Z is for Zero-Debt

You’ve made it through the alphabet! How appropriate is it that the last letter is Z and stands for Zero-Debt—the result we hope will be your efforts from budgeting.

Wouldn’t it be great to be debt-free?  How would your world change? Imagine the possibilities if you had all that extra income to better enjoy life today and provide for your future.

So much of what we have written was intended to motivate you to do the heavy lifting required to dig yourself out of debt and become financially fit.  CapitalYOU™ can encourage you.  But we can’t do the hard work for you. Only you can. And once you are out of debt, only you can stay out of debt!

We at NWCM extend to you our best wishes and hopes that you do become and stay financially healthy.

If you have more questions about reducing your debt, feel free to Ask an Expert.

Y is for Yes

Once you are financially fit, you will have the ability to say “Yes” more often to so many of the things that you have had to deny yourself in your efforts to become financially healthy. A word of caution: newly, financially healthy people can slip back into old ways and lose that fitness in much the same way that people who lose weight after a rigorous diet gain it back.

Financial fitness is a life-long endeavor. It will always require commitment and discipline.  Just as maintaining an ideal physical weight is so much less than the effort of first having to lose it, so too is maintaining your financial fitness.  You no longer need to pay off debt.  You’re debt free!  Revel in it!

X is for Xenia

With only 400 words in the English language that start with the letter X, we really struggled coming up with something applicable to our discussions about debt reduction.

Xenia is an ancient Greek custom of hospitality, specifically the giving of presents to guests or strangers. CapitalYou™ is an example of Xenia. We created and maintain CapitalYou™ resources as a public resource, available to the “guests” who browse our website at no cost or obligation.  A gift, really.

NWCM is a for-profit business and a Certified B Corp®. Although we are shamelessly in business to make a profit, as a B Corp® we want to use our business to do good for the community in which we and our clients live. A strong, vibrant community has as its members financially fit people who can patronize the community’s businesses, support its churches and community-based organizations. The more financially fit the people in a community are, the better the community.

We want you to be financially fit—even if you aren’t our client. You’re our neighbor, or the neighbor of our client. We hope this instance of Xenia helps you to become financially fit.

W is for Wishful Thinking

Wishful thinking is that you win the lottery or get a financial windfall that pays off all your debt and leaves you with a large savings balance. It will never happen.  Plan accordingly!

What should that plan be? Analyze your expenses; create a Budget; and Commit to living within it. It’s as straightforward as ABC.

Yes, it’s hard work.  But is being under the yoke of debt payments easy?

Shift your focus. Do what it takes to become financially fit.  It’s well worth the effort!

V is for Victory

A decision to live on a budget is a great victory.  Many people in your situation do not have your resolve.  Once you pay off your debts, you can celebrate a tremendous victory!  You join the ranks of the small percentage of the American population that does not have debt.  Your life will have changed.  Free from the stress of debt, you now have significant disposable income that can be redirected in very positive ways.

U is for Underwater

When you have debt, it is said that you’re “underwater”.  How deep you are—and how potentially tenuous your situation is—depends on how much debt you have.  You can never come up for air and get a break from the stress that having debt involves until you pay it off.  You can never reach the beach, sit on the sand, warm yourself and enjoy the breeze.

Life is so much better when you are financially fit!  The only obstacle to keeping you from being debt-free is your decision not to do what is necessary to pay it off. That’s the simple truth.

T is for Tenacious

Tenacious is what you need to be when following your budget: persistent, determined.  Having a budget means nothing unless you follow it.  And unless you follow it, you won’t get out from underneath that debt.  And if you don’t get out from underneath that debt, avenues you wish to pursue in life will be closed to you.  No one but you is going to pay off your debts.

This is your life.  Be a casualty, or be a winner.  Your choice.

S is for Saving

Saving is just not depositing money into an investment account.  Saving also means that you stop spending money on non-essentials. You prioritize; you economize, so that you avoid taking on installment or credit card debt; or you create within your budget the money to speed up the payment on the debt you do have. With installment debt paid off, you now have the money to deposit into a savings account.

R is for Resilient

Sticking to a budget is very hard work.  Remember, life happens.  Things will come your way that will knock you for a loop and set you back on your budgeting.  Be resilient.  You can recover quickly if you believe in yourself and in what you are trying to accomplish.  Keep focusing on the goals you set out for yourself—goals that can only be accomplished once you are debt-free.

