Video: Basics of Money Management Transcript
[PNC Employee Education]
Hello and welcome! This presentation discusses the Basics of Money Management.
What it means in terms of what you make and what you spend.
During this presentation, I'll discuss the topics of how we think about money, setting financial goals, controlling spending, and if it applies to you, reducing debt.
I'll also discuss basic guidelines for developing a budget or using different approaches to budgeting if you already have a budget in place.
And then, of course, I'll talk about the importance of saving for retirement because it is the longest vacation you will ever have to pay for, and it's important that you fund that savings goal now, regardless of your age.
Let's begin with the root of our financial beliefs and values and that is how we think about money. Without consistent, healthy, financial habits in place, money can be tough to manage.
It can seem like a big mystery, at times, and feel complicated.
This is especially true when faced with an unexpected expense like a surprise car repair or an expensive medical bill.
It stands to reason that if you're constantly struggling to pay for today, then it makes it that much harder to save for tomorrow. In fact, most people have a hard time looking beyond their short-term financial emergencies to longer-term financial planning because of the need to devote time to what's happening now.
This is why an important step in making long lasting financial progress is to first understand how you think about money. Do you already have healthy money habits in place or is your first step to create them?
If you have habits in place, are they manageable and consistent or are they upended and thrown by the wayside when a financial emergency arises?
Do you have an organized method of keeping track of your financial progress, like a budget, or even a spending plan? These are important things to consider so that you can effectively create, or fine tune, your money management plan.
Having an effective money management system in place will allow you to lessen the severity of a financial setback or maybe even avoid it altogether. It's also going to allow you to reduce or eliminate any debt that you may have, which in turn gives you more financial freedom and control.
You can reach your financial dreams faster, and you can recover faster, if you're faced with an unexpected emergency or a disaster.
Now, after you've taken some time to honestly assess how you think and feel about your financial situation, you should have a pretty good idea on what you'd like to change or improve. This means that you're now ready to set some financial goals. The first step towards achieving your financial goals, of course, is to have a clear idea of what that goal is.
Then having a plan in place to make sure that you stick to it.
So, let's talk about the six tips for setting and achieving your financial goals. Step #1 or tip #1:
Define and prioritize your financial goals.
Make a list of what you'd like to achieve and be specific. Rank the list in order of importance. Indicate the length of your goal. Is it a short, medium or intermediate term, or a longer-term goal like saving for retirement?
Next, step #2:
Assess your financial situation. List out your monthly obligations, the financial obligations like the rent, the utilities, the groceries.
But also, be sure to include your savings and spending goals. For example, paying for the vacation, or perhaps most importantly, replenishing that emergency fund that type of thing. If you used your emergency fund last month, it will need to be included in the list to replenish the next month.
After you've done that, you can now subtract those financial obligations from your monthly income. So, what's going out and subtract what's coming in. The objective of this process is to allow you the flexibility to reprioritize your goals each month, should you need to, because they can change.
Tip #3: Set specific financial targets. Really, be specific. Vague targets are difficult to hit and if you do hit them, often times it may not necessarily be what you intended.
So, ask yourself some questions.
How much is this going to cost? What is the monetary value attached to each of these?
And how much will you need to save each month and for how long in order to achieve it?
When it comes to those longer-term goals, start small, and as your income grows, you can increase your contributions toward it.
Tip #4: Keep track of your progress. Tracking your progress will help keep you motivated, and it may help point out areas that you may need to realistically adjust. Some people have found that keeping an app or journal can help.
But whatever you choose, find a way that works best for you and a method that is flexible enough for you to maintain.
Tip #5: Talk about your goals. Yes, tell someone! Peer pressure with trusted people can help keep you accountable, and a professional may also help, for example, a financial planner, who can even help you realistically take steps to get there and help keep you on track.
This last tip, tip #6 is an important one.
Keep a positive outlook. I know financial setbacks can seem insurmountable at times, but this is where having an emergency fund in place can keep plans from derailing.
We can all experience setbacks. So, just plan for them. Stay focused and keep in mind that any progress that you've made is good progress. If you're following these tips, then yes, your goals are in sight.
