# Credit Card Debt for Dummies

You don’t have to be a genius to get a credit card, but you want to be smart when you use it!

Credit cards are pretty convenient to have, but if you’re not careful, it’s easy to get into trouble with them.  Half the battle is knowing what you’re getting into before you begin.  Hopefully, this will help.

First, a credit card is like a little loan to help you pay for things.  If you pay off the entire balance each month when you get your bill then you won’t have any problems.  If you don’t pay off the entire balance, then the credit card company will charge you interest on the amount that’s left over.  That’s how they make money.  (That and the fees they charge the store owners for using credit cards.)

Let’s say you went out and purchased some new furniture for your home and spent \$5,000 on a credit card that charges an 18% interest rate.    The first bill comes in the mail and you see the minimum payment is \$100.  Now if you pay the full \$5,000 – cool, you pay no interest.  But what if you don’t have it and you only pay the \$100?

The credit card company takes their interest payment first – remember that’s how they make their money.  So, at 18% per year, that works out to be 1.5% interest per month.

\$5000 times .015 equals \$75.

So \$75 goes to the credit card company for the privilege of using the credit card to buy your stuff.  Since you only paid \$100 towards the debt, then that only leaves \$25 to reduce the balance.  You still owe \$4,975.

If you only pay \$100 a month to reduce the debt, you will have paid \$9,400 before the account is paid up in 7 years and 9 months.  Ouch!

Now, if you were to pay \$200 a month in the same situation, you’d have only paid \$6,400 and you’d be paid off in 32 months.  You’re throwing an extra \$100 a month towards the balance so of course it gets paid off faster!   That first \$75 will still go to the credit card company to pay the interest, but you’ll have paid \$125 towards the debt so you only owe \$4,875 the next month.  And this is where it’s so sweet.  The interest you pay on \$4875 is \$73.13.  The interest you pay on \$4975 is \$74.63.  Okay, not a huge difference, right?  But every month that gap keeps getting bigger and bigger.  So you save money by making a bigger payment on your credit card.

Another way to save money is if your credit card has a lower interest rate.  For example:  let’s say the interest rate is 12% instead of 18%, and you pay \$100 a month.  You’d pay off the balance in less than 6 years and pay only \$7,000 instead of \$9,400..

So here are the three things I want you to remember about credit card debt:

Paying off your credit card charges immediately will keep you from paying interest.

If you don’t pay the full amount, the money you do pay gets applied to interest first, then the balance owed.  The more you pay, the sooner you’re paid up.  Paying down the debt saves you money!

The lower your interest rate, the less you pay towards interest.

Hopefully, by seeing how much it costs to use your credit card will help you make good spending choices.

# How To Allocate Your Savings

I recently wrote a post about saving money and why you need to have an emergency fund saved up before you start saving for retirement. (See: How Much of My Income Should I be Saving? (http://robergtaxsolutions.com/2015/06/how-much-of-my-income-should-i-be-saving/) Well, a friend of mine recently asked me what I thought should be the next step in saving and this is what I told him.

I’m not a financial planner or money guru of any kind. If you have access to a professional in that field I recommend you hire one because I think everybody could use a plan tailored to their needs. But if you don’t have access to a personal planner, this is my opinion of how I think you should prioritize your savings.

First: Have at least three months worth of expenses saved up in a regular bank account. I like to see 6 months to a year’s worth in the bank, but the three months is crucial before you start putting money anywhere else.

Second: If your employer matches your 401(k) contribution- then put your money there up to the match. An employer match is a 100% return on your investment. You can’t get that anywhere in the marketplace. If you find a bank account that pays one half of one percent interest that’s considered good these days. A 100% match? That’s totally awesome! Do not miss out on that opportunity.

Third: If you have money left to save after contributing up to the match, then I would put money into a Roth IRA if you qualify. Generally you need to earn less than \$129,000 a year if you’re single and \$191,000 a year if you’re married. The reason I like the Roth IRA over the 401(k) or traditional IRA is that you get to take the money out tax free in retirement. It’s also a good source of funds for college, housing, or other emergencies if you should need it. There is no tax benefit now for putting money into the Roth, all the benefit comes when you take the money out. I cannot overstate how valuable that “tax-free” part of the retirement equation is.

Fourth: My next choice for savings would be back to your employer sponsored 401(k). This gives you a tax reduction benefit now.

Fifth: College savings. People with new babies always ask me about college savings programs. They will have no money in their own savings or retirement but they want to open a 529 plan. So why is college savings so far down on the list? Here’s the main reason: you can get a loan to go to college. You cannot get a loan to retire. We’re talking about priorites: savings, Roth IRA, 401(k), then college. (Remember, a Roth IRA can be used for college if needed.)

Have you gotten this far and you still have money left to save? That’s great! That also implies that you’ve got enough money to hire a professional financial planner. There are cool things you can do with annuities, life insurance, and other investments that are way beyond the scope of anything I can tell you about. Find someone that you can really talk to.

