Financial Peace University: Week 9: Of Mice and Mutual Funds

This week was about the basics of investing.


Yay! By this point in the Financial Peace University program, we are learning about Baby Step #4, INVESTING! Dave advocates investing 15% of your household income in mutual funds.  By this baby step, you have paid off all consumer debt (except the mortgage), and have a 3-6 month emergency fund saved.  Now it is time to start building some wealth.  Dave Ramsey teaches that mutual funds are a great way to invest.  Of course, in an hour long lesson, we will not know all of the in's and out's of investing, but he points us in the right direction.

His first rule of investing is to never buy something you don’t understand. Only invest in companies and products that you can explain to a seventh grader. Stick to things that are easy to understand, or in other words, use the "KISS" principle: KEEP IT SIMPLE STUPID! Often times, financial planners or investment counselors use such complex terms that we don't know what we are getting into.  Keep it simple, and understand everything you buy.  Investing is methodical, week by week, month by month.


Dave begins by covering the basics of risk versus return. In other words, the safer and more liquid (accessible) that you want your money to be (low risk), the lower the potential return will be.  Safe investments are typically CD’s and money market mutual funds.  However, they tend to often time not even come close to the rate of inflation.  Riskier investments (with generally higher rates of return) include single stocks (Dave says DON'T DO THAT), bonds, mutual funds, and real estate.  Real estate is one of Dave's favorites, but only when he can pay cash for it.  Real estate takes a lot of money to get into, and also to maintain. It should not be used for short term investments, but has a great return for the long term.


He spent quite a bit of time talking about diversification, or not "putting all of your eggs in one basket". This protects your investment more than about anything.  Diversification is investing your money in many different products, companies, and levels of aggressiveness. You don’t want to have all of your money in one company’s stock (even if it’s the company you work for), or one mutual fund.  If for some reason that company crashes, you will lose all of your money.  Investing in multiple funds, stocks, and industries makes sure that even if one company or product tanks, your others will take up the slack. This makes it much less risky. Dave’s standard mutual fund diversification is as follows:


25% in Growth (mid cap): These are mid-sized companies that still have a lot of room for growth.
25% in Growth and Income (large cap): These are big, well established companies that grow a little but mostly stay stable.
25% in International: These are overseas and foreign companies.
25% in Aggressive Growth (small cap): These are small companies and emerging markets that have a lot of potential to grow, but alo have a lot of potential to crash.


Dave then tells us that your money will need to earn at least a 6% return in order to compensate for inflation and taxes. With that you simply break even. Dave shoots for an average of 12% return with his mutual funds. With the down markets we have had over the last several years, that would be hard to come by. He also recommends funds that have a strong track record for the past 10 years.


All in all, this class was an eye opener for me (and the class). When we looked at how debt has robbed us from earning real wealth, it was sickening.


Click here for a visual representation of what saving 15% of your income can look like. This is from Doughroller.net, and it puts it all in perspective.

Financial Peace University Week 6: Buyer Beware

This week – Buyer Beware!

This week we talked about common traps to avoid when buying things.   Some of the important points from the lesson:

1. Learn the marketing method companies use to market products and services to you. You can be in control!
2. Wait 24 hours before making a major purchase larger than $200 (or whatever amount you and your spouse decide on).
3. Always talk to your spouse before making a major purchase.

Know the marketing techniques businesses are using to get you to SPEND:

Almost all businesses use highly trained individuals to get you to buy their product.  Most companies use the same tactics and marketing ploys.  Why? Because they work!  If we know what the tactic is, we can spot it, and hopefully not fall into the trap.

For example, one tactic a lot of companies are using is the 0% financing offer.  They lure you into buying a product (dryer, a car, a big screen TV, etc), with the 0% offer.   What they don’t tell you (except for in the fine print) is that if you don’t pay the balance of that loan in full by the time the initial term is over, your finance rates will shoot up considerably (often to 30% or more) , and you’ll often be liable for the finance charges for the 0% term as well.  Or, if that isn't bad enough, the cost of the 0% financing is already added in to the product you are buying.

Wait 24 hours before making a major purchase:
This one step is crucial.  This often eliminates the impulse purchases we all make.  If after the 24 hours you really need it, and you have the cash to pay for it, great.  Often times when we wait for the 24 hours, we realize that we really didn't need or want the item.  It was just a spur of the moment impulse.
Always talk to your spouse before making a major purchase:
Only after discussing and counseling with your spouse should you make a major purchase.  This keeps the lines of communication open, and the trust there.  Often times your spouse can help us decide if we really should get the item.

Look at the opportunity cost of the item:
This means, look at what you are giving up to buy that item.  Is it worth it??

Understand about the item before you buy anything:
Dave Ramsey talks about how we should never purchase anything that we don't understand.  This could be for insurance, mutual funds, or even a new camera. 

Next week
Next week is a lesson entitled “Clause and Effect” which deals with common traps to avoid when buying insurance of all kinds. See you next week!

Financial Peace University Week 4: Dumping Debt

This was one of the most intense weeks ever in class!  The DVD was very inspiring and motivating.  At the end of the class, each of us were ready to go and conquer any and all debt!
This week's lesson: Dumping Debt!

Last week our class added up the total amount of debt (not including the home mortgage) that we had.  I was FLOORED.  The total came in at just under $460,000!!  Wow.  This lesson really hits home for a lot of people.

Imagine being DEBT FREE.  Dave teaches about how to do this, which is Baby Step #2 – Paying off all debt using the debt snowball.

