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Welcome!
FINANCIAL FREEDOM WORKSHOP
Session 3
Developed using the books
Your Money Map: A Proven 7 Step Guide to True Financial Freedom
and The Total Money Makeover
ASSIGNMENT FROM LAST WEEK
- Finish working on your budget listing all your expenses that you can.
- Review your credit report.
THE ROAD TO FINACIAL FREEDOM
MONEY MAP
Destination #1
- Begin using a spending plan
- Save $1,000 for emergencies
Destination #2
- Pay off credit cards
- Increase savings to one month’s living expenses
ROAD TO FINACIAL FREEDOM
Destination #3
Pay off all consumer debt
Increase savings to three month’s living expenses.
- “49% of Americans could cover less than one month’s expenses if they lost their income” (Ramsey).
- Due to the unemployment and underemployment rate in this area, I would recommend six months savings.
- How much savings do you need? One question you can ask yourself, “How long will it take me to find another job if I am laid off?”
- You will have to live off your savings until you find another job. The more savings you have, the more flexibility it gives you in looking for just the right job for you.
Romans 13:8
“Keep out of debt and owe no man anything.”
WHICH DO I DO FIRST?
Work on your consumer debt and savings at the same time.
- Consumer debt is all debt other than credit cards, your home mortgage, and business loans.
- The three most common consumer debts are auto debt, student loans, and home equity loans.
- Take the amount you were spending on paying off credit cards and increasing your savings from the last destination.
- Divide it in two. Pay half to savings and half to your consumer debt.
When you meet one of the goals, put that money toward the other goal.
- Just like in the last destination.
- If you meet your savings goal first, put all the money toward paying off consumer debt.
- If you pay off consumer debt first, put all the money toward meeting three months savings.
How? Snowball the debt like the credit cards.
- Continue making minimum payments on all your consumer debts.
- Focus on acceleration the payment of your smallest higher-interest consumer debt first.
- When you pay that one off, apply that payment toward the next smallest one, and so on.
AUTO DEBT
A debt free strategy
- Unlike a home, a car depreciates in value as soon as you drive it off the lot.
- It is worth less than you paid for it.
- The average car payment in America today is $484 over 84 months (Dave Ramsey Radio)
- Four steps to get out of auto debt:
~ Decide to keep your car at least three years longer than your car loan.
~ Pay off your car loan.
~ After your last payment, keep making the payment, but pay it to yourself. Put it into an account that you will use to buy your next car.
~ Use your car’s trade-in value and the money you’ve saved to pay for your next car.
- What if you need another car now but have not saved up?
~ Decide how much you can afford to pay on a car.
~ Buy a $1000 beater and drive it for six months.
~ Save up what you would have paid in payments (let’s say $300 per month).
~ In six months, sell the car (for probably what you paid for it) and add what you saved to buy a better car for $2,800 ($1,000 + $1,800).
~ Save up for another six months, sell the car, and buy another one for $4,600 ($2,800 + $1,800).
~ In another year, sell the car, and buy a car for $8,200 ($4,600 + $3,600).
~ Do this until you have the car you need.
~ Now start setting those same payments aside until you have enough saved up for you next car.
Buy used cars
- Cars experience the worst depreciation in the first two years.
- Cars lose around 35% of their value in the first year alone.
- Buying a newer low-mileage used car is a better value.
- Most people use the cost of car repairs as a reason to buy a new car.
- Compare what an expensive car repair would be to a year of car payments.
- The repair is typically cheaper.
- The most economical car is usually the one you already own” - Larry Burkett
- Don’t be too proud to drive an older car.
Leasing isn’t the solution
- Monthly lease payments are often lower than a car loan.
- It may seem like you’re paying less, you’re not!
- You will get stuck at the end of the lease.
- Charges for excessive mileage (10-20 cents a mile) and penalties for wear and tear should be expected.
- It is very expensive, if not impossible, to get out of a car lease.
- You may get stuck with it.
- Also, you will have no value in the car at the end because you don’t own it.
- “The whole idea of the back-end penalties is twofold: to get you to lease another one so you can painlessly roll the gotchas into the new lease, and to make sure the car company makes money” (Ramsey).
- The National Auto Dealers Association was quoted in stating that dealers make on average $82 profit from a cash sale of a car, $775 profit when they finance a car, and $1,300 profit when they lease a car (Ramsey).
Cost of driving
- Most of us only consider the gas cost when choosing how much to drive.
- At $4.5 a gallon, a 20 mpg car will cost 23 cents per mile.
- You also need to consider the other costs.
- A Hertz Rental Car study showed that the cost of insurance, tires, depreciation, license and repairs bring the actual cost to 70 cents per mile.
- Every time you fill up your tank, multiply the cost of gas by four to figure out how much you are actually spending.
- Consider car pooling or doing all your shopping and errands in one trip to cut costs.
LOANS
Student loans
- Student loans are rising dramatically.
- Average Undergraduate Student loans:
1992: $9,000
1997: $11,400
2002: $18,900
- If you have more than one loan, consider consolidation.
- It may reduce your interest rate and lower monthly payments.
- Beware of graduated repayment plans.
- Lower payments at first are usually interest only.
- This just prolongs repayment.
- We’ll speak more on this in depth in future sessions.
Home equity loans
- Home equity loans are simply additional mortgages on your home.
- You are borrowing from the value you have in your home.
- The temptation is the lower interest rate.
- Lenders also advertise the tax-deductible interest.
