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Zero Based Budgeting

June 18, 2018

A budget is the most important aspect of your finances. Whether you make $20K a year or $200K; you need to have a plan for your money. If your personal finances were a business and you didn’t keep track of your annual income and expenses, you’d have to close up shop pretty soon. There are dozens of budgeting methods and, in truth, one is not better than the other. The budget you choose is a matter of preference, and as long as you stick to it, you can theoretically reach any financial goal you could conjure up. Let’s take a look at zero based budgeting and if it is the right budget for you.

If you’re like most recent grads, you’re still getting a handle on your finances, likely juggling student loan payments, low starting salary, and a few vague ideas of what you’d like to see in your financial future. As such, many shy away from a budget, believing their financial troubles to be out of sight, out of mind. Unfortunately, money doesn’t work this way, and if you don’t take control of it, it will almost certainly take control of you.

Zero Based Budgeting

Because mindless spending is such a common pitfall, the Zero-Based Budgeting method has become widely used. The point of zero-based budgeting is to assign every dollar of your income with a task so that you avoid careless spending. In theory, if you have a comprehensive budget that accounts for everything BEFORE each month begins, you shouldn’t have any cash left over to waste throughout the month.

When you look at your monthly income, you should have a very finite number to work with. Acting like it’s an arbitrary number is the same thing as saying you have about 24 hours in a day. You have exactly 24 hours in your day, and you have exactly X amount of income every month. How you choose to spend those hours is completely up to you and the possibilities are limitless, just like your finances.

The zero-based budget balances a diligent tracking of last month’s expenses with a mindful forecast for next month’s. Because it takes some thorough crafting, you shouldn’t expect to nail this in your first couple months, nor should you anticipate it being a one-and-done deal. By design, it will need to be flexible, like extra cash for your A/C bill in the summer or holiday gifts at the end of the year.

Name every dollar

You have to give a name to every dollar coming in the door so that it has a specific purpose when it goes out the door. If you can’t, that’s a great indication of where your mindless spending is. If you’ve accounted for every foreseeable cost and still have a couple hundred bucks floating around aimlessly, add them to your emergency fund or investment portfolio. Shave $100 off your electricity bill in the spring? Stash it away in your holiday fund for a colder day. Find $20 on the street? Ok, that’s pretty rare so you’re off the hook on this one.

Think before you swipe

Look, the point is – be mindful with your money. You’re smart. You’ve lived enough life to know your spending habits, and sure, maybe you have some bad ones here and there. But ignoring them is not going to make them disappear. That’s why enlisting a proper budget will draw attention to the problem areas and empowers an opportunity for change.

 

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2020-02-19
High Income, High Debt: How to Stop the Spiral

By Caroline Farhat  

A lot of people think if you are earning a high income you must have lots of wealth and no debt. However, that is not always reality. In fact, for some people, earning a high income can mean higher amounts of debt. If you are in these circumstances, read on to find out how to stop the spiral.

 

High Income, High Debt

There are many reasons that higher-income households can have higher debt. One reason is higher earners like doctors and lawyers may have higher debt due to the amount of student loans needed to obtain their education.

 

But the big problem lies with the high earners who have high levels of debt and no assets to show for their income. A 2015 Nielsen study found 25% of American households earning $150,000 or more were living paycheck to paycheck. These are the earners who may be going down a spiral. There are reasons for this spiral that can be addressed to stop it. Some reasons include:

  • Desire to spend - A person earning a high income feels like they have a lot of money they can spend and deserve to spend. However, this can cause some to spend up to the total amount they bring home or worse exceed the amount, causing credit card debt or the need for personal loans.
  • Keeping up with the Joneses - Always trying to keep up with your group and show “wealth” you may not really have. This can be seen in the form of always buying the latest gadget, flashiest car or taking a trip to the latest popular destination. Even if you can afford some of these items now, feeling the need to keep up can be dangerous because you never know when a time may come that you may not be able to afford your lifestyle due to sudden job loss or a change in financial circumstances. 
  • Lifestyle creep - Increasing your expenses when your income increases because of your wants or perceived new needs. For example, the thought that now you need a more expensive and larger house because you can afford it with your higher income.
 

How to Stop the Spiral

Did any of this resonate with you? If so, don’t panic. You can always stop the spiral of high income and high debt. Below are some actionable steps you can start today.