Key points from this lesson:

1. Being Gazelle Intense is the only way to conquer debt.  A lax attitude will not get you very far!!  As Dave Ramsey says, "YOU HAVE GOT TO KICK IT BABY!"
2. Debt has only become accepted as normal in America in our generation.  Our great grandparents abhorred debt.  Our grandparents didn't like debt.  Our parents used debt for the big stuff (house and car), and we use debt for EVERYTHING.
3. Make a commitment to never use credit cards again. This is the first and most important step to dumping debt. In class, we had people come up and cut up their cards.  It was very emotional, and liberating.
4. Do not become slave to the FICO score. It seems that we will do anything to have a good credit score.  It really is an "I love debt score".  Some people claim that credit is the only way to: rent a car, get a mortgage, etc.  Dave says that there are other ways to accomplish these things.  A debit card has the same protection as a credit card.  And yes, you CAN get a mortgage without a FICO score.  Debt should never be the first way to accomplish anything.
5. The rich rule over the poor, and the borrower is servant to the lender. Proverbs 22:7

Baby Step 2 – The Debt Snowball I previously posted on this topic in detail, so click here to get the info.  Here is the short version of Baby Step #2, The Debt Snowball.
Here’s how the debt snowball works:
Step 1 – Make a list of all your debts, ranked in order from the highest balance to the smallest balance.
Step 2 – Beginning with the card with the smallest balance, pay as much as you can on that card while paying the minimums on the other cards.
Step 3 – Once the card with the smallest balance is paid off, take the amount you were paying towards that card and apply to the card with the next lowest balance.
Step 4 – Keep on paying them off until ALL the debts are paid off.

Steps to getting out of debt:

1. Quit borrowing more money!! Commit right now to NEVER take out any more debt.
2. Cut up your credit cards. This was hard for me!  Although I haven't used credit cards for several years, I have kept them for an emergency.  No more!
3. Get an extra job. Even if it is temporary, the extra income can really accelerate the debt snowball.
4. Sell stuff.  Plan a yard sale or put stuff on ebay.  Use the cash to pay toward your debt.
5. Get the debt snowball rolling! Pay off the lowest debt first, then add the amount you were paying for that debt and roll it over to the next debt.
6. The average person who applies these principles is DEBT FREE except for the house in 18-24 months!!!

Here is the Dave Ramsey Debt Snowball Form:


Debt Snowball Form

Financial Peace University: Week 3: Cash Flow Planning

This week in our Financial Peace University class, we learned about "Cash Flow Planning", or in other words, the big B word..... BUDGET!!  It is so true, if we don't tell our money where to go, and what to do, it disappears. Money that has a name, and a purpose, on paper, goes farther.  I was surprised how many of our class have never kept a budget.  The problem with not keeping a budget, is that debt slowly creeps in.  Money is not accounted for, and problems begin.  With a budget, every dollar is accounted for, assigned a category, and planned how it will be spent before it ever even comes in.

Some key points from this week’s lesson:

1. Spend all money on paper before the month begins. You don’t want money not being allocated, and then “disappearing”.
2. Use the Envelope System for successful cash management for food, clothing, entertainment and other categories that are easily overspent.
3. Give your budget 90 days to really start working.
4. Plan on a fight as you do your first budget.  However, if married, each partner has a vote!!

Budget Committee Meetings:
Last week we talked about "budget committee meetings" and how each partner is responsible for the budget.  Nothing is spent that is not in the budget without an emergency budget committee meeting.  Dave said the first month you will have a whole lot of emergency budget committee meetings, but as the months progress, and we get better at our budgets, those meetings will be fewer and farther between.

Zero Based Budget
The type of budget that Dave recommends is called a zero based budget.  If you are new to zero based budgeting, click here for a detailed post how to do this. Basically, you spend EVERY dollar on paper before the month begins.

The envelope system:
After setting up your zero based budget, the next step is to setup your envelope system of budgeting for certain spending categories. If you have never used an envelope system before, basically it boils down to this:  At the first of the month, you put the budgeted amount of CASH into envelopes marked with certain categories that are easy to overspend.  For us, the envelopes we use are food, clothing, entertainment and blow money.  Simply get an envelope, take a sharpie marker, mark what category it is, and fund it with cash.  When the money is gone, it is GONE.  Overspending is virtually eliminated.  If you do need more money for that category, the money must be taken from another envelope, or another spending category. There is no free money, it has to come from somewhere!

Here is an excel spreadsheet to walk you through the zero based budget.  The fields highlighted yellow are good ones for cash envelopes.  My husband and I have done zero based budgeting for years. I love it!! It seems that money is found, and can be applied to whatever baby step in the plan you are on.  I can't imagine not living on a budget.
Click here to download excel version.

Financial Peace University: Week 2: Relating with Money

Last week I reviewed week 1 of Dave Ramsey's Financial Peace University.  In review, week 1 talked about the importance of:

• Savings must become a priority.
• You must save for an emergency fund, major purchases, and wealth building.
• Decide and agree with your spouse on what qualifies as an emergency.

We have quite a large group attending, so I decided to split the class into 2 groups for discussions.  That seemed to be more manageable.

Week 2: Relating with Money
This week the topic of discussion in class was the importance of working together in relationships and how we as individuals handle money differently.  While the number 1 cause of divorce is money matters, this lesson I thought was particularly useful.   How we manage our money can affect our personal relationships, especially with those who we are closest with.  One spouse may be more of a "nerd", one who has a natural tendency for budgeting, enjoys it, and likes to work numbers.  The other spouse may be what Dave Ramsey calls "a free spirit", who does not like to think about budgeting, does not enjoy it, and likes to pass it off to the "nerd".  When two opposites in money matters are together, there are bound to be problems.  This is why it is important to learn to work together, and find common ground.
Some key points from this week’s lesson:

1. Men and women think very differently about money. For men it is often more of a tool, something to be used. Men like to negotiate.  Women like to hunt for the deals. For women it often means security.
2. The nerd and free spirit must learn how to work together.
3. If you are single, find an accountability partner with whom to discuss your finances.
4. Teach your children how to manage money so they avoid our mistakes.

