815 $2.44 $890.15 $67,651.56 Cola 12/12 oz. 144 $5.49 $0.0381250000 $3.35 $1,223.77 $93,006.78 Copyright 2008 Willie Glenn Page, Inc. Understanding “Opportunity Costs” For Needs, Wants And Desires Need Want Desire To drink: Tap Water Bottled Water Cola Cost/year = $2.85 Cost/year = $890.15 Cost/year = $1,223.77 Cost/lifetime = $216.86 Cost/lifetime = $67,651.56 Cost/lifetime = $93,006.78 If savings is invested @ 8% growth over 76 years: $2.85 (Need Cost) - $890.15 (Want Cost) - $0.00 (-$93,006.78 in $1,223.77 (Desire Cost) = $1,223.77 (Desire Cost) = opportunity costs) $1,220.92 at 8%/year for $333.62 at 8%/year for 76 76 years = $5,278,966.47 years = $3,848,795.99 Copyright 2008 Willie Glenn Page, Inc. “Opportunity Costs” is the cost of passing up the next best choice when making a decision. Realistically, few people will go through life only drinking tap water. Few people will be able to invest for 76 years during their lifetime. The purpose of this example is to point out how a shift from “spending on wants and desires” to “spending on needs and then saving and investing the difference” can have a profound impact upon your finances. Your values determine your perception of needs, wants and desires. Everyone has different values. Complete The SS44 Values And Spending Exercise (CD-RW). Copyright 2008 Willie Glenn Page, Inc. Calculating The “Opportunity Cost” For An Expensive Watch Using The Rule of 72 Need Want Desire To tell time: Use free available clocks An inexpensive watch-- An expensive watch-- Timex Rolex e.g. $10,000 The Rule of 72: At 10% interest, money doubles every 7.2 years. If a person works 28.8 years, their money should double 4 times. Copyright 2008 Willie Glenn Page, Inc. Calculating The “Opportunity Cost” For An Expensive Watch ($10,000 Original Cost) Using The Rule of 72 1st 7 2nd 7 3rd 7 4th 7 years years years years $20,000 $40,000 $80,000 $160,000 Copyright 2008 Willie Glenn Page, Inc. “Compound Interest” Works As A Powerful Ally To Build Wealth—It’s Antithesis “Bad Debt” Works To Destroy Wealth. Example Of Growth/or Decline Compound Interest: +1 +2 +4 +6 +8 +16 +32 +64 +128 +256 +512 Bad Debt Interest: -1 -2 -4 -6 -8 -16 -32 -64 -128 -256 -512 Pay off all of your “bad debt” as soon as possible—you will be happier, healthier and wealthier! Copyright 2008 Willie Glenn Page, Inc. 4 C’s Of Credit (What Creditors Look At) Collateral— “secured loan”—an asset of value the lender can take from you if you fail to repay the loan. Capital—items of value that could be sold to repay the loan—e.g. investment accounts, your home (in some states). Capacity—ability to repay a loan. Income and employment history. Character—your credit record. Do you have a history or paying bills on time. Copyright 2008 Willie Glenn Page, Inc. Credit Report—your credit history, a record of your personal financial transactions. Tells lenders any credit you have, loan amounts, your credit card balances and limits, history of paying bills. It covers the last 7 to 10 years. It may be checked when you get a cell phone, buy a car, rent an apartment, apply for a job, etc. You are entitled to a free credit report every year—correct any mistakes. Credit Score—based on the 4 C’s. It is a number that reflects your creditworthiness at any point in time. The most popular credit score is the FICO score which ranges from 300 to 850—a score of 680 or more is considered good. The 3 main credit reporting agencies: Equifax, Experian, and TransUnion. Copyright 2008 Willie Glenn Page, Inc. You may request one “free” annual copy of your credit report at www.annualcreditreport.com or by calling 877- 322-8228—sponsored by Equifax, Transunion, and Experian. You may get free personal information from www.Quizzle.com including your credit rating, home value, budget information, and mortgage information. Copyright 2008 Willie Glenn Page, Inc. Order of expenditures per $100.00 of income earned: 1. Tithe (example: 10% to God) $10.00 2. Savings (example: 10% to your 401K) $10.00 3. Federal taxes (example: 25% Federal taxes) $25.00 4. State Taxes (example: 7% to your state’s tax program) $7.00 5. FICA Taxes (e.g.: 6.2% Social Security + 1.45% Medicare Ins. = 