The Don't Sweat Guide to Your Finances

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Foreword

Most people agree that personal finances can be stressful at times. There is so much to keep track of: investments, taxes, paperwork, changes in the law, credit card and bank statements. It is also important these days for all of us to pay close attention to security issues, such as keeping our personal information private to avoid identity theft. There are so many bills to pay, and even with the Internet, there are piles of paper everywhere!

Discipline in our spending is also critical but not always easy. It’s important and often difficult to live within one’s means. With so much consumption temptation at our fingertips and all over the media, it can be hard to set a ceiling on our desires. Everywhere we turn, something seems to be calling out to us, “Buy me.” Everyone else seems to be able to afford so much, and if they can’t, they simply get another line of credit. We ask, “Why shouldn’t I do that?”

There’s another reason that finances are important, and that has to do with social responsibility. The more responsible, ethical, and organized that we are with our own finances, the more comfortable we will be in giving our money away to organizations that we believe in.

The editors of Don’t Sweat Press have written what I think is an excellent guide to the world of finances. Unlike many stale and often boring guides, filled with facts and figures, this book includes the much-needed missing link—perspective. The book shows you some creative ways to keep your cool in the midst of chaos and clutter and ways to manage your decisions and keep track of everything, all without losing your bearings.

I believe that this book can make the difference in keeping the stress of finances from becoming overwhelming. Often, a slight shift here or a small change in attitude there can be all the difference it will take to keep things under control.

To me, the key to finances, as in most other aspects of life, is to keep a clear mind that is not distracted by frustration, stress, and irritation. In the absence of distraction, you have what it takes to get the job done.

I’ve never believed that money is the most important part of life, and I hope you don’t, either. However, there’s no denying the fact that if we deal with our finances responsibly, ethically, and in an organized fashion, we will be less stressed as a result. I hope this book serves you in helping to create this reality, as it has for me.

    Richard Carlson
    Benicia, California, 2004

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1.
Setting Financial Goals

Most people have financial goals that they want to achieve; however, quite often they fall short of those goals. Make certain that you achieve your goals by following these four easy steps.

First, visualize your goal. As easy as this sounds, this is very important. Clearly imagine and describe your goal in positive terms. For instance, don’t say that you want to cut spending by fifteen percent. Instead, state the goal in terms of saving $350 a month. You can save this money from your paycheck in a proactive manner. Then you can determine how you are going to reduce your spending in order to save the money. While the positive goal gets you to the same place, saving $350 a month sounds better than reducing spending by fifteen percent. After all, who wants to have a negative goal to meet?

When you have your goal, write it down. The more specific it is, the easier it is to attain it. Read your goal each day in order to focus your mind on it.

The next important thing to do is to give yourself a deadline. Without a deadline, the goal is nothing more than a good idea. Everyone has good ideas; unfortunately, it takes more than a good idea to accomplish a goal.

The remaining step is to stay focused. As easy as that seems, it really isn’t. As soon as you make a resolution to accomplish a goal, circumstances will conspire to move you away from your goal. For instance, you may be invited to travel with your friends on a ten-day cruise that is the best bargain ever at $799; or, as bad luck would have it, your television may break, leaving you to spend $500 on a new one.

Life will conspire to get you off the track of attaining your financial goals. However, you don’t have to give in to the temptation or the perceived urgency of spending. After all, your financial future is at stake. Stay focused, and hold on to your goal.

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2.
Access Your Home’s Riches

The smart homeowner will want to fully utilize the home’s riches by obtaining a credit line based on the equity in the home. A home-equity credit line is an easy way to pay for purchases using borrowed money with a low interest rate while being able to deduct the interest expense from your income taxes. The credit line can be used to pay for remodeling the kitchen or redecorating the entire house. College education expenses, a special vacation, or car purchases are other popular expenditures that a home-equity credit line can fund. Many people also use home-equity credit lines to pay off high-interest credit card balances.

To put the power of a home-equity credit line to work for you, call your mortgage lender to find out what the current interest rate and fees are. Then call other banks to find out what their terms are. After doing your homework, you will know what bank is offering the best deal.

It is important to remember that a home-equity credit line isn’t just for spending. It also can be obtained and reserved for emergency use. That way, if a financial catastrophe occurs, funds are readily available. While some banks may charge a small fee for the credit line, interest isn’t charged unless money is actually borrowed. The peace of mind that an open credit line provides more than justifies the small fee.

However, as the saying goes, there is no free lunch. Remember that any borrowed funds eventually have to be paid back. Don’t take on more debt than you can afford. If your financial circumstances change—for example, if you lose your job—failing to pay your home-equity credit line could mean that the bank could seize your home in a foreclosure proceeding. Also, if you plan to sell your home and buy a bigger one, the bank will use the sale proceeds to pay off your credit line, as well as the mortgage. Your large windfall that you anticipated to pay for the new home could be a lot smaller than you originally had thought.

Home-equity credit lines can be a valuable financial tool. Just make certain that you are aware of the downside, as well as the benefits.