Budget committee meetings
Dave Ramsey talks about the need for family “budget committee meetings” where both partners in the relationship talk about the monthly budget, and have a stake in it. More than once in the presentation, Dave asks, "Who is responsible for the budget?" You both are!!

Dave Ramsey states: "The challenge in a marriage is to work through the different identities, ideals and values you each bring to the relationship. You win at marriage by losing your need to get your way in every battle. You get a happy marriage by giving up selfish desires in order to win together—you create shared visions and goals out of your own individual goals!  That’s why it’s important that both spouses be involved with creating the monthly budget. The partner with the natural gift can prepare the budget, but the decision-making must be done by both of you. When you sit down with your spouse to have a budget committee meeting, there are three rules that each of you must follow.

Rules for the nerd: Listen. Take input. Keep it brief.

Rules for the free spirit: Show up. Give input. Be realistic.

Remember that opposites tend to attract in marriage, so work together for maximum wisdom. When you have a budget that reflects both of your goals and ideals, you will experience fabulous unity in your marriage."

New Year... Financial Peace University!!

Happy New Year!  I cannot believe that 2009 is now a thing of the past.  I loved Christmas, and New Year's, but I am sure glad to be starting a new year.  I am ready to start saving money again.  It seems like Christmas always costs a lot, even when budgeted for.

My ward is hosting Dave Ramsey's Financial Peace University!  I can hardly wait!  My bishop asked me to be the moderator of the class.  We passed around a signup sheet today, and it seems like there is a lot of interest.  We are starting the 9th of February, and I will post what is taught each week. I can hardly wait!  I love Dave Ramsey, and we have been following his plan for several years.  What a difference he has made in our lives!! Those who complete the 13 week course on average pay off $5300.00 of debt and save $2700.00 in the 90 days.  Amazing!!

Budgeting on an Irregular Income

The great thing about a budget is, it keeps us on track, right?  I have come to feel like a person without a budget is like a car being driven by an 8 year old!  Scary!  I only know that from experience, unfortunately.

What about when there is not a steady income?  Here is a small article that I submitted to the Random Sampler in the Ensign magazine a couple of years ago about budgeting on an irregular income:

“Random Sampler,” Ensign, Mar 2007, 72–73

Budgeting on an Irregular Income

Katie Stone, “Budgeting on an Irregular Income,” Ensign, Mar. 2007, 72

One of the hardest things my husband and I have encountered while being self-employed is maintaining a budget. With a fluctuating income, it can be a challenge to plan for expenses. For us, the key to successful budgeting is creating a “steady income.” We do that by depositing all net income into one account and paying ourselves a monthly household salary, a median of the highs and lows. In other words, even when the previous month’s income was high, we maintain an average income, thus leaving enough to cover the low-income months as well. To successfully track our spending, we have established a detailed spending plan that includes all our fixed and periodic expenses. We also maintain a careful savings plan. The saying “don’t count your chickens before they’re hatched” is especially relevant when you are self-employed. You cannot spend what you make month to month. You have to look at the overall picture and set a budget plan within fixed parameters.
Katie Stone, Utah

BYU Personal Finance

Budgeting and saving money are hobbies of mine. I am always on the look out for sound financial information to help me and my family be prepared financially. Since my husband is self employed, and income is irregular, it is especially important for me to be a wise steward over our finances. Luckily, there are so many resources to help. If you haven't checked out the BYU Personal Finance site, I highly recommend it. It is all free, and it has a wealth of information. Check it out!

The Fully Funded Emergency Fund: Baby Step #3

Today I wanted to post on Dave Ramsey's Baby Step #3, Fully Funding your Emergency Fund. If you are on this step, that means that you have completed Baby Step #1, the $1000 beginner emergency fund, and also Baby Step #2, the debt snowball. So now, you are completely out of debt (except your house). This step (#3) is probably the easiest to understand, but not the easiest to actually DO.

If you’ve been working the Baby Steps and you paid off your debt using the debt snowball method, that means you can simply start putting the same amount of cash that you were giving to someone else and put it in your savings account instead. For instance, if you paid your last Discover Card bill of say $500 in April, now in May redirect that $500 to your saving account. Your monthly budget will stay the same for a while as you get that emergency fund nice and fat.

Q: How much should I have in my Fully Funded Emergency Fund (FFEM)?

A: That depends. Most financial experts recommend 3-6 months of expenses, not income. Big difference. I think the best way to determine how much you need, is determine where you will feel "peace". For my family, we feel we need the 6 months of expenses. If you are single, with a steady, secure job, 3 months may be adequate. If you are self employed, like my husband, 6 months may be better. Suze Orman changed her response from 6 months to having a full 8 months of expenses saved. Talk it over with your spouse, and decide how much you would need. When figuring out how much your expenses would be per month, remember that in a true emergency, you would spend far less than your income. If you lost your job, what budget categories would you still need? These usually end up being: mortgage or rent, utilites, food, gas, insurance, and phone service. In the event of a true emergency, you would probably cut out or spend significantly less on eating out, entertainment, lessons, gift giving etc. Lets take a look at the Smith's (a fictional family). Here is what they think they can get by with in an emergency:

• Mortgage: $1000
• Utilities: $250
  
• Gas: $100
• Food: $300 (they use/rotate their food storage)
• Phone: $100
• Insurance: $400

Total: $2150 per month
For 3 month FFEF: $2150x3=$6450
For 6 month FFEF: $2150x6=$12,900
For 8 month FFEF: $2150x8=$17,200

Because the Smiths are self employed and have several children, they decided to make their goal be $15,000.

Q: What constitutes an emergency?
A: An unexpected event such as a medical emergency, a job loss, a car wreck, etc. Christmas is not an emergency. A "great deal" on a new bedroom set is not an emergency, nor is a dream vacation to Hawaii. It is great to save up for these things, but not with the emergency fund.

