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Ask The Expert: Managing Budget and Debt

Are you curious about the best way to manage your money, whether or not you have debt? Do you know the difference between “good” and “bad” debt? Our expert, Martin Booker will share the three most important numbers to know when it comes to managing your budget and debt. Martin will also discuss strategies for budgeting and how to maintain a lifestyle with less debt.

 

Join us now thru Monday, April 27th!

 

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Thanks for joining the discussion with AARP Expert Martin Booker. We hope you have taken away some valuable information, advice and tips. We welcome your continued participation in the Budget & Savings forum. For more on these topics, please visit Managing Debt on AARP.org.

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AARP Expert

Based on the lifestyle changes due to the shelter-in-place orders, many of us are experiencing adjustments to our finances. For some, there has been an unfortunate reduction or loss of income while others are still working but seeing a rise or reduction in certain expenses. What have you experienced and how are you managing at this time? Provide your best tips based on what you've done so far and I will share tips, tricks and resources all week as well. 

 

Let's have fun conversation about budgeting and debt! 

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AARP Expert

Your budget is the foundation of money management. Having a budget will allow you to be knowledgeable of exactly how much money you make, spend and have remaining. There are multiple ways to bring awareness to cash flow. Here are two of methods:

 

Spending trackers- There are companies that will track you’re spending by linking to your bank account. These companies will take what you’ve spent and categorize it to make you aware of how much money you’re spending on groceries, eating out, transportation and more. The benefit to these trackers is that you can get an accurate snapshot of how much money you’re spending. Once you’re aware, you can make adjustments if you believe that you’re overspending in certain areas. Some banks and credit unions offer these trackers. This is a good place to start if you’re interested in an automated way to track your spending through your debit card purchases. If your bank or credit union does not offer this service, third party apps will offer this service but be sure to fully understand their security measures before providing access to your banking records. If you decide to use a tracker, be sure to stay active with your spending tracker and make the necessary adjustments based on the results. The tracker will only be helpful if you are engaged in the process.

 

Budgeting applications- There are many forms and styles to budgeting. You can use an electronic application, spreadsheet or paper and pen. You can also have a monthly, weekly or daily budget. Some people prefer to budget for the entire household or create a budget for only their expenses. While there are so many options and ways to budget, what’s most important for you in choosing is to find the budget that is most comfortable and effective for you. Usually your lifestyle can dictate the type of budget you need. For example, if you prefer technology and creating formulas to do the math for you, a spreadsheet might work, but if you prefer to write out the number and do the math, pen and paper may be your preferred method. Another thing to consider is your income schedule to decide if you need a monthly, weekly or daily budget. If you receive all of your money once a month, you can consider a monthly budget, but if you have a side hustle, you may want a weekly or daily budget in order to budget all of your expenses based on when you receive income.

 

What’s great about a budget is the ability to determine your spending before you receive your income. With a budget, you get to decide how much you’ll spend on eating out, transportation, etc. and then make adjustments to your lifestyle to meet your budget. So instead of following what you spent, you take the lead in setting your spending. Budgets can be made for weeks or months in advance and then adjusted as your finances change. For example, if you are seeing a decrease in transportation cost right now, you can adjust your budget to account for the times. Now you will be able to make decisions on how to use the extra funds. If you decide to budget, be sure to plan ahead. You want to know your potential numbers for the future and adjust in real time when necessary.

 

If you choose to track your spending or budget your income and expenses in advance, your most important step is to be active. Make adjustments to the numbers when needed and make adjustments to your lifestyle when the numbers aren’t working in your favor. Also, keep testing different software, budget methods and more until you find your right fit. We are different in many ways so finding the right tool may take time. Feel free to try out this home budget calculator https://www.aarp.org/money/budgeting-saving/home_budget_calculator.html

 

Let us know which methods you use or have used in the past to effectively manage your money.

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Periodic Contributor

Spending trackers and budgets are nice things to have, but what are those things really telling you?  Suppose you have a pet and lets say your annual budget is $900 for pet care.  

So, what if you find out your $200 over budget every year for 3 years?  Do you buy cheaper, less nutritious food?  Spend less on pet toys?  Perhaps it's time to put the animal up for adoption?  Lets say your pet gets hurt and requires surgery at a cost of $1000.  What do you do now?  

Financial tools are nice things to have, but we make decisions with emotion, year after year.

So we'll go on loving our pets, are budgets will suffer, and our trackers will tell us what we already know.

  

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AARP Expert

Hello Michael (@Michael2021), 

 

Thank you for responding and this is a good point that you make. 

 

Your budget is used to proactively guide how much you will spend per category and the hard work is sticking to your budget after you make it. As you engage your budget in real time, you're able to make adjustments based on your spending habits. 