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3.
Accounting Made Simple

If you ever thought that accounting was complicated, think again. There’s no reason that accounting has to be difficult if you understand a few simple concepts. With that knowledge, you can grasp the basics of accounting. Soon, you’ll be able to maneuver your way around even the most complex financial statements.

There are three major documents that comprise a company’s financial statements: an income statement, a balance statement, and a statement of cash flows. Each statement gives you unique information.

The income statement summarizes a company’s revenues and expenses. To simplify, if you subtract expenses from sales, you will see how much money the company made, which is its net income. Once the net income is calculated, it is divided by the number of shares outstanding, which gives you the basic earnings per share.

The balance sheet says nothing about how much the company made or lost. Instead, it explains how many assets the company owns, as well as how much debt it has. If investors are concerned that a company has too much debt, then they will closely watch the balance sheet to see if the debt is growing or decreasing. Assets listed will include current assets—cash, accounts receivable, inventories, and prepaid expenses—as well as other long-term assets, such as equipment, land, and buildings. If the company has assets such as goodwill, those will be listed. Also listed on the balance sheet is stockholders’ equity, which shows how much of the owners’ money is invested in the company.

The third report is the statement of cash flows. This measures how much money is coming into the company and what it is being used for, as well as how much money the company has used and where that money went. This is important, because even if a company is profitable, if outgoing money exceeds incoming money, the company could still run into trouble.

Once you learn a few accounting basics, you can add to your knowledge until you obtain mastery of the subject. Eventually, you’ll be reading through statements in a matter of minutes. After all, shouldn’t investing give you time for a better quality of life without intimidating you with the details?

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4.
Clarity Creates Money

If you listen to any conversation between friends, you will hear complaints that they aren’t paid enough, have too many bills, or wonder why their money doesn’t go further. While everyone has concerns about money, don’t shortchange yourself. Take the time to clarify the positive aspects about your financial situation, as well as the negatives. This will allow you to take positive actions to improve the quality of your life and help you fulfill your financial goals.

Clarity gives you the inner peace of knowing what your financial strengths and financial weaknesses are. Often, people don’t give themselves credit for what they have and instead focus on the negatives. For instance, people with large credit card debts may feel like they have failed. At the same time, they are ignoring the fact that they earn $80,000 a year. While that doesn’t make them millionaires, it does mean that they have a nice income, and they should be proud of themselves.

If you are looking at your checking account balance to determine how you are doing financially, that is perhaps the wrong place to look. Instead, total up your savings and brokerage account balances, and add in the value of retirement accounts and the equity in your home. Once all of those numbers are added together, you might find that your opinion of your financial situation improves.

Clarity is also important to allow you to clearly identify what you don’t like about your financial situation and develop a plan to make the appropriate changes. Money should be available to add to your quality of life. If you have clarity about what you have or don’t have, you can make an informed decision about what changes you need to make. For instance, if you have not set aside enough for retirement, you can take the constructive actions needed to remedy the situation instead of just worrying about it. Those actions will increase your peace of mind and boost your self-confidence.

Clarity lets you remove the fear of the unknown and set yourself on a path to achieving constructive financial goals. Once fears—rational or irrational—are brought into the light of day, they won’t seem so overwhelming.

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5.
Be a Smart Home Buyer

Purchasing a home can be one of the most stressful financial events in a person’s life. In order to manage your workload and head stress off even before it begins, start the process to become pre-approved for a mortgage.

Pre-approval provides several advantages. First, when you meet sellers, they know that they are dealing with someone who can complete the transaction. That keeps a deal from falling apart because the potential buyer couldn’t obtain financing. If you are in a situation where there may be several parties that are putting in bids on a house, you want to be in the dominant situation of letting the seller know that you have already been approved for a mortgage. Even if your offer is slightly lower, if the seller knows that the deal will be completed, you have a distinct advantage.

By talking with your bank first, you will quickly find out if you are looking at houses that are too expensive for your financial circumstances. Sometimes, a reality check can be helpful, and obtaining that earlier in the process is important.

Another advantage of being pre-approved for a mortgage is that you can quickly discover any lurking credit problems and resolve those early in the process. By finding out the bad news earlier, you’ll have plenty of time to resolve any problems.

You also might save a significant amount of money. For example, a credit problem may not be sufficient enough to prevent you from receiving a mortgage. However, it may result in a higher interest rate, which over the life of a thirty-year mortgage will cost you thousands of dollars. By having plenty of time to resolve the problem or provide an explanation, you may be able to still receive the lowest interest rate possible.

Purchasing a house is stressful enough. Take care of yourself, and adopt the best financial practices by obtaining pre-approval for your mortgage. By taking care of it ahead of time, you can keep your stress level to a minimum and focus on completing the house purchasing process.

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6.
Beat Credit Card Companies at Their Game

Every week, millions of people are bombarded with offers to sign up for credit cards. The offers often end up in the trash—the result of our confusion about which card company to choose and why. In our busy lives, sorting through all the information just seems too time-consuming.