Q: Where should I store my emergency fund?
A: Dave Ramsey said that any bank savings account is fine. It needs to be liquid, or in other words, easily accesible. However, you don't want it too accessible. We decided to put ours in an "add-on CD" through our credit union. We get 3.5% interest on it, can withdraw it penalty free for 5 days each quarter, and add to it as often as we want. If we needed to withdraw it anytime besides those 5 days, we would lose the interest for that quarter. We decided that was still better than getting the terrible interest rates that the banks are offering in their savings accounts. Another option is online banks. They usually give you a higher interest rate.

Q: How long will this take?
A: That depends on how much you are going to save each month, how committed to putting every extra penny in the account, and the interest you are receiving. If you could put $1000 per month into your emergency fund, it would add up pretty fast. Our example of the Smiths could have their FFEF done in just over a year.

Q: Is it worth it to sacrifice a bit longer to fully fund my emergency fund?
A: Think ahead a year.... you decided that you didn't think YOU needed the emergency fund. Unfortunately your husband lost his job, or your car died. Even worse, you had a medical emergency in your family. Now, do you think it would have been worth it? Having the peace of a fully funded emergency fund is one of the greatest goals I think anyone can have. YES, it is worth it.

Below are some quotes on Emergency Funds:

"What do you do when your car breaks down in the morning, your wife calls later to tell you the dog ate the sofa, you lose your biggest account in the afternoon, and when you get home in the evening you find a note from the plumber saying he replaced the living room baseboard, and P.S., your furnace is dead? You express deep gratitude for your contingency fund, that's what."
— Jerrold Mundis, How to Get Out of Debt, Stay Out of Debt, and Live Prosperously

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"Maybe you've felt it. The rush in the pit of your stomach when you hear the pinging sound in your car, and you wonder how you'll ever pay the mechanic. The tightness in your chest when the plumber tells you it will be $185 to fix the shower. The rock-hard knots in your back when you realize that the check you mailed to the electric company will probably bounce.

These are the feelings of not having any Savings. And when you start to save — when you really sock it away, month after month — these feelings stop. You can put these feelings in a box and mail them to the moon, because they won't be with you anymore."
— Elizabeth Warren and Amelia Tyagi, All Your Worth (2005)

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"The basic truth is that you must plan for the unexpected, because it will happen. Although we don't know what form it will take, it will come. Cars do break; women do get pregnant; people do get hurt or die; businesses do lay people off. To think otherwise is naive. So you have to plan for it. Saving into an emergency fund is an essential element for financial peace."
— Dave Ramsey, Financial Peace (1995)

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"You start the emergency fund with $1,000, but a fully-funded emergency fund will usually range from $5,000 to $25,000. The typical family that can make it on $3,000 per month might have a $10,000 emergency fund as a minimum. What would it feel like to have no payments but the house, and $10,000 in savings for when it rains?

Remember what we said about emergencies a couple of chapters back? It will rain; you need an umbrella. When the big stuff happens, like the job layoff or the blown car engine, you can't depend on credit cards. If you use debt to cover emergencies, you have backtracked again. A well-designed Total Money Makeover will walk you out of debt forever. A strong foundation in your financial house includes the big savings account, which will be used just for emergencies."
— Dave Ramsey, The Total Money Makeover (2003)

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"The amount you need in your emergency fund is not the same as what you earn in three to six months. It's also not what you typically spend. When you're working, you spend much more freely than you would if you were just trying to get by."
— Jean Chatzky, You Don't Have to Be Rich (2003)

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"Why bother to become a better saver? Because boosting your saving prowess can have a huge emotional payoff. Nine out of ten savers say they're 'happy' with their lives. Savers are more likely than spenders to be happy with their lifestyle, self-esteem, even their weight and appearance. They're more likely to feel confident and content, less likely to feel stressed and restless. Spenders are just the opposite: They're more likely to be frustrated with their lot in life."
— Jean Chatzky, You Don't Have to Be Rich (2003)

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Small steps are inevitably going to be your first steps, and they definitely count. Once you have put aside $25 one week and discovered that you can live in fact without that $25 in your spending account, then you have the confidence to know that you can do it again. You may even have the confidence to think, "Well, hey, if I put aside $25 and I didn't miss it, I'm going to try to put $50 aside and not miss it."
— Jean Chatzky, Bankrate.com Interview, 2007-07-23

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"You need to understand and know that the main unknown in your financial life — and where most people tend to get in trouble with their money — is when something happens that you are not expecting. A job loss, an accident, a family crisis, an illness (either your own or that of a parent or child), a death or disability, or an unexpected divorce — each is an unforeseen even that affects your expenses and finances. When an unforeseen event does occur, your biggest problem usually will be to know where to get the money you need to pay for your known expenses and your unknown, unanticipated ones until you can become safe and secure again. Keep in mind that your financial world can be shaken or destroyed by very common, unforeseen possiblilties. This has always been the case, of course — and in a time of economic and global uncertainty, it is especially true. People who sail through difficulties with relatively little financial harm do so because they have prepared for them."
— Suze Orman, The Laws of Money, The Lessons of Life (2003)

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"Another problem that you may encounter in preparing for the unknown is that you find it hard to save — and can't imagine setting up an account with eight months worth of expenses in a short amount of time. Well, my friend, if this is the case, the way for you to create an emergency fund is simply to take every extra penny you have, put it into a money market account, and save it there. You have to make a decision here. Which means more to you — having a Starbucks coffee this afternoon and going to the movies tonight, or knowing that you and your loved ones will be protected even if you lose your job or get sick? Doing what is right for you — including making sure you'll have what you need in any sitution — may mean giving up what you want right now to pay for what you could need later on. I hope you decide to do this, for you'll be amazed at how much control over your life you will feel with your emergency fund standing behind you."
— Suze Orman, The Laws of Money, The Lessons of Life (2003)

Paying for Food Storage

As I look around and see friends who are struggling because loss of jobs, etc, it makes me even more appreciative of food storage. However, the #1 excuse for not having a year supply of food is "It just costs too much" or "I don't have enough money." Does obtaining a year supply of food totally freak you out financially? It sure doesn't have to.