 

To use your example, if I am overspending on pet care, then I can look at my entire budget and find another place to cut expenses. The beauty of budgeting is that you get to see a full picture of your spending. So, when you realize that pet care will cost more than expected, you can find something that isn't as important and cut cost in that area. If there is nowhere to cut cost, then you’re aware of how much additional money you will need to make to fund your lifestyle.

 

Your point also speaks to the importance of an active budget and having a purpose for managing money well. Being able to make adjustments week to week or month to month will contribute to healthy finances over time. For example, if I notice that my utility bill continues to rise each month, I can now seek a solution to lower the bill or make an adjustment in my budget elsewhere to continue to cover this expense. You will be aware of the higher expense and make the adjustments faster with an active budget. Also, your budget can account for emergency savings in order to handle unexcepted expenses as well. 

 

While a lot of us are emotional spenders, the answer to managing that habit is clear goals and boundaries. If I have a reason to combat my emotional spending than I will. So having goals such as lowering debt in order to have a more comfortable retirement or adding more money towards savings will help stay on track. The way to win against our impulses and habits are with, purpose, boundaries and a plan (or budget).

 

When trying to take control of unexepected expenses, AARP Money Map is a great tool to use. Checkout AARP Money at www.moneymap.aarp.org/

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Periodic Contributor

Thanks, and I'll check out that moneymap!

Michael

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How do you budget during a crisis like this and your small business had to shut down and your living off of disability?

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AARP Expert

Hello, @EricaS364072,

 

Thank you for your question and I’d like to start by saying my thoughts and support are with you during this tough time. I hope that on the other side of this pandemic that your business thrives in ways that you never imagined. During a time like this, budgeting becomes one of the most important actions to take in your daily life. I reinforce this statement with the following sports analogy. The one time that coaches, players and fans are the most focused during a game is when there are seconds left on the clock and the next decision will be the deciding factor of the game. At that time, every decision from both teams count more than ever. So right now, this is a close game for you and each decision that you make will be critical.

 

If you are currently living off of one income that you receive once a month, you can consider a monthly budget. When creating this budget, here’s what is important right now:

 

Plan for every dollar of your income: Be sure to list the income that you’re currently making. Knowing exactly what you make for the month will help determine which expenses will need to be priority. If you get paid once a month, you can consider paying all of your necessities on the day that you get paid instead of waiting until the day that the bill is due. This will allow you to know that the obligation is covered until the following month and remove that money from your bank account. Be sure to layout your full budget and think through the entire month before making decisions on how this income will be used. When you plan out your budget for the month, think about anything additional that may come up that will require some of your resources. Especially one-time expenses like graduation gifts.

 

Know what you must spend a month: There are two important things to do here 1. List all of your expenses so that you’re fully aware of how much you will spend per month at the moment. This will allow you to organize and prioritize everything that needs to be paid. It’s a good idea to list your expenses in order of importance. If you have to cut expenses, you know which ones can be eliminated first. 2. This is a good time to review your budget and adjust the cost of expenses that are no longer being used or expenses that have been reduced due to this pandemic. Here are a few that are likely reduced at the moment: transportation cost, hair and nails, some small business expenses and some insurances. While some other expenses may rise some like utility bills or groceries, you may have some additional margin due to staying home. Be prepared to redirect any funds that are lowered to covering your necessities.

 

Be aware and make good use of your margin: After knowing your full income and expenses during this time, you will be able to determine how much money you have remaining. If there is money remaining, this is a good time to save since there is still uncertainty in the economy. If there is a deficit, start by deciding what other expenses can be eliminated until your business is operational again. Remember that if you have to eliminate expenses, it will only be temporary. Next, begin to make decisions about which bills must be covered. While considering these decisions, take advantage of the payment deferrals that are happening in different industries such as rent/mortgage and student loan payments. It’s important to do this research prior to making payments for the month as you may be able to find relief on some of your major expenses.

 

Determine if you should touch your savings: Factor in your savings when needed for emergencies. If you have more expenses than income and you cannot find relief on certain bills, you may need to tap your emergency savings. Be sure to check your Covid-19 relief options and map out your budget before exhausting your savings. If you’d prefer to use an online app for budgeting, you can create a free monthly budget at https://www.everydollar.com/. The free version should cover your needs for a monthly budget or feel free to use a spreadsheet or paper and pencil.

 

These are uncertain times but in many cases, there are places to turn for information, resources and assistance. Please visit the AARP to learn about small business and personal relief during this time at www.aarp.org/.