Q is for Quality of Life

People often confuse quality of life with lifestyle. “I’ll be much happier if I have a nice car, a big house, fancy clothes, go on nice vacations, …”  That may be true if you can afford it, meaning you have an income large enough to spend all that you wish and still live within your means.

Too many people have a lifestyle which they cannot afford. They carry a large debt load that can compromise their longer-term financial health for the shorter-term enjoyment the debt burden affords. There’s a big tradeoff for lifestyle when risking quality of life over the long run.

Maybe it was through unfortunate circumstances like unemployment, medical bills or a divorce that you are in debt without the short-term gratification of the material goods which debt buys for other people.

Life is full of tradeoffs. Maybe your lifestyle suffers a short-term hit while you stick with your budget to get rid of debt.  Believe us when we say the tradeoff is worth an improved quality of life when you are debt-free, and your budget will then allow you to better achieve your goals and dreams.

P is for Patience

Depending on how deep the hole you are in, e.g., how much debt you have, it may take some time—even years—for you to dig yourself out of a tough situation.  “Rome wasn’t built in a day.” With each passing month, you are getting closer to being debt-free and to having the greater ability to achieve your goals and dreams.

O is for Opportunity

Being overwhelmed by debt closes out so many opportunities for you.  All of your goals and dreams are better achieved without debt.  That’s what you’re working hard to realize when you stick with a budget: Opportunities for you and for the ones you love.

N is for Net-Asset Value

When you buy or sell shares of a mutual fund, their price is the fund’s net-asset value (or NAV, for short). The NAV is calculated by totaling up the value of all the mutual fund’s securities at the end of the trading day and dividing that value by the number of shares outstanding.  As the NAV rises and falls each day, you are gaining or losing value.

Mutual funds pay dividends, which almost always are reinvested in additional shares within the fund.  The NAV will be reduced by the amount of the dividend.  This doesn’t mean you lost money.  You now own more shares of the fund at a lower value.  Before the dividend was paid, you owned fewer shares of the fund at a higher price.  The math works out such that the value of your ownership in the fund is the same before and after the dividend payment. The lesson here?  Don’t track the performance of your investment by its share price.  Look at the total value of your shares.

M is for Mutual Fund

Most of the investment options within your 401(k) are mutual funds.  For the novice investor, or for someone too busy to manage their own portfolios, mutual funds are great options for IRAs and other investment accounts.

A mutual fund is a portfolio of stocks and/or bonds, whose total value can be in the billions of dollars. Investors are “pooling” their money to hire a professional manager who will make the day-to-day decisions about the securities to buy or sell.  Investors own “shares” in the portfolio, each having an undivided interest in the portfolio. With a very small investment, you can own a portfolio that offers you important diversification in various asset classes and in numerous sectors of the economy here and around the world.

Shares of mutual funds are issued and redeemed by the mutual fund itself, at a price calculated at the close of the financial markets each day. Another investment that has gained popularity is the exchange traded fund, or ETF, which trades like a stock, meaning it can be bought or sold at any time during trading hours.  ETFs are also a good way to invest small sums of money.

L is for Lease

Transportation is going to be an important part of your budget. The most budget-friendly way to get around is using public transportation (and the occasional Uber). Is this a possibility for you?  Can you move someplace closer to work and make this a reality? Ride share? How about a bike?  There are the ancillary benefits of being environmentally-friendly and being very inexpensive.

If not, then you need a car or truck. One way many Americans afford their cars and trucks is to lease them.  Leasing generally involves a smaller monthly payment and a shorter payment term than purchasing a vehicle, even if at a very low or no interest rate. Does it make sense to buy or lease?

A lease is a contract in which the leasing company agrees to purchase your vehicle back after the lease period for a guaranteed price and in a pre-agreed condition. If the car is not in that condition, e.g., more miles driven, dings, scratches, worn tires, poor mechanical condition, upholstery tears, you pay for those defects at the time you turn in your vehicle.  -Keep in mind that the leasing company needs to sell your vehicle, and anything that detracts from their ability to sell it at the price negotiated up front will have you paying them to restore it to that pre-agreed condition. If you are going to lease, take excellent care of that vehicle.  The affordability of the lease decision is not really known until the term of the lease expires!

Remember, your budget must allow for additional expenditures as gas, maintenance, insurance, and parking.

If you have to get a car or truck, consider buying a used vehicle.  Hey, maybe a car that came off a lease!  After all, you can be assured it’s in great condition.