Food storage is anything that you are not eating right now. Anything in your pantry is food storage. Anything in your freezer is food storage. Anything in your "food storage room" is food storage.

Here are some ideas that have helped our family:

1. Do not buy your food storage all at once. Most families would not be able to afford that! How do you eat an elephant? One bite at a time. Absolutely do not go into debt for food storage.

2. Each week, grocery stores have "loss leaders" on their ad. These are generally 1-5 items that lure you into the store. These items will be on sale for less than what the store pays for it. The idea of loss leaders are to get you into the store, in hopes that you will buy lots more while you are there. When an item is a loss leader, buy your year supply of that item. For example, when ketchup was on sale for .59 cents, I bought 12 bottles of it. That cost me only $7.00 (not a huge increase of my budget for the week), and now I have my year supply of that item. Often times, I would buy 3-4 loss leaders per week, buying the whole year supply of that item.

3. Make goals for your long term storage (beans, rice, flour, oats, wheat, powdered milk, etc). I would make a goal for the month. For example: This month I am going to get 1 five gallon bucket full of wheat (about $8), one bucket of rice, and one bucket of oats. These are very attainable goals. I have found that the LDS cannery usually has the best price on wheat, oats, beans and powdered milk. I have found rice and flour cheaper at Sam's and Costco.

4. Use 5 gallon buckets for wheat, beans, rice, flour, & oats. Did you know that most bakeries will give you their used icing buckets (usually 4-5 gallon buckets) for free? I got all of my buckets (except for two that I already had) for free. Reams in Springville, UT, and Buy Low Market in Provo, UT love to give you buckets for free. A couple of other bakeries wanted to charge $1. Just call around and see who will give them to you. Do NOT use 5 gallon buckets for powdered milk. I only store milk in #10 cans. I do buy gamma lids for my buckets. These are lids that snap on but twist on and off. They are airtight, but MUCH easier to get into. They are expensive (but worth it) at about $6 per lid. Make sure you number each of your buckets as you fill them. When you have your year supply of that item, you should only have one bucket open at a time. When that bucket is gone, refill it, and start on the next numbered bucket. This way you are always using the oldest first. This idea came from my friend Vanessa. Thanks Vanessa!

5. Coupons. I have started couponing and seriously can't believe how much I am saving. Just think, if you save say $50 per month with coupons, you have an extra $50 that month for food storage. That would fill a few 5 gallon buckets.

6. Only buy items on sale. Stores cycle their ads about every 3 months. If you buy at least a 3 month supply of an item when it is on sale (preferable a year supply), then you won't have to buy it again until it is on sale again.

7. Food Storage Date Night. Instead of going on your regular date for the week, do a free date and use the money saved for food storage. If you forego only one date a month (dinner and a movie), you could easily have an extra $50-60 for food storage.

8. Tax Returns. This is the perfect time of year to use some of that tax return for food storage.

9. Store brands. Often times store brands can save you big. However, make sure that you buy one or two cans/boxes/bottles first to make sure you like them. No sense saving money on food you don't necessarily like.

10. Canning. When you find a great deal on meats, buy a bunch and pressure can it (future post). When boneless/skinless chicken breast is on sale, I buy 40-80 pounds and can it. Same with pork, hamburger, steak, etc. Canned meat is a great thing to have in your food storage. Do the same with fruits (apples, pears, peaches) and vegetables (beans, beets, etc). Last year I went to the fruit orchards and bought boxes of 2nd quality apples for $5 per box. One box did 14 quarts of applesauce!

11. Your food storage is an extension of your pantry. It is nice to be able to "shop" in your food storage room for the items you need. Take is slow. Take it steady.

12. Ask for food storage for Christmas or birthdays. The peace of mind we receive from having our food storage outweighs many of the other things we could receive.

13. Plant a garden. For several dollars you can get seeds to plant enough produce to feed your family.

14. Eat at home. This alone can save so much money- which can be put towards food storage. Not to mention much more nutritious.

15. Know that the Lord will bless you as you endeavor to build your food storage.

Got debt? Baby Step #2

Got debt? Join the club! Today I read an article about debt that had some statistics that were quite surprising. I thought I would share them:

• Today’s consumer has an average of 13 debt obligations on their credit report.
• The total amount of debt owed by Americans is more than 2.5 trillion. $8,500 per person on average.
• 38% of the 2.5 trillion comes from credit card debt.
• The average amount of credit card debt per card holder is $12,500 according to the Federal Reserve.
• 74.9% of families had credit cards and 58% of those carry a balance.

Hopefully you do not fit into the categories listed above. But, if you are a "normal" American, you just might. So, what to do? Yesterday's post was on baby step #1, obtaining a beginner emergency fund of $1000. Once that is done, it is time to move on to baby step #2, getting out of debt.

Baby Step #2: Pay off your debts in order of smallest balance to largest. "Snowball" the payments as you go.

List all of your debts on a paper (or a spreadsheet if you prefer) arranged from smallest balance to largest balance. (Don't worry about interest rate unless you have two equal debts. In that case, list the largest interest rate first). Now, this is where the fun begins! This step is the hardest to complete, but probably the most satisfying. I can't even tell you the joy and peace I felt when each debt we had was finally paid in full! Most people can be completely debt free (except for their home) in 18-24 months. Yes, completely.

