FAQ
|
|
Frequently Asked Questions:Click on the question you want answered. What is the recommended distribution of income into the various expense categories?
Should I pay off my debt first and then start accumulating savings, or should I start saving now and pay off my debt later?The reason you are in debt is because you have spent money you didn’t have. You have used credit as a substitute for savings. To change this situation, you need to accumulate money so you have it when you need it and no longer have to rely on credit. If you wait until you pay off your debts to accumulate money, you will continue to have to rely on credit. You will remain in a cycle of debt. If you make regular payments on you debt and take on no new debt, you will eventually get out of debt. It is very difficult to avoid new debt, however, unless you have money over and above you normal monthly expenses and debt service. This money is savings. So saving must occur while debt is being paid off. Savings replaces credit as a means for paying for things, eliminating the need for new debt. This makes it possible to get completely out of debt and to stay out of debt. Start by accumulating an emergency savings account equal to three to six months take home pay. Of course, take advantage of your company's 401K to the extent that you can, especially if your employer matches your contributions. As you pay down your debt, use the money you were putting toward monthly debt payments to add to your savings. Keep making those payments, only make them to your self. What is the recommended distribution of income into the various expense categories?The government publishes tables that show what the American consumer spends on average for various living expenses such as food, shelter, clothing, etc.. In 1992, according to government sources, the average American family spent 28% of their pretax income for housing, 13% for food including eating out, 5% for clothing and so on. But what do those figure mean to you? In reality, not much. First of all, if you are not average, meaning of average income, then these figures are virtually worthless. Lower income families will likely spend a higher percentage of income on housing, food and clothing. Families with higher incomes may spend a lower percentage on these items, but they may not. They may simply purchase more expensive houses, eat out more often and at more expensive restaurants and buy name brand name or designer clothes. What are more important than national averages are your financial goals and your desired standard of living. These will determine how much you spend in each category. In other words, your spending priorities will dictate how much you spend for housing, food, clothing, transportation, recreation, etc.. Those priorities will reflect your goals. So if you place a high priority on accumulating savings and on living in a good neighborhood, then your spending as a percentage of your income will reflect this, and this spending may exceed the average. Consequently, you may spend less than the average on food, transportation, clothing and entertainment in order to fund your priorities of housing and savings. What is appropriate spending is what allows you to realize your goals through the adequate funding of your priorities. If you aren't achieving your goals, then some of your spending may need adjustment, but only you can determine where to make adjustments and how much to shift from one spending category to another. If you are having problems determining where to cut and add, you may need to sharpen your goals and spending priorities. Clearly defined goals and spending priorities will make it easier to make decisions about how much to set aside for this or that expense. When applying extra money to credit cards to pay them off quicker, which should I pay off first, the cards with the lowest balance or the cards with the highest interest rates?Most of the time the answer is to pay off the credit cards with the highest interest rates first, because these are costing you the most in finance charges. However, if cash flow is a problem, in other words if you are barely squeaking by, and you come into a lump sum of money that will allow you to pay off one or more cards completely thus freeing up the payments you have been making on those cards for other uses, then it would be smart to go ahead and pay off those cards regardless of the interest rates charged. In this case, the additional cash flow rendered by paying off the cards completely is more important than saving on finance charges. Another instance in which it might be better to pay off cards with low balances regardless of the interest rate charged by those cards is when the psychological impact of paying off credit cards completely is more important than saving money on finance charges. Your personality will determine if this is the best choice for you. Some people need to see rapid progress in reducing their outstanding debts. Perceived progress may come in the form of eliminating open accounts by paying them off. Reducing the number of open accounts right now may give more of a mental lift than the knowledge that interest is being saved in the long run by paying off high interest balances first. |
|
E-mail: info@liveoncash.com • P.O. Box 962264 • El Paso, TX 79996-2264 • Phone (888) 599-2742 Fax (877) 778-2574 © Copyright 2008 KC & CO. All Rights Reserved |