 

1. Determine your fixed expenses

Fixed expenses are the expenses that are mostly out of your control and remain constant every month. They include your rent or mortgage, car insurance, internet bill, cell phone bill, utility expenses (although these may not be the same each month you can figure out the average), and loan payments. Knowing these expenses will help you complete the next step.  

2. Create a budget

You knew this was coming! Now that you know your fixed expenses you can create a budget. There are different methods you can use to create a budget. One budget that many people find easy to follow is the
50/20/30 rule. The basic principle is subtract your fixed expenses from your take-home pay. Then put money in savings for your emergency fund, retirement, or whatever you determine is most important to you. The rest of your income is used to pay your variable expenses. These are the expenses you have the most control over, like your food budget, restaurants, and clothing shopping.   

3. Try to reduce your expenses.

The easiest expenses to try to reduce will be the ones completely in your control, like eating out less. But there are some ways to reduce your fixed expenses.  

Refinance student loans - Have a high monthly payment? Refinancing may be a good option. Refinancing student loans can reduce your monthly payment and save you in interest costs over the life of your loan(s). You can refinance private student loans and federal student loans. Check out our student loan refinance calculator to determine what your potential savings could be.*

 

Negotiate your bills - Have a high internet bill? Or maybe you are still paying for cable. Check for any deals with your provider and compare with competitors. Better yet, think about whether you really need the service. If you are a die-hard Netflix fan, it may be time to cut the cable cord.

 

4. Pick a method to attack your debt.

There are two methods financial experts recommend to pay off debt: the snowball method and the avalanche method.  

Snowball method - Use any extra money to pay off your lowest loan first. Once the lowest loan is paid off you take the payment you were making to that loan and apply it to the second-lowest loan. Here is an example of how it works:

  • If you have a student loan of $25,000 with a payment of $290 and an auto loan of $15,000 with a payment of $275 you would focus on paying the auto loan off first. You would make both minimum payments but if you have an extra $25 per month to apply to a loan you would apply it to the auto loan. Once the auto loan is paid off you would apply the payments of $275 and $25 to your regular minimum student loan payment of $290 and now be paying $590 per month to your student loan ($275+25+290 = $590). You would continue this until all debts are paid off.
 

Avalanche method - List your debts in order of interest rates and start paying off the debt with the highest interest rate first. Add any additional payments to the loan with the highest interest rate. Continue paying the minimum on all other loans. Once the highest interest rate loan is paid off you apply that minimum payment to the next highest interest rate loan. 

 

5. Put salary increases into savings

Don’t give into the lifestyle creep. If you were able to pay all your expenses before your salary increase, you can continue to live off your old income amount and save the increased amount. The difference can be put into a retirement account or savings account, thereby increasing your wealth. The best way to do this is to set up an automatic transfer so that the extra money never hits your bank account. If you can’t see it, you can’t spend it!  

Bottom Line

If you have realized you are in a high income, high debt spiral, there is hope of stopping it. With some work, you can get your finances in order and begin to see your savings grow.

 
 

*Subject to credit approval. Terms and conditions apply.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

2020-02-18
Why Experiences are the New Measure of Wealth

By Caroline Farhat  

For the past half-century of American history, material objects have been a primary source of value to the working class of Americans. Following World War II, many Americans dreamt of owning a suburban home, driving a car, and joining in on the baby boom. The U.S. saw significant expansion through the 40s and 50s, gross national product rose dramatically, as did personal expenditures on things. By the end of the 50s, the majority of families owned a television, a car, and a home. By 1960, blue-collar workers became avid buyers, enjoying more disposable income through the 1970s.

 

Today is a different story. A study found 74% of Americans value experiences over things. The reason for this shift in ideology can be tied to a number of things, such as younger adults having watched the effects of the 2008 recession and, as a result, feel less of a need to be tied to material objects. This is leading to many millennials skipping the mall to attend music festivals, skipping homeownership to live in the city, and putting off having children for added freedom. Rather than defining wealth by what they have, many young adults are measuring wealth by what they can experience.