The competitive battle among credit card companies desperate to attract the best customers does mean a better opportunity for credit-worthy customers. Here are some simple guidelines to follow to make sure that you profit from this situation in order to obtain the least expensive credit card with the most perks.

As you receive these offers in the mail, collect them over several weeks, and then compare them to see which card offers the lowest interest rate for the longest period of time. You may even receive a credit card that charges no interest for one year!

For people who are carrying a balance on their credit card, such offers can be particularly lucrative. Many cards offer an interest rate of zero for a specific time. This allows you to transfer your balance from a high-interest credit card to a card that charges no interest, which will save a significant amount of money and help you pay the balance off much more quickly.

If you have offers for several cards that charge no interest, examine how much you will be charged for transferring a balance to that card. Often, the fee is equal to three percent of the balance being transferred, with a cap set at thirty-five or fifty dollars. If you know that you can pay the card balance off before the no-interest-rate period expires, then the card offering the lowest balance transfer fee will be your best option. However, if you won’t be able to pay it off during that time period, you are better off taking the card with the longest period of zero-percent interest, even if the balance transfer fee is more.

Also look at the length of a grace period on purchases, which often is twenty-five days. If a card seems to offer the lowest interest rate but has no grace period for purchases, it might not be the best deal in the long run, because interest charges begin accumulating even before you have received the bill.

It’s worth a little bit of time to research credit cards to ensure that you receive the best deal. After all, why pay more interest and fees than are necessary?

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7.
Buy the Best House That You Can Afford

When interest rates are at low levels, homebuyers have an amazing discount available to help them take care of their families and provide a secure home. With low mortgage interest rates, the smart buyer will take advantage of the situation to buy the nicest house possible.

However, just because you may have the ability to make your money go farther doesn’t mean that your goal is to keep up with the Joneses. Nothing could be further from the truth. Instead, you’ll be taking advantage of the fact that houses are on sale and have the opportunity to provide more for your family now than ever before.

Here’s how it works. When interest rates fall, the amount of monthly mortgage payments declines drastically, as well. That means the $250,000 house that you were eyeing would go on sale, opening up two options. First, your $250,000 house would cost less than it once would have, saving you considerable money in the process. Second, with the substantially lower cost, maybe you could purchase a house for $275,000 instead.

It also is possible to lower the monthly mortgage payment even further. A variable-rate mortgage will have a lower interest rate than a thirty-year fixed mortgage, passing along savings and lowering your monthly payment. However, variable mortgages require caution. The interest rate will be guaranteed for a period of three or five years, and then it can change. If interest rates rise, your monthly payment will rise, too.

You must make these decisions with an eye toward your future. That said, it can be difficult to project where you will be in five or ten years’ time. Just because you are able to spend more now doesn’t mean that you should. Examine your motivations. Are you caught up in what your friends are doing? As human beings, we are susceptible to want to “keep up,” but if you make keeping up a priority, nothing can bring on more stress than suddenly finding yourself unable to do so.

Make certain that you carefully evaluate how expensive a house you can afford. While you may be able to purchase something much nicer than you ever dreamed, you don’t want to end up in a financial bind and create more problems for your family.

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8.
Check Your Credit Report

One of the most effective ways to preempt a stressful situation when purchasing a house or car is to find out ahead of time what your credit report says. That simple action will avoid unpleasant surprises when you are ready to make a large purchase.

While you may think that your credit is perfect, a mistake could have been made by one of the credit reporting agencies. A creditor also could have accidentally attributed a negative comment about someone else to your credit report. Mistakes do happen.

Even if there are no mistakes, the report may mention late bill payments that you weren’t aware were on your report. If it does, you should have a response prepared. Obtaining your credit report before you need it gives you the time to prepare a response. For instance, if one credit card company reports that you have paid your bill late, you can prepare an explanation about what happened. You can point out that this was an insolated instance and show the other times that you have paid your bills on time.

However, if there was a pattern of late bill payment, you may have had extenuating circumstances. If you were sick for an extended period of time, or if you were laid off and your unemployment benefits didn’t cover all of your expenses, you can explain that situation so your potential creditors understand that it was a difficult and extraordinary time. You can show that you paid your most important expenses, such as your rent and car payment, and had to juggle other bills, such as credit cards. You also can point out that as soon as you were employed or healthy again you began paying all of your bills on time.

Finding out exactly what your credit report says before anyone checks it can substantially reduce your stress level. If your credit rating is perfect, then you can relax knowing that you won’t have any problems obtaining credit. Instead, you will be viewed as a perfect buyer, making the purchase process as stress-free as possible.

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9.
Choosing a Bank

It is important that you determine what you need in a bank and then choose accordingly. Some people hate to pay monthly fees for checking accounts, even if they are just five or ten dollars per month. If that sounds familiar, you will want to ask, in advance, what a bank’s checking account charges will be. Usually, that involves knowing what balance you are likely to keep in the checking account and knowing what will be charged if your balance drops below that level.