Start focusing on the first debt with the smallest balance. Every extra penny you can find goes to pay that balance down quickly. Do everything you can (even get a second or part time job) to reduce the first debt. Keep paying the minimum on all other debts. Once that first debt is paid and gone, then "snowball" its monthly payment: Add it to the normal payment you're making on the next-smallest debt, and focus your efforts on that next debt. It is amazing what happens when you are totally focused on this step. When that one is paid off, take that monthly payment amount and apply it toward your next debt. Each time a debt is paid off, the amount you were paying on that debt now is added on to the next debt. Make sense? Each debt that you eliminate makes the "snowball" get bigger and bigger, wiping out everything in its way.

"I’m convinced of the unstoppable potential of people when they get on fire for something."
— Dave Ramsey

You may wonder why the debts are not listed by interest rate, with the highest ones being paid off first. Dave explains: "The reason we list the debts from smallest balance to largest is to have some quick wins. Sometimes behavior modification is more important than math. This is one of those times." I personally have to agree. As we paid off each debt, we were so excited and couldn't wait to see how quickly we could get the next one paid off. It's amazing how fired up you become when you see success. Somewhat like dieting.

Remember: If you're working on this second Baby Step and some emergency arises which forces you to spend any part of your emergency fund, then immediately stop this step and return to Baby Step #1. Stay there until you've refunded your Emergency Fund in full.

It is important not to start your debt elimination on this step. If baby step #1 is not in place before starting baby step #2, this and all steps can be in serious jeopardy. We had to dip into our beginner emergency fund several times. Thankfully we had it! We were able to get through the "emergencies" without incurring additional debt, repay it, and get back on track with baby step #2. Just think how good you will feel, when those nagging debts are gone. BYE BYE.

You can find many debt snowball spreadsheets for free online. It is very motivating to see just how quick your debt can (and will!) be gone. Keep up the good work.

Beginner Emergency Fund- Baby Step #1

How many times have your found yourself with an expense that you did not foresee? Even worse, what if you haven't budgeted for it? What if you don't have the money for it? Often times people have to turn to the old stand-by of credit cards to help them through these "emergencies".

We have been counseled to get out of debt. Hopefully everyone reading this is either

• completely debt free
  
• working extremely hard to get out of debt or
• looking for help to get started.
  

Using a credit card, even for emergencies, can totally be avoided.

The way that my family squashed all consumer debt was by following Dave Ramsey's plan. For those who have not read "The Total Money Makeover", I highly, highly recommend it! I will post on each of Dave's "baby steps" to complete financial freedom. The first baby step to debt elimination (I believe that the pre-walking phase is to make sure you are paying a full tithe) is to obtain a beginner emergency fund. This fund should be $1,000.

Baby Step #1: Make minimum payments on all your bills. Squeeze your budget until you've accumulated $1,000 cash. This is your beginner Emergency Fund.

You'll never make headway in your quest to get out of debt if you don't have at least a little something to fall back on. That "little something" is called an Emergency Fund, and that's what this first $1,000 is for (or $500, if you make less than $20,000 per year). Put everything else on hold. Make only minimum payments on all your debts; take on a second job if necessary; squeeze that budget! Forego retirement-plan contributions (temporarily) if you can. Get your emergency fund together first. Get it together fast. Most people can realistically get that in 1-2 months. We had a yard sale to get ours. Amazingly, we made $900! By cutting out restaurants and movies etc for a few weeks, we were able to save the remainder.

If you already have more than $1,000 in savings, and in anything other than a retirement account, withdraw everything except the $1,000. Use these proceeds for Baby Step #2, which will be posted soon.

Once you have accumulated the $1,000 (or $500), keep it someplace where you cannot easily get at it.

It must be available, but not easily available.

It must be spendable, but not easily spendable.

Why? Because if you are like most, if the money's right there in front of you, you're going to find a way to spend it. And that's not what we want. $1000, fast.

"Sometimes," Ramsey instructs, "you have to protect yourself from you."

What is considered an emergency? Christmas is NOT an emergency. A great sale is NOT an emergency. Before spending ANY money out of the emergency fund, discuss it with your spouse, and agree that it truly is an emergency. Then, quickly replace the funds spent. You always want the full $1000 in the beginner fund.

So, grab a paper. List all the ways you can earn (or save) some extra money. Congratulations! You are on your way.

Zero-based Budget

Several weeks ago I received a phone call that I had been chosen for a "Success Story" on the Mvelopes website. Mvelopes is a budgeting program that I use to keep on track with our finances. Whatever you use for budgeting, STICK WITH IT! I truly believe that budgeting is the only way to achieve financial peace, and to avoid the debt trap. To see the story, click here. (If that doesn't take you directly to the story, click on "blog" once on the mvelopes website, then you can find it.)

This is why I decided to post on budgeting. I LOVE BUDGETING! It brings such peace and freedom! Much of this explanation of zero based budgeting comes from Getting Finances Done. It explains it so well that I wanted to share. This is the type of budgeting I have done for the last 4 years. I can promise you that financial peace can be yours with a little bit of knowledge, and a lot of doing.

One of the ways to make your budget work is to create a zero-based budget. Today’s post outlines how to create your first zero-based budget. Over the next few weeks I’ll be addressing various aspects of creating and managing a budget. Let’s start with the basics. Some of these steps may seem obvious or simplistic. But for those who just can’t seem to get a budget started, I hope to give you some step-by-step detail that will help make creating a budget easier. Are you ready?

What is a zero-based budget?

A zero-based budget is one where your total income minus your total expenses equals $0. In other words, it forces you to assign every dollar of income to an expense (or savings) category. As Dave Ramsey puts it, you’ll be “spending your month’s income on paper” before you spend it in real life.