- If you get a second mortgage for the full equity in your home, it is just like starting over on buying your home, or worse.
- The Down side:
~ Credit card companies can only sue you if you do not pay, home equity bankers can take your home.
~ Fees and closing costs can be thousands of dollars.
~ If there are no closing costs, ther is usually some catch like a higher interest rate or a prepayment penality.
Home equity line of credit
- In this type of loan, the lender approves you for a loan up to a certain amount.
- Think of it like a giant credit card.
- Your monthly payments are based on the amount you borrow.
- The advantages are: lower interest rates, tax-deductible interest, and lower closing costs.
- The major downside: like a credit card, the tendency is to use it too often that to spend carefully.
Is consolidation for you?
- In theory, this sounds like a good idea.
- Consolidation can being lower interest rates and/or lower monthly payments.
- What’s the downside?
- If you have not solved the problem that got you into debt, consolidating can make things worse.
- Lower monthly payments can make it easier to afford more credit card payments.
- You could end up in deeper debt than before.
- People should not consolidate until they have changed their habits and have a monthly surplus.
- Guidelines for consolidation:
~ Hate debt
~ Start paying it off
~ Spend less than you earn
~ Then consolidate.
DEBT FREE ADVICE
Dealing with creditors
- Some people that are deep in debt just try to ignore the problem.
- It will not just go away but will intensify.
- Most creditors are open to hearing from you and often are willing to work out an arrangement for repayment.
- It is impossible to negotiate with a creditor you have ignored.
- Silence is deadly.
- Three simple rules for dealing with creditors:
~ Start communicating with your creditors.
~ Offer lenders a written copy of your budget, a list of your debts, and your repayment plan.
~ Exercise integrity - always be completely honest with your creditors (don’t promise what you can’t do)
Debt management companies
- They represent you to negotiate lower monthly payments and lower interest rates with creditors.
- They work it out so you just make one monthly payment and avoid late fees and over the limit fees.
- Be careful, there are some scam artist in the business.
- Interview companies and compare charges.
- One of the best is FinancialHope.com
Bankruptcy
- 20 years ago 1 in 300 homes went through bankruptcy.
- Today, it is 1 in 69
- If trends hold steady, soon it will climb to 1 in 7.
- The Bible never prohibits bankruptcy, but it does discourage it:
Psalm 37:21
“The wicked borrow and do not repay, but the righteous give generously.”
- Bankruptcy may be acceptable in extreme financial difficulties where there is no other option or if the emotional health of the borrow is at stake.
- Bankruptcy remains on your credit report for 10 years.
- Many job applications ask if you have ever filed for bankruptcy.
- If you’ve declared bankruptcy, don’t carry a load of guilt.
- Learn what the God wants to teach you through it.
- You should try to repay the debts even if you are no longer legally obligated to do so.
- It will develop your character and give a godly witness to your creditor.
Cosigning
- Think about it. Why do people need a co-signer?
- The bank believes the applicant won’t pay!
- A Federal Trade Commission study found that 50% of those who cosigned for bank loans ended up making the payments.
- If you cosign, you are likely to pay.
- Your credit will be damaged because most lenders normally do not contact you when payments are late or if they repossess a car.
- By the time they ask you to pay, it is often too late to protect your credit.
- Anytime you cosign a loan, you become legally responsible for the debt of another.
Proverbs 17:18
“It is poor judgment to co-sign a friend’s note, to become responsible for a neighbor’s debts.” (NLT)
- Poor judgment in this verse is literally translated: destitute of mind.
- Should parents cosign for their children?
- You need to model for your children that cosigning should be avoided.
- One couple chose not to cosign for their child’s first car.
- Instead, they encouraged them to save up for it by matching what they saved.
Encouragement
- Depending on your debt, it may take a while to pay off consumer debt.
- Don’t be discouraged.
- It’s worth the effort on your journey to financial freedom!
YOU CAN DO IT!
James (23)
Train Conductor
and Tabitha (31) Atwood
Merchandising Coordinator
I grew up in government-assisted housing (the projects) and, for a long time, thought that’s how the remainder of my life was supposed to be lived. However, when I was twenty-four years old, the Lord provided me with a job that challenged me intellectualy and continually pushed me to think outside the box. I began to listen to the news and political discussions on the radio, and one day I happened to stumble across a funny white guy named Dave.
After listening to Dave, it took a few years for my wife and me to get onboard. When we finally did decide to have a Total Money Makeover, the hardest part was getting mad enough to eliminate all our debt at once. We continued to make purchases on our credit card and would find ourselves back at square one. But reality set in once I was laid off from my job. We couldn’t afford to make ends meet. I felt like such a failure because I know that if I had stuck to Dave’s plan and advice, we would have been in a much better situation.
After that initial layoff, we struggled for a while until I finally landed a new job. Yet, we have become debt-free because we all work together and do our part to assure the financial success of our present and future. The level of accountability that is required is tremendous! We fought a lot at the beginning, but as we’ve worked through things, our communication has become smooth and hassle-free. We have been patient and diligent in our budgeting and are now reaping the benefits!
Our family is still realizing the full impact of being debt free. The month after we paid of the debt, I was laid off again. But this time we were in completely different place than before. The financial worries and strains were nonexistent. There is a sense of peace that surpasses all understanding, and until you have experienced it for yourself, you can’t even imagine its amazing power.
(Total Money Makeover)
Assignment for Next Week
- Find out what you are currently putting aside for retirement.
- Find out what percentage of your pay this amounts to compared to your income.