K is Key to Success

Most people fail to dig themselves out from under the crushing weight of their debt because it’s too hard to do so. They can’t say “No!” to their spouse, partner, family, friends—even to themselves—when asked to buy this or that, to go out to dinner, to go away for the weekend, etc.

The Key to Success when it comes to living within a budget is to simply say, “No!”  You really can’t afford certain things YET.  We say “yet” because once you pay off your debt, you will have much more disposable income with which to say “Yes!” to certain things—so long as you are living within a budget. Once that time comes, you will need to shift the focus of your budget to other priorities, such as saving for retirement.  But it should leave you room to say, “Yes!” Have that as your goal.

J is for Job

You have a job that generates income for you. You might work in an office, a hospital, a factory, a school, or you’re on the road. The job’s income is important to you; and thus, the job is important.

You might also have the job of being a mother or a father, a spouse or a partner. People depend on you for much more than just a paycheck. You have a responsibility to yourself as well, single or otherwise.

You have a non-income job as well: getting yourself on track to becoming financially healthy.  No one else is going to do this job for you.  As many people as there are in your life who love you, they can’t do it for you, short of giving you lots of money.  And that is not going to happen!

Do your job.

I is for Investing

Yes, you will have an investment account! How should you invest it?

Your choice is either in cash, stocks, bonds or any combination thereof.

You probably are familiar with cash investments, both money market funds and certificates of deposit. You may be less familiar with stocks and bonds. We have some great videos on stocks and bonds. Please click here to view them.

H is for Health

So far, our discussion has been about financial health, but it’s equally important to be physically healthy.

Let’s hope you have good health insurance and that you don’t get sick.  If you do, there are deductibles and co-pays that will come out of your pocket. Such medical expenses can negatively impact your financial health.

One of the biggest financial risks you will have in retirement is the cost of your health care.  Life happens. Even the most physically fit among us succumb to illnesses over which we have no control.  But so many health problems are preventable: heart disease, stroke, type 2 diabetes, obesity, just to name a few.  Just as there is often too little time to make up for the missed opportunities to have saved during our working careers, reversing a preventable health problem in our older years may be impossible.

Most health professionals recommend that you exercise at least four times a week.  Your exercise regimen doesn’t have to be at a gym or with a trainer.  Walking for 30-45 minutes qualifies as exercise.  Just do something to become active! (If your current state of physical conditioning suggests it, see your doctor first.)

Getting financially fit could prove to be a challenging endeavor. You will be changing the behaviors that caused the financial difficulties you are currently facing.  Change will require commitment and determination.  Being in a good frame of mind will be critical—and regular exercise can help improve your mental attitude.

If you can avoid an extraordinary health cost in retirement by initiating a life-long exercise habit today, the savings you can accumulate while working will last that much longer in retirement.

And let’s not forget you will enjoy life and retirement much more if you are healthy and active!

G is for Goals

What gets you out of bed in the morning? Other than your need to keep a roof over your head and food in your belly.  What drives you each and every day?  Your career? Your family? Do you have a passion for the arts, sports, the outdoors?  Do you like to volunteer at your church or in the community? Are you hoping to travel? Looking forward to retirement?

Think a minute and ask yourself, “How many of my goals and dreams involve money?”  We bet, in one way or another, every one of them!

Would being financially fit improve the odds that you will achieve your goals?

To help you stay motivated to rid yourself of debt and become financially healthy, write down your goals.  Post them in a conspicuous place to remind you of why you are making the hard decisions every day to remain true to your budget.

This is your life.  You only get to do it once. Do it the right way.

F is for Four-O-One(K)

Yes, it’s correctly spelled 401(k).  We just wanted to get a discussion about saving for retirement early on in our alphabet.

People ask us if they should hold off making contributions into a 401(k), and instead, divert that money to reducing debt. If your objective is to retire at a certain age, the amount you will need to fund a comfortable and secure retirement will be the same regardless of when you start saving for retirement.  The longer you delay investing for retirement, the greater the amount you will have to save each year to accumulate the necessary funds to retire.  Let’s repeat that: the longer you delay, the more you will have to save later on.

The challenge of accumulating enough money to retire comfortably is so great, we think it extremely important to make a 401(k) contribution.  Yes, we know it’s one more financial ball you will be juggling. We’re all about you acquiring good financial habits: 401(k) participation is one of them.

If your employer’s 401(k) plan offers a matching contribution, you MUST take advantage of it. (It’s part of your compensation package!) Until you have your debt and discretionary spending under control, you should contribute at least the minimum amount of your compensation that earns you the maximum match (generally somewhere between 3% and 8%).