 

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AARP Expert

Hello @BeckyC932328,

 

Thank you for your question. When it comes to debt consolidation, the two things to consider are organizing the debt and lowering the amount of interest you will pay on the debt. A consolidation can help with both of these for sure, but here are other factors to successfully eliminating your debt:

 

Motivation- Are you at the point where you no longer want to carry this credit card debt? Are you tired of paying interest? Are you ready to repurpose your debt payments to save for your future, give to charity or fund your lifestyle? When you find the motivation and reason for lowering debt, you will be consistent with debt elimination. Prior to consolidating your debt, make sure that you find your purpose for doing so and you will have a more successful journey

 

Boundaries- in many cases, you want to make decisions that will prevent you from accumulating more debt. So using systems that will keep you from adding more debt will be critical. Try things like taking your credit card out of your wallet so that you won’t use them, cutting up your credit cards, unlinking your credit card from online purchasing or deactivating the credit card. If you perform a debt consolidation and those credit cards are still open, what boundaries will you put in place to keep yourself from using them again which will give you more debt?

 

Accountability- Debt reduction can be a long process depending on how much debt you’ve acquired and how much money you have available to pay down debt. It can be easier to have a partner in this journey to keep you motivated, hold you accountable and be there to celebrate each debt pay down milestone. If your accountability isn’t a person that you know, it can be videos, books and tools such as the AARP Money Map which is releasing its solution on managing debt in June. Money Map can be found at https://moneymap.aarp.org/  

 

If you decide to consolidate your debt with a personal loan with a lower interest rate, use the debt snowball or use the debt avalanche to lower debt, keep these three things in mind so that your debt reduction journey is sustainable. All three strategies have proven successful for different people so the choice is yours, but be sure to stay motivated during the journey. Good luck!

 

Read more about managing debt from AARP’s financial experts at https://www.aarp.org/money/credit-loans-debt/

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Newbie

Would it be smarter to get a personal at a low rate to consolidate credit card balances?

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AARP Expert

When budgeting, keep the following things in mind:

 

- Budgeting will make you fully aware of your income, expenses and the difference.

- The larger the difference between your income and expenses, the more money you have  to meet short and long term goals

- Budgeting before you spend your money will allow you to guide your income

- When you have variable income, round down on your projected income for budget planning 

- When you have variable expenses, round up on your projected expenses for budget planning

- A budget is a living document. Numbers will change so stay active during the budgeting process

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AARP Expert

Here are a few tips about the three most important numbers to know when budgeting are the following:

 

Income- List all of your income from all sources. Be sure to include sporadic and variable income as well when you budget. When creating your budget, it is better to round down on your variable income in order to prevent a deficit. For example, if your take home pay is between $489 and $515 a week, you may want to set your projected income at $480 and adjust the income line on pay day. Your income is what you will use to fund your current lifestyle and reach your goals.

 

Expenses- Include all expenses in your budget. It is easy to forget about expenses such as self-care expenses or gratuity that you pay but as much as you can estimate these expenses, the more accurate your budget will become. It’s important to round up on your expenses if it is a variable expense. By doing so, you can prevent a deficit in your budget when you make payments. For example, if a utility can range between $40 and $55, you may want to set it in your budget at $60 and adjust your budget when you make the payment.

 

The difference- This is the balance remaining after subtracting your expenses from your income. The difference is that amount of money that you are able to use to payoff more debt, give or increase your savings. The more that you can increase your income and/or lower expenses the larger the difference. When you determine how you will use the difference, you can determine how soon you can reach that goal by knowing your difference. Any time that there is a deficit when subtracting your expenses from your income, you have two choices. You can either increase your income or decrease your expenses in order to break even or have excess.

 

After creating your budget, become familiar with your numbers. If you have a significant difference between your income and your expenses, create some important goals to reach such as increasing retirement savings, paying off debt or saving money for a child’s college. When you know these three numbers, you will be more aware of your finances which can lead to better money management.

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AARP Expert

Has anyone seen an increase or decrease in debt during this time? 

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AARP Expert

During the uncertainty of COVID-19, many people are concerned about their finances or continuing to pay off their current debt. One thing to consider when it comes to debt during these uncertain times is should you accelerate debt payoff. Right now, there is uncertainty about the future of jobs and companies across America.

 

As you consider how to manage your money right now, one important thing to prioritize is liquid savings. If you have not saved an emergency fund (3 months of your expenses if you’re in a double income household or 6 months of your expenses if you’re in a single income household), then you may want to take measures to increase your savings now.

 

Here are some ways to do so:

 

-Reach out to your financial planner to discuss where you can make changes to increase your liquid savings

 

-Contact your mortgage lender or leasing office to discuss options for payment deferral

 

-Take advantage of the Student loan payment deferral

 

-Pay only the minimum balances on debt and move excess money to savings

 

-Reach out to companies where you make payments and ask about COVID-19 relief

 

-Save money from expenses that have been lowered such as transportation cost

 

When asking for a deferral or deciding to defer in order to save money, be sure to understand the terms of your deferral before you make a decision. Ask the following questions when contacting a representative:

 

-When will payments begin again?

 

-What are my options for payback after the deferment?

 

-Will you report missed payments to the credit bureau during this deferral?

 

-What will happen to any interest that I owe during a payment deferral?

 

Be as informed as possible so that you in a better situation after we make it through these uncertain times.

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