 

Typical Measure of Wealth

Wealth is typically measured by calculating a person’s net worth. This is calculated as assets - liabilities = net worth. Assets can include homes, cash, retirement accounts, and stocks. Liabilities can include all debts such as student loans, auto loans, and mortgages. Take a look at this example to calculate net worth: 

  • If a person owns a home valued at $500,000, a car valued at $22,000, they have $15,000 saved in a bank account and $33,000 saved in a retirement account, they would have a total of $570,000 in assets.
  • If there is a mortgage on the home for $200,000 and a car loan for $5,000 and student loan debt of $30,000, this person would have liabilities totaling $235,000.
  • This person’s net worth would be $570,000 - $235,000 = $335,000.

The net worth that is considered “wealthy” is subjective, however, a survey conducted by the Federal Reserve in 2017 found that the median net worth of families was just $97,300. Calculating net worth allows a person to see numerically how much wealth they have, but it is not the only way people define wealth. 

 

Why Millennials Value Experiences

Calculating net worth may be considered an old measure of wealth by millennials (people born between 1981 and 1996), but why?

 

To begin with, millennials value relationships with others more than material objects. The benefit of being able to experience things with their friends and significant others seems to outweigh the benefit of accumulating wealth.

 

While millennials do seem to understand the value of saving money, they also understand the need for work-life balance. A study conducted by Deloitte found 57% of millennials say traveling is their top aspiration. This supports the notion that being able to enjoy life and experiences is a measure of wealth to millennials. This supports the notion that being able to enjoy life and experiences is a measure of wealth to millennials.

 

Another reason for the shift in measuring wealth is millennials are facing financial struggles that previous generations did not experience. According to a study by the Pew Research Center, more millennials have student loan debt compared to previous generations, and the amount of student loan debt they have is also greater. If you are dealing with student loan debt and high monthly payments, you may feel you are not able to purchase a home, start a family, or build the traditional standard of wealth. But even with a low net worth, millennials can partake in great experiences that add value to their life and make them feel wealthy. 

 

Options to Build Your Wealth

If you have student loan debt, whether federal or private student loans, you may be feeling you will never be able to grow your net worth or have the life experiences you want – but that is not the reality. Student loans do not have to hinder you from growing your wealth. Check out these options to build your wealth:

  • Start a side hustle. Earning extra money outside of your day job allows you the freedom to use the money how you want. It doesn’t have to pay the bills, it’s extra money that you can use to travel or put away for retirement. Plus your side hustle may lead you to passions and causes that are important to you which only further enhances your life!
  • Refinance your student loans. When you refinance your student loan you may be able to lower your monthly payment and save interest over the life of the loan. The extra money you have monthly could go towards experiences to enrich your life and extra savings in the bank for emergencies. How much savings can you expect a month? Check out our student loan refinance calculator on our site to get an estimate of your savings.* Student loan refinancing is easy with the right lender. With ELFI you never pay an application fee or origination fee. You also receive a personal loan advisor who guides you through the process of refinancing.
  • Create a zero-based budget. What if you were told to “spend” all of your income each month?  This might sound crazy at first, but many financial experts regard this method as the most effective one out there. The concept of zero-based budgeting is that your monthly income minus your expenses should equal zero. The idea is that each dime you make should have a “job” and fall into a certain category in your budget. For example, if your take-home pay is $5,000, you have exactly $5,000 to spend, save, or invest. This can help you take control of your finances and ensure every dollar is put to good use.
  • Use an effective debt-payoff strategy. Using the debt snowball or debt avalanche method of paying off debt can make payoff simpler and more effective. The debt snowball involves paying off debts with the lowest balances first, then moving onto the next smallest balance. The debt avalanche method involves paying off the largest debt first, then moving on to the next largest balance. Both strategies have their pros and cons, but both will also lead to a debt-free life.
 

Bottom Line

Wealth is more than just the possessions you own or the car you drive. Experiencing a full life with great relationships and experiences can lead to happiness overall. By getting a handle on your student loans not only will your typical financial wealth increase, but so can your experiences in life. No matter how you measure wealth, you can achieve it while paying your student loans!

 
  *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
2020-02-12
What the New FICO Score Changes Mean For You

By Caroline Farhat  

Are you apartment hunting, trying to refinance your student loans or thinking of applying for a new credit card? If you ever needed the motivation to care about your credit score, this is it. Your FICO score is going to be an important factor when trying to do any of those things. Recently, Fair, Isaac, and Company, the company behind FICO, announced that changes will be made to how the score is calculated. Keep reading to find out about the changes and what they could mean for your FICO score. 