Benefits of a zero-based budget

Using a zero-based budget and properly dealing with the difference from month to month will allow you to gain total control over every dollar you spend. If you get a bonus or spend less than you planned during the month, you can easily redirect that money where you really want it instead of letting it dissipate through unfocused spending.

A word about spreadsheets

I highly recommend using a spreadsheet to do your initial budget because it’s very easy to calculate amounts and rearrange the order of items. If you don’t have Excel, you can download the free Open Office CALC spreadsheet software or use a free online spreadsheet like Google spreadsheets. Simply using paper and pen is OK too. If you do, you may need to re-write it a couple of times and be sure to double check your calculations.

When first starting your budget I would NOT use the budgeting tools in Quicken, MS Money or other automated tools. You may be able to use those tools effectively once you have a solid hold on your budget, but for now it’s best to make your budget by yourself so you know every nook and cranny. That way you’ll be less likely to make errors due to not understanding how an automated tool is built. You will also be more likely to use a budget if you create it yourself. Once you have a high degree of confidence that your budget is working properly, feel free to experiment with pre-built tools and spreadsheets like mint.com, or my favorite, mvelopes.com.

Preparation: Get out those statements

Before you get into the thick of things, you’ll want to do a little preparation by collecting the following:

• Pay stubs
• Records for other income such as bonuses, gifts, and tax returns
• Copies of your recurring bills
• If you track expenses in Quicken or MS Money, print out monthly reports of your expenses for the last few months
• If you use checks regularly, it may be useful to have your check register on hand

Agree to be civil

Now take a few deep breaths. If you are doing this with a spouse, agree to be civil. Ask yourself “how can I do this and enjoy it?” As you go through the initial steps of allocating, don’t nit-pick too much. If one person wants to budget funds for a category and the other disagrees, let them budget the funds and you can go back later and adjust once you know if you’re over and by how much.

If this tends to lead to contention, just work on it for a set amount of time (15-30 minutes). Doing small bits at a time over a period of several days will lead to getting done without too many problems with your spouse.

Step #1: Write down all your sources of income for the month

Let’s get started. If you have a fixed paycheck once or twice a month, this step will be easy. Just write down how much you make every month. If your finances are really tight, you should do a budget for each paycheck to ensure you have the funds on hand to pay bills that occur in that time period.

If you are self employed or have an irregular source of income, you’ll want to wait until you get an actual check and then follow this process for just that check. In the meantime, you can follow this process for the money you have available in your bank account. Just use your balance as the income. For example, if your bank account balance is currently $3,000 then put that amount as your income. As we go through this process you’ll be allocating how you’ll use that $3,000 until your next paycheck.

Do I put down net or gross income?

It really doesn’t matter if you put down net or gross. If you use gross (the amount before taxes, insurance, etc that are automatically deducted from your paycheck) you need to be sure to include the categories and amounts that are automatically deducted from your paycheck in your budget. I prefer using net so that I don’t need to write the extra expenses down every month. Because taxes and insurance are the same from month to month I prefer to simply check the amounts every quarter or so to make sure everything is still the same. It’s more efficient to track them separately.

Of course, if you’re self employed, be sure to allocate for paying taxes.

Step #2: Write down a list of expenses

Write down a list of all the expenses you expect to have this month. I’ve included a list of possible expenses below to prompt your memory. Be sure to include expenses unique to only this month. Do you have a friend or family birthday? Is your registration due? This step may actually unearth some expenses that you forgot about. If you think of expenses that are coming up but not in this month, that’s ok, just go ahead and write them down and we’ll deal with them a little later.

• Income
• Paycheck 1
• Paycheck 2
• Other Income 1
• Other Income 2
• Expenses
• Taxes (if using gross income or you are self employed)
• Mortgage Payment
• Second Mortgage payment
• Household (yard)
• Utilities: Gas
• Utilities: Elect/Water/ Gar
• Auto: Gas
• Auto: Insurance
• Auto: Maintenance
• Auto: Registration
• Satellite TV
• Life Insurance
• Debt reduction
• Babysitting
• Clothing
• Grocery
• Grocery: Eat Out
• Grocery: Eat Out
• Grocery: Nonfood
• Medical
• Hair cut/personal care items
• Charitable Donations
• Emergency Fund
• New car savings
• College Fund
• Dry Cleaning
• Gifts: Birthdays
• Gifts: Christmas
• Gifts: Holidays and Other
• Household: Maintenance
• Retirement Savings
• Magazine Subscriptions
• Entertainment: Dates
• Entertainment: Video rentals
• Personal money (1 for each individual)
• Cushion

You’ll probably miss an expense or two at first and find yourself part way through the month saying “shoot, I forgot to budget for that.” To address this scenario, be sure to budget a “cushion” account. I recommend starting at about $100 at first. Over time, you’ll be able to get a feel if this is too much or not enough.

Include savings and debt reduction in expenses

When I say “expenses,” I really mean “funds that will be spent or allocated to other purposes.” Saying “expenses” is just so much easier. Include any savings allocations, debt reduction payments, or any other monetary outflows in your expense list.

Step #3: Identify your expense types

For this step, simply go through all the expense categories and mark if they are fixed, semi-fixed, or variable. Just write an “f,”"s-f,” or “v” next to the category (or in another column if using a spreadsheet). Fixed expenses are those that don’t change from month to month like your cable bill. Semi-fixed expenses are those that may vary slightly from month to month like a phone bill. As a rule of thumb, semi-fixed expenses shouldn’t vary more than $10 in a month. Variable expenses are those that vary from month to month more than $10 like groceries or gas expenses.

Step #4: Allocate your fixed and semi-fixed expenses first

The reason we marked each expense type was to determine the order to allocate them in. First allocate your fixed and semi-fixed expenses. I recommend doing this simply because it’s easy. Your fixed expenses will probably include your largest expenses, such as your mortgage, so it will be easier to deal with the smaller amount left over. Plus, most of your fixed expenses are probably not very negotiable without dramatic lifestyle changes or disruptions so they give you a sort of “hard landscape” around which you will fill in the variable expenses.