Now, let's switch gears and discuss two things that can slow progress down and that is out of control spending and debt. Any well-meaning, money management strategy will likely fail or be ineffective unless you control or keep track of your spending, and if you have it, reduce debt.
These can be especially painful if you haven't taken steps in your money management plan and have an emergency plan in place, as well.
So, starting with the financial safety net, this is important. You'll want to have this in place. As the first step of setting your financial goals, or one of the first categories.
So, when you're creating your budget and that spending plan, you're going to want to include your emergency fund as if it is its very own bill or expense. The amount that you set aside each paycheck, or each month can be used to cover those unexpected expenses.
And, of course, you'll want to have that in place before the emergencies pop up and surprise you later.
So, that's the first step. The next thing and in addition to that, studies have shown that when people are faced with a financial emergency, even having a $1,000 set aside to cover that emergency, or a piece of it, can help keep a money management plan intact. So, a rainy-day fund could help you not dip into the credit card to cover expense and add on to debt as well as keep your plan on track.
Speaking of debt, let's take a closer look at it because it might be a priority issue for you that you are going to tackle as part of your plan. So, when it comes to prioritizing debt, if you're looking at reducing it, just know that there are two types.
What is considered good debt and what is considered bad debt? And while it's important to reduce or eliminate all types of debt, especially if you're spending more than what you're making, prioritizing which debt to payoff first can be helpful.
So, looking at good debt, this is what you'll pay off last, or after you pay off the bad debt. Good debt is things like education or a home purchase because it has some sort of appreciation benefit or potential increased value attached to it. For example, student loans; that's an investment in your future. You can likely get a better job or earn more down the line. A mortgage, now that's debt, but it's better than rent in that it does help you build equity and allow you to increase your homes market value and the value to you, should you sell the home later.
Those types of things are what are considered good debt. On the other hand, bad debt like auto loans and credit cards have no appreciation benefit or increased value.
Interest rates are typically higher, and repaying bad debt takes away from savings like retirement or that emergency fund. If you're like many American households, you do have credit cards. And if you do be sure to use your credit wisely.
Choose the right cards. Of course, the ones with the lower interest rates or ones that have valuable perks that would help you save on other expenses, like travel, or maybe even offer you cash back, for example.
Pay your credit cards promptly and in full. The sooner you pay the balances is off, the less you'll pay in finance charges over time; and the more cash you will free up each month that can be used to pay off other credit cards or debt faster. I'm going to walk you through the details of some strategies on how to do that.
You can research online many accelerated debt repayment strategies, but there's a couple of methods that are easy to follow and pretty popular.
So, let's talk about those two methods. The first is the Snowball Method. This is where you focus on paying the smallest debt as quickly as possible, and then applying that money to your next smallest debt.
The Pro here is that it can give you more motivation to paying off that card faster, but the Con is that because you are paying higher interest rates later, it may result in you pay more overall. Another popular method is the Avalanche Method. So, with this method, you focus on paying the highest interest rate first.
You may pay less debt overall, and it may help you decrease your debt faster; but it may take you longer to pay it off, which can make it harder to stay motivated and continue on.
There are other methods that are available, but these two are effective and are the most popular.
Now, I want to take a moment and I want to pause. And I'd like to ask you a pop quiz question. Are you ready? Okay, here it is.
The average American household carries what amount in credit card debt? Is it A, B, or C?
All right, let's take a look if you guessed the answer is C, you are correct. According to a 2022 study, the average American household carries $7,876 in credit card debt, and by the way, that amount is about half of what the same study showed five years ago, when it was a little over $15,000 as the average amount. So, the good news is because it means many Americans are having success in reducing their credit card debt, and a lower interest rate environment did help with that. All right here comes another pop was question. Are you ready?
Here we go. The average American borrows how much for an auto loan or a used car? Is it A, B, or C?
Alright, let's take a look. If you guessed the answer C, you are correct. The average auto loan balance is about $28,000. Now, interestingly enough, while the auto loan debt has been increasing steadily over the last decade, it's hovered at about the same amount over the last five years. The average auto load balance in 2009 was about $18,000. In 2017, it was about the same as it is today, about $27,700. That said, this statistic is looking at used cars, not new cars. The average price trend for new cars continues to move upward.