 

What is a FICO score?

The FICO score is a scale used to determine a person’s creditworthiness or risk. The score is used by potential lenders, such as banks and credit card companies. A FICO score ranges from 300 to 850, with a score of 700 or higher being considered good. A score of 800 or higher is considered exceptional. The average FICO score in 2019 was 703. 

 

A person with a higher score is regarded as being less risky to lend to than a person with a lower score. Your FICO score can determine whether lenders will lend to you, as well as the terms of the loan, such as your interest rate. The interest rate on credit cards, student loans, car loans, and mortgages are all affected by your credit score. A higher interest rate can sometimes cost you thousands of dollars more over the life of a loan. A FICO score may also be considered when applying to rent an apartment – for example, a low score may require you to pay a higher deposit.  

 

A FICO score is determined by assessing the following, among other factors:

  • A person’s payment history
  • How much debt a person has compared to how much available credit they have
  • The total amount of debt a person has or their debt-to-income ratio
  • The length of credit history

Typically, if you maintain a debt-to-income ratio of 30% or less and make on-time payments to your credit cards and loans, you can work towards a high score. If you’re ready to start improving your credit score now, check out our good credit-building guide.

 

New FICO Score Changes

The new changes coming to FICO are known as FICO 10 and are set to go into effect in the summer of 2020. They include:  

  1. With the new FICO score chenges, lenders will be able to look at payment history two years back as well as account balances. This will demonstrate to lenders whether you are an occasional credit user or someone who consistently maxes out credit and hardly makes payments back.  
  2. It will be noted if a person is taking out personal loans, and this could potentially negatively impact a person’s credit score. Personal loans may be considered riskier since they are unsecured loans, unlike mortgages and auto loans where your asset is the collateral for the loan.  
  3. Late payments and high credit card debt compared to a person’s overall credit will also more negatively affect a person’s score. 

Based on the new FICO 10 model, it is estimated that 110 million consumers will not see a significant change to their score, if at all. It is also estimated that 40 million people may see an improvement to their score by more than 20 points, and 40 million others may see their score reduced by more than 20 points. 

 

What it Means for You

It is unclear when this latest FICO 10 model will be utilized because it is up to the individual lenders to determine what model they use. Some lenders are still utilizing FICO 8, which was released in 2009. Therefore, these new FICO score changes may not mean much for you now but could be significant in the future.  

 

These new FICO score changes could help your credit score if you have a credit card balance that is occasionally high but you pay off the full balance monthly. However, if you are one of the 40 million people whose credit score is negatively impacted by this change, this may cause you to receive higher interest rates when applying for loans. If this is the case there are options:

  • Try finding a creditworthy cosigner for your loan.  
  • Try strategies to improve your score and apply after you have raised your score. 
  • Refinance if you already have a loan, but now have a higher score.

If you have student loans and the new FICO model increased your credit score, you may be eligible for a lower interest rate on your student loans through student loan refinancing, thereby potentially saving you thousands of dollars. Do your research to find the best student loan refinance companies with low-interest rates, flexible terms, no application fees, and great customer service. Also, be sure to compare the student loan refinance rates from different lenders to find the lowest student loan refinancing rates available. Student loan refinancing can be an easy process and can potentially replace your high-interest loan(s) with a lower interest rate. 

 

Want to find out if student loan refinancing is financially right for you? Check out our student loan refinance calculator to see your potential savings. At ELFI, we have no application fees, no origination fees, and no prepayment penalty. When you apply for student loan refinancing, you receive a personal loan advisor to help answer any questions and guide you through the process of refinancing.*  

 

If you have student loans and your FICO score dropped, continue to make on-time payments and try to not take on any more debt. Refinancing may still be an option since different lenders require different minimum scores. However, if you are unable to refinance now, refinancing may be a good option in the future once you have demonstrated consistent on-time payments.

 

Bottom Line 

FICO models may change, but the basic principle is the same: try to reduce any debt you have and make on-time payments. 

 

Need additional help with raising your credit score? Check out these 5 habits for good credit score hygiene.

 
 

*Subject to credit approval. Terms and conditions apply. 

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.