7.65%; $7.65 or self employed 12.4% Social Security + 2.9% Medicare = 15.3%): $15.30 6. Balance to spend on other items--employed by others: $40.35 Self-employed: $32.70 Copyright 2008 Willie Glenn Page, Inc. Budgeting Small children can start with 3 jars labeled “giving”, “saving”, and “spending.” For each dollar, they put 10 cents in giving, 10 cents in saving, and 80 cents in spending. Teenagers might want to use an envelope system similar to the jar system above for all of their expenditures. Copyright 2008 Willie Glenn Page, Inc. Basic Budgeting Beginning Steps Step 1: List Financial Goals— • Short-term Goals (one year goals)—e.g. immediately save $1,000 and then 3-6 months expenses and then 6 to 9 months expenses in a liquid emergency fund account. Take full advantage of employer-matching funds up to the full “matching limit.” Pay off all credit card debt. Pay off credit cards in full each month. • Mid-term Goals (2 to 5 years)—e.g. purchase a used car within 3 years. Pay off all student loans. Save 20% for a down payment on a home purchase. • Long-term Goals (over 5 years)—e.g. After maximizing savings up to the full employer match in retirement savings accounts, invest in a Roth IRA. Eliminate all debt—car payments, home mortgage, etc. Copyright 2008 Willie Glenn Page, Inc. Basic Budgeting Beginning Steps Step 2: Conduct A Credit Card Debt Analysis Suggestion: open up the “SS13.a Calculator—Debt Management.xls” and click on the “Credit Card Analysis” sheet tab to prepare your own credit card debt analysis. Copyright 2008 Willie Glenn Page, Inc. Basic Budgeting Beginning Steps Step 3: Conduct A Cash Flow Analysis • Analyze all income and expenditures. Use pay stubs, check books, billing statements, and any other statements showing money flowing into and out of your accounts. • List all “fixed” expenses—e.g. those that have little or no flexibility such as rent and insurance. • List all “discretionary expenses”—e.g. those that can be easily changed such as dining out, entertainment, vacations, hobbies, etc. • “Total Income” – “Total Expenses” = a “cash surplus” (discretionary income) or a “cash deficit.” Suggestion: open up the “SS13.a Calculator—Debt Management.xls” and click on the “Cash Flow Statement” sheet tab to prepare your own cash flow analysis. Copyright 2008 Willie Glenn Page, Inc. Basic Budgeting Beginning Steps Step 4: Determine Your Net Worth • This is a listing of what you own and what you owe. The goal is to increase your net worth each year. • Compare your net worth statement each year to prior years. • Adjust your spending/or saving habits as needed. Suggestion: open up the “SS13.a Calculator—Debt Management.xls” and click on the “Net Worth Statement” sheet tab to prepare your own net worth analysis. Copyright 2008 Willie Glenn Page, Inc. Budget If you are unable to live within your means— you are deficit spending — you should prepare a very detailed budget. Use the “Making Money Work SS13 Calculator-Budget.xls” worksheet for a more detailed household budget (Making Money Work Book CD-ROM calculator). Copyright 2008 Willie Glenn Page, Inc. Budget Guidelines Budget Category % Tithing/Giving 10% or > Of Income Income - Statutory Payroll Deductions: Federal Income Tax, Medicare, Social Security, State/Local Taxes, etc. Of Income minus Statutory Payroll Savings 10% or > Deductions Of Income minus Statutory Payroll Total Housing Costs < 30% Deductions Of Income minus Statutory Payroll Total Transportation Costs < 18% Deductions Of Income minus Statutory Payroll All Other Expenses < 18% Deductions Of Income minus Statutory Payroll All Other Debt < 15% Deductions Copyright 2008 Willie Glenn Page, Inc. Steps To Becoming Debt Free Pray—when you work, you work. When you pray, God works. Stop accumulating debt. Destroy credit cards if necessary and pay by cash, check, or debit card. Practice “delayed gratification.” Be happy with what you have. Do not spend “tomorrow’s money” today. Institute the 24-hour rule: before buying anything over $50, wait a day to make sure your really need it. List all of your assets and determine if any need to be sold and the proceeds used to reduce/or eliminate debt. List all of your