Once we are done allocating all our expenses, we’ll circle back and see if we want to eliminate one or more of the fixed expenses. For now though, allocate them all.

Average out your semi-fixed expenses

For your semi-fixed expenses you’ll have to average out how much you’ve spent over the last 3-4 months. No need to get too crazy or precise as long as your in the ball park. You’ll be wrong anyway.

How to deal with periodic expenses

There will be many expenses that won’t occur this month but that you will need to save for like car registrations, birthday and Christmas gifts, and some insurance payments. To ensure you have enough money when the time comes you need to start saving that money now.

Most people just divide these expenses by 12 and save that amount each month. DON’T TAKE THIS APPROACH WHEN STARTING A BUDGET. You will end up short unless that expense is a full year away. Instead you need to take each expense, count how many months away it is, and divide the total payment amount by the number of months. For example, if I have a car registration payment of $100 due in four months, I will divide $100 by 4. That means I should budget $25 a month to save towards the registration. As soon as I pay the registration, I can then divide the next registration payment by 12 and save little by little for next year.

This approach may cause a little strain on your budget at first because you will need to be saving a larger amount each month for the expenses coming up in the short-term. However, once you make the payment, your monthly allocation will go down for that category freeing up extra cash that you can redirect wherever you want.

Step #5: Allocate your variable expenses.

Now that you’ve gotten a good chunk of your income out of the way, it’s time to deal with what’s left (hopefully it isn’t depressingly little). So far we haven’t worried about calculating income minus expenses. If you want to, you can do a quick calculation at this point so you know how much left over you’re dealing with. Or you can just speed through and budget your variable expenses and do a mass calculation at the end.

Try not to scrimp too much on your necessity categories like food, clothing, and transportation/gas. Most people underestimate these categories.

Personal money

I highly recommend allocating personal money for each spouse. Having your own money to spend however you want is crucial to making a budget work. Even if you can only afford to budget $10 or $20 dollars, it will help your budget feel more manageable.

Step #6: Calculate the difference between income and expenses.

Ahhh, the moment of truth. Subtract your total expenses from your total income. This is where a spreadsheet comes in handy. You might want to be sitting down when you do this. Don't hyperventilate.

Step #7: Adjust your categories until income = expenses

Now comes the hard part. You need to adjust your categories until your income equals your expenses. This is where you will need to make some trade-offs between one category and another. This step is usually where the most conflict occurs between couples because it exposes their conflicting values. If things get too heated, it’s probably better to take a break and continue later. Just remember that this is your first budget and you will refine things as you go. You don’t have to feel locked in to the decisions you make now.

What to do with a positive difference

If you’re in this situation, congratulations! Now you just have to allocate the remaining money. The whole point of a zero-based budget is that you need to ALLOCATE EVERYTHING. That way the remainder won’t just disappear through unconscious spending. The good news is you can allocate it any way you want. If you are going to allocate it as money to blow, that’s fine as long as you consciously do so. Some other suggestions for allocating this money include:

• Pay down debt (THIS IS THE FIRST AND BEST CHOICE)
  
• Save for retirement or your children’s college
• Save for larger purchases like vehicles or furniture
• Save for a vacation

What to do with a negative difference

I’m guessing that the vast majority of people will have allocated more expenses than they have income resulting in a negative difference. Don’t be discouraged! The first time we did this, reality hit us hard. We had to do a major evaluation of our priorities and really distinguish between our wants and needs.

For many families this process will expose that they have been spending more than they make and can’t support their current lifestyle on existing income. It can be extremely hard to realize that lifestyle changes are in order, but at least you now know the truth and can fix your problem instead of going into more debt.

Here are some suggestions for adjusting your budget:

1. Identify all your non-necessities. Yes, cable is a non-necessity.
2. Each spouse should rank the non-necessities in terms of importance to them
3. Eliminate or reduce those that both spouses agree are a low priority

Hopefully by eliminating or lowering the easier “consensus” items you will now be at a zero balance. If not, you will have to negotiate which categories are most important to each of you. You may have to make a lifestyle change by either earning more income or lowering your cost of living. In some cases, moving to a less expensive place may be in order. Housing is usually the largest expense and can make the biggest difference to your expenses.

Step #8: Print out your final budget

I strongly recommend you print out your final budget and put it in a binder. This gives you a hard-copy record of your decisions. The problem with keeping only an electronic version is that you sometimes can’t be sure if it’s been changed from the original. Printing a copy allows you to put a stake in the ground for your decisions up to that point. It will also be useful when reconciling at the end of the month and planning next month’s budget.

Next steps

Congratulations! You’ve now completed your first zero-based budget. Now that you have a budget in place you will need to execute your plan and follow up at the end of the month to deal with what you actually spent. Over the next few weeks, I will be covering some ways to make tracking your spending and reconciling your budget much easier. The first month you use a budget, review it as often as you need to stay on track. Take a few moments each day to review your spending if necessary. I recommend reviewing your progress at least each week at first. Once you get your budget down, and with a few tips and tricks, you’ll be able to stay on track with a single monthly review.

Why start a blog??

OK, so I am new to the blogging world! I do not claim to be the top expert in the things I will post about, but hopefully this blog will give some tips & tricks on what has worked for me and my family in the areas of food storage, finances, cooking, organizing and all the other fun things that I enjoy. Recently a lot of people have asked me about how we got our year supply of food, how we eliminated our debt, how I can make a dollar go so far, and such. These are all hobbies of mine, and I seem to obsess a bit about it. So, in the future, I will post ideas about these and many other things. In addition, if I put the information on my blog, I can find it quickly :) Stay tuned....