What are your plans for the future? Where do you want to be when you retire? When will you retire? How will you get there? These are all things that need to be tailored just to you and can’t be answered in some blog post.

# Personal Budgeting – Is it for You?

Photo by 401(K) 2013 at Flickr.com

Individuals and corporations (as well as income from estates and trusts and estate and gift transfers) are all subject to taxes pending the presence of taxable income. Among one of the numerous benefits with budgeting is planning for the impact of these taxes. But first let’s look into why certain entities do and do not budget.

In a corporate setting, budgeting is a necessary part of the accounting system and managers often receive pay increases if production is within budget. Also, budgeting is imperative in corporations in order to stay current with the ever changing government regulations and to keep up with the current industry competition.

What about the small business level? Do you like to stay up late and write up budgets and proforma financial statements? Not everyone does. And in my opinion, not everyone has to. Jan and I have seen many successful small businesses who do not write up formal budgets for their businesses. It’s your choice but I am not against them whatsoever. Of course, the bigger your company is getting, the more likely you will want or even have to start creating budgets.

And you? Do you have a budget? Not your small business, not your S Corp, not your partnership, but YOU? Personal budgeting for some can be worse than going to the dentist. If a template is all that is holding you back, we have a free one in this blog and in the downloads tab on top of the website. This budget template has a very clean presentation and is nicely detailed. I am certain that you will like it.

The RTS Personal Annual Budget is available for download from this blog or from the downloads tab near the top of the website.

My point with this blog was not to tell you that budgeting will solve all of your problems and that once you create the perfect budget, the weight of the world will be lifted off your shoulders—although for some people it will. Making a budget is not imperative for your success – many Americans alike get up and go to work everyday, make a modest salary, and support a family with discretionary income leftover all without ever touching excel. Where am I getting at? If you don’t have a reason for making a budget, then you simply won’t. Money is different things to different people – a blog post in its own—and some people do not care to know how much money they are making on a monthly basis.

However, what about the gentleman who finds himself with enormous tax debt and needing to do an offer in compromise with the IRS? To do that, he has to do a 433-A (OIC) which asks you to provide monthly income and expenses–essential a monthly budget.

Will creating a budget reduce my taxes? Not necessarily. Whether you make a budget or not, your income will always be subject to taxes. However, it does help plan your tax liability and gives you a more accurate picture of what your taxes and tax bracket could be given accurate estimates.

Photo by Tax Credits at Flickr.com

Updated December 2013

Today, I’m talking about budgets.  I’ve even got a free “gift” for you.  It’s a home budget planner.   All you have to do is click on this link  RTS Budget Planner and  download the excel spreadsheet and start inputting the numbers.

The basic idea is that you want to make more money than you spend.  Now I confess, I have a little experience with this—it’s not always as easy as it looks.  I’m way better at spending than at making money (Just ask my husband).  But I also know that when I set up a budget, I’m more careful with my money, and for me that’s half the battle.

If you’ve never tried using a family budget before, here are some things that I’ve learned over the years.

1. Expect your first draft of the budget to not be perfect.  Make your budget and try it for a month or two and see how it works.   What  did you leave out?  What did you underestimate?  What did you over estimate?  Expect to make some changes.
2. The first draft of your budget should include everything that you really do spend money on.  You may need to trim your budget,  but you have to know what you’re spending your money on before you start trimming expenses.
3. Budget for things that are important to you, don’t eliminate stuff just to make your budget look good.  If you go to the movies  regularly, budget for it.  If you smoke (even if you want to quit)—budget for it.
4. If you’re married, be prepared to compromise.  When I’ve done budgets in the past, I cut my husband’s lunch money and cable  TV.  I bring my lunch to work and I don’t watch that much TV, so why pay for those things?   But if I want to stay married, my  husband needs to eat and have access to his beloved Cardinals baseball team.   We kept the cable TV and trimmed the budget  someplace else.
5. Remember to budget for charity and savings.  Now many people do a budget to see how much they can save or how much they can  give to charity.  I suggest that you decide up front how much you want to save and to donate and stick that right into your budget  from the get go.  If you do the budget and decide to save what’s left over—you won’t be saving anything.  The general  recommendation is 10% of your take home pay for savings and another 10% for charity.
6. Depending upon who you talk to, your housing costs should run somewhere between 25 to 33% of your take-home pay, but that’s  just a guideline.  For many people, housing costs take up a much higher proportion of their income.

Those are my main tips.  If you’ve got a good budget tip, please put it in the comments section below.   In this economy, we all need all the help we can get.

Happy budgeting.

# Budget Hero

Think you got what it takes to make a sound Federal budget?  Ladies and gentlemen get your calculators ready – it’s time to play Budget Hero!

This game was created and is owned by American Public Media and appears here with their permission.