liabilities—know where you stand financially. Establish a written budget. Analyze spending habits to determine where you can cut back or eliminate expenses. Establish a debt-repayment plan. By looking at the debt amount and interest rates charged, decide which debts you should pay back first. Typically, you save the most money by paying off the highest interest rate charges first. As each credit card is paid off, use the savings to pay off the next card(s) until all are paid in full. Copyright 2008 Willie Glenn Page, Inc. Steps To Becoming Debt Free If you have a line of credit with a low rate, you might consider using it to pay off higher interest rate debt such as credit cards—warning: only do this if you are certain you can make the payments and do not put your home at risk. Earn additional income to pay down debt—e.g. non-working spouse gets a job, working spouse gets an additional part-time job. Consider an extreme change in lifestyle—e.g. the elimination of non-wealth producing activities such as luxury vehicles, boats, etc. Moving to a smaller house with a lower mortgage payment. Work hard at reducing your debt and never give up—the Lord said, “I am with you always.” Support groups such as Debtors Anonymous www.debtorsanonymous.org helps correct spending habits and stop impulse buying. The National Foundation for Consumer Credit www.nfcc.org 800-388-2227 offers free or low cost credit counseling. Copyright 2008 Willie Glenn Page, Inc. SS12 Calculator-Liquid Assets Versus Current Liabilities.xls (Making Money Work Book CD-ROM calculator): The % of current liabilities to current assets should be less than 50%-- for individuals and companies. SS14 Calculator-Loan Payment.xls (Making Money Work Book CD-ROM calculator): Exercise: Given the following: You wish to purchase a car. It cost $5,000. You have a 20% down payment. There are 12 payments per year at a 12% interest rate. Your loan is for 36 months. How much are your monthly payments? What are your total payments over the life of the 36 month loan? How much will you have to pay in interest charges over 36 months? Copyright 2008 Willie Glenn Page, Inc. Most lenders use scores calculated by Fair Isaac Corp.—uses a formula with 22 pieces of data. Scores range from 300 to 850. They predict how likely you are to pay bills on time. www.myfico.com Chance of defaulting within two years, by credit score Credit Score Chance of defaulting within 2 years Credit Score up to 499 83% 500-549 70% 550-599 51% 600-649 31% 650-699 14% 700-749 5% 750-799 2% 800+ 1% Consumer Report: A person with a credit score of 720 and up would be eligible for a 5.55% interest rate on $150,000 30-year mortgage and a $856 monthly payment. Someone with a score of 620 to 674 could pay $1,034/month for the same loan. If you are in the 580 to 620 range, you will probably still qualify for a mortgage loan, but at a higher rate. How Does Your Credit Score Impact You Financially? Example Of Average Amounts People With Various Credit Scores Would Pay For A 30-Year Fixed $200,000 Mortgage Loan FICO Score APR Monthly Payment Total Paid* 720-850 5.933% $1,191 $428,580 700-719 6.059% $1,207 $434,411 675-699 6.601% $1,277 $459,882 620-674 7.760% $1,434 $516,314 *Numbers do not include property taxes, insurance, or points--only interest paid + the $200,000 borrowed. Example is based on 2008 APR averages. Copyright 2008 Willie Glenn Page, Inc. Luke 19:8-10—Zacchaeus said to Jesus “‘Here and now, sir, I give half my possessions to charity; and if I have cheated anyone, I am ready to repay him four times over,’ Jesus said to him, ‘Salvation has come to this house today!”’ Romans 13:7-8--“Discharge your obligations to all men; pay tax and toll, reverence and respect, to those to whom they are due, Leave no claim outstanding against you, except that of mutual love.” Debt is a burden affecting not only your living, but also your giving. Debt prevents you from being able to give everything God intended for you to give! Copyright 2008 Willie Glenn Page, Inc. Please complete the “Chapter 4 Debt Management--Extra Learning Module” (CD-RW). Copyright 2008 Willie Glenn Page, Inc.
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