If that’s too big a percentage, do what you can – even if it’s $10 or $25 a paycheck. As your financial health improves, and as you learn first-hand about the unique advantages a 401(k) offers, we think you will find the motivation to increase your 401(k) contributions.

In a perfect world, your minimum target for contributions to a retirement plan should be 15% of your compensation from all sources.  Yes, this means counting towards that 15% the contributions your employer makes to the plan. However, the ideal contribution to your 401(k) from your paycheck is the maximum amount the IRS permits.

Saving for retirement is a big topic, one deserving of your attention.  We suggest you click on the following link to access videos in the CapitalYOU™ library.

E is for Emergency Fund

Some people have credit card and installment debt because there was a financial emergency, like a car repair, medical bill or a home appliance repair.  Without an emergency fund, where does one get the money other than to take on debt? Remember, we’re trying to get rid of debt!

You must immediately (and that means, today) cut down on discretionary spending.  Stop charging with your credit card. Pay cash for everything. Cancel the premium cable package. Bring your lunch to work.  Cook at home.  Invite friends to a potluck. Get videos from the library. Stay home for the weekend and visit a museum, a botanical garden, explore your city as a tourist might. Make coffee at home and bring it to work in a thermos. Take the bus. Carpool. Get a roommate. Get a part-time job.  Hold a garage sale. Do what it takes to put away $750 in a savings account that is difficult to access but available for an emergency.

D is for Debt Reduction

From our experience as investment advisors, most people cannot save money for any reason because so much of their income goes to paying off their debt.

Your budget needs to focus on paying off, as quickly as possible, your consumer installment debt (think debt with very high interest rates, like credit cards).  If you have a home mortgage, paying off that debt can wait for later.

When building your budget, gather the following information about your consumer debt: current balance, minimum payment, and interest rate. Then order your debts by the amount of current balance, lowest to highest.

Let’s assume your lowest current account balance is a credit card debt of $1,000 with interest 19.9%.  Let’s further assume the minimum payment is $36.50—which has you paying off the balance in 36 months at a cost of $314.30 in interest. And one last assumption:  The dollar amount in your budget you have designated for “additional debt payments” is $150.

Pay the minimum payment on all of your debt except the one with the lowest current balance.  Pay the $36.50 plus the $150. Within 6 months, your $186.50 payments will have this $1,000 credit card balance paid in full!  And your interest payments will only total about $56.

Then, what is the installment debt with the lowest credit balance? Let’s say its minimum payment is $62.  Add to this $62 the $186.50 you previously had budgeted to pay off the other debt.  The resulting increased monthly payments of $248.50 will pay off this debt much quicker.  When it’s paid off, add $248.50 to the minimum payment of the third debt on your original debt and pay that off more quickly.  Continue this strategy until you have paid off all your consumer debt.

Once your consumer debt is all paid off, how much extra money do you think you will have in your budget each month? A lot!

Oh, and don’t take on any more installment debt!

C is for Commitment

How often do you buy lottery tickets, hoping that you will defy the 1-in-a-gazillion odds and win an incredible sum of money that will solve all your financial problems?  Be honest –  it will never happen.

Or do you sometimes wish that you had a long-lost rich uncle that will send you a big check? He doesn’t exist, does he?

You can only count on yourself.  It’s like weight loss. If you want to lose weight, you need to be the one exercising. You need to be eating healthier foods and smaller portions.  You need to commit to sticking with your budget.  Only by doing so can you get to a much healthier financial lifestyle.

Too often, people say, “I’ll start on a budget next year.”  And they say the same thing the following year.  Next year turns into two years, and then into three, and then into never.  Delay getting started living on a budget and your financial health will only get poorer, and the challenge to get better becomes much more difficult.

The Chinese philosopher Laozi said over 2,500 years ago, “A journey of a thousand miles begins with a single step.” The single most important step—the first step—in your journey to financial fitness is to commit to taking the second step, and then the third, and then the fourth, and so on.  Before you know it, you’ll be quite a long way down the road and closer to your better financial health!

Be relentless in sticking to your budget.  No doubt it will be difficult. But how tough is it now to be under the weight of debt? How hard will life be during retirement if you failed to adequately save while working?

Many people have the financial difficulties they do because of poor decisions.  This is your life.  You choose how you want to live it.

The Dreaded B Word

The second step towards financial health begins with a word that can make the staunchest of us cringe: Budget. Very few financially healthy people do not have to follow a budget; for you, it’s mandatory.

During retirement, a budget will also be mandatory, so get used to it—even if you’re decades away from retirement.  There are stories aplenty about retirees having to choose between taking a full dosage of a prescription drug or buying food. Either budget now when you have greater flexibility and can positively impact the amount of income you have during retirement (which we’ll talk about later) –  or live on a restricted budget during retirement. You choose. It’s your life.

Budgeting is all about differentiating the essential expenses of your household from “discretionary” spending. (Discretionary expenditures are ones you don’t really have to make.)  Examples of essential expenses are rent, mortgage, utilities, food, and insurance.  Examples of discretionary spending are the daily non-fat mocha with a shot of vanilla, eating out several times at your favorite restaurant, buying the latest fashion, the 60” flat-screen TV, all the purchases you couldn’t account for when analyzing your checking account statements, and other things that define a lifestyle you can’t afford.

Certainly, your budget needs to pay for the essential expenses of life. Just as important, there needs to be room in your budget to “pay yourself first”. From each paycheck, set aside a specific dollar amount that will allow you to:

  1. Build an emergency fund;
  2. Make extra payments on your debts that are greater than the monthly account minimum; and
  3. Start making minimum contributions to your 401(k).

How can you set aside money in your budget to do all we listed in the paragraph above?  Reduce your discretionary spending! Yes, you will need to make some sacrifices. It’s not much different than being on a diet and not having a second helping of dessert.  It won’t be easy. We’ll explore in greater detail these three additional budget goals so that you can understand their importance—and thus have the motivation to fine-tune your budget (and later stick with it.)

Click on this link to access a worksheet that will help you set up a budget.

The ABCs of Financial Success

Our strategy to get you to financial fitness involves a few steps. We say it’s as simple as ABC.

A is for Analyze, as in “analyze how you are spending your money”.  Just as A is the first letter in the alphabet, the first step to becoming financially fit is an analysis of your expenditures.

Look at your bank statements for the past 6 to 12 months.  Dig out your credit card bills.  Try to account for how you spent all of your take-home pay.

You should be able to easily account for rent or mortgage payments, insurance premiums, gas, electricity, cell phone bills, car payments and other debt payments.  But how did all those cash withdrawals get spent? Often there is insufficient detail on your credit and debit card statements to identify the businesses where you spent money, leaving you scratching your head over this or that charge.

Get as detailed as you possibly can with itemizing where all the money was spent.  (It will be important when we talk about the letter B.)

If you are like most consumers, there will be a big percentage of your expenditures you won’t be able to nail down. You have plenty of company wondering where all the money went.

Can I take a loan from my 401(k)?

  1. Only if the plan allows for loans. Many employers feel strongly that plan money is for retirement and procedures should be in place to help you retain your plan balances for that express purpose.
  2. Some plans restrict the number of loans you can have at any given time. So if you have an existing loan, you might have to pay that loan off first before taking a new loan.
  3. Some plans restrict loans to certain “source” of money in the plan, for instance, 401(k) deferrals. Thus you might have a profit sharing contribution but no deferrals., and thus cannot take a loan.

How much can I contribute?

  1. $18,000, but no more than 100% of your paycheck (less FICA taxes). Some plans, for IRS considerations, may impose lower limits for some or all plan participants.
  2. If in the current calendar year you are age 50 or older, you can also make a catch-up contribution of $6,000 in addition to the $18,000.
  3. These dollar limits can increase year-by-year given inflation and IRS rules.
  4. Certain employees designated by the IRS as “highly compensated” may not be able to defer as much as they might otherwise prefer. If you are impacted by these IRS rules, your HR department will undoubtedly inform you of your deferral limitations.

Can I take a loan out for any reason?

  1. Some plans allow you to take a loan for any purpose—even imprudent ones!
  2. Some plans restrict your ability to borrow money from the plan only if you have a financial hardship. Most plans use the IRS’ definition of financial hardship to include:
    1. Funds to avoid foreclosure or eviction
    2. Medical expenses not covered by insurance
    3. Funeral expenses
    4. Home purchase
    5. Post-secondary education expenses

My 401(k) allows for Roth contributions. Can I “double up” my contributions?

No. While you can make both Roth and “traditional” 401(k) contributions, the total contributions into your 401(k) cannot exceed the current year’s dollar limitations (or a lesser amount if your compensation is less than the dollar limitations).