Alright, let's continue discussing debt.
If you're like many Americans, you have it and if you have it, how best can you take control of it? Well first, start by paying your bills on time. This is going to help you avoid higher interest rates in those expensive late fees.
Second, only keep the cards and the loans that you really need.
Keep in mind, good debt versus bad debt when you're prioritizing which of those, you're going to pay off first, and of course, pay down debt rather than just spreading it around. Research shows that those accelerated debt repayment strategies, like the Avalanche
Method or the Snowball Method, really does allow you to reduce or eliminate your debt quickly.
Consolidating debt into one place may help you manage it, but it doesn't necessarily mean that you pay it off faster unless you're paying more or getting a lower rate.
The next step in your money management strategy is to understand and manage your credit score. You can start by visiting myfico.com to understand factors that affect the credit score.
Be sure to check your actual in full credit reports at least once a year. You can get a free credit report from each of the three major consumer credit bureaus each year by going to annualcreditreport.com.
These free credit reports can help you gauge your debt reduction process, and it can help you monitor or possible identity theft.
It's important to note that credit reports from annualcreditreport.com are free, but credit scores are not necessarily free, so just be sure to know the source of your credit score, and what factors are being used to calculate it. Not all credit scores are created equal.
The FICO score, which is the Fair Isaac's score is the most commonly used, but it is not the only scoring model that exists.
Alright, let's take a little bit more of a closer look at credit score and some of the factors that are used to create it.
Now, under the FICO, or the Fair Isaac System, credit scores can range from 300 to 850, and it will look at your payment history, which is the number of times you've been late or had missed payments.
It's the heaviest weighted, and it is the most important factor of your score at 35%.
The credit utilization, meaning the amount that you owe creditors compared to the amount that you have credit available, is the second most heavily weighted and that is 30%. This is another very good reason to reduce your credit card balances using the debt reduction strategy mentioned earlier.
The length of your credit history, which is how long you've had your accounts open, that's 15%. In general, the longer your credit history, the better. Types of credit, that's 10%.
This looks at a combination of the types of credit you have, for example, car loans, mortgages, credit cards. Generally, lenders like to see a mix of credit, as opposed to just one type.
Lastly, 10%, that's new credit.
This looks at any new credit that has been added to your credit report recently.
Newly added credit accounts can lower your average score in age because it has a more significant effect, if you don't have a lot of credit information in your file.
So, understanding and managing your credit score is an important part of a successful money management strategy if you have credit cards. The higher your credit score, the less you're going to pay in finance charges and loan interest.
You know what that means? Less money going towards interest charges, and more money going towards the things that you want in your savings plan. So, what do you want to spend your money on? Do you have specific financial goals? More specifically, do you have a budget in place to help you achieve them? Yes.
Having a budget, I know the word budget may cause some of you to cringe because we do naturally associate that word with sacrifice or restriction the same way, we may view the word diet as it's something we have to give up.
But the truth is, budgeting really is something that works for you. A budget is a tool, and it helps you identify priorities while giving you protection and control.
And the opportunity to reach your financial goals. So, after you've identified those goals, and we talked about it earlier, it is time for you to create a spending plan to actually reach them.
You may already have your own budgeting method in place and if you do, you can continue to use it. But here's an example of some common approaches that you can use just as a guy can either get me started or maybe freshen up your approach if you already do have a budget in place.
The first is the Line Item Budget. This is where you group expenses by categories then review where you can cut back. All it requires is your financial information in a spreadsheet.
This can be done electronically using an app or budgeting software program, or even good old-fashioned pen and paper, whatever your preference is.
Then there's the 50/30/20 Budget. This is where you spend 50% on your needs, 30% on your wants, and 20% on saving or pay down debt. This is a great system for those who want to pay down debt and build and maintain the emergency fund.
Next, an increasingly popular budget approach is. the Envelope-based Budget System. With this system, you determine how much you want to spend on each category for that month, or even by paycheck. For example,
I want to spend $200 on food, $100 on entertainment, and $50 on debt, that type of thing.
Then, place that amount of cash in a designated envelope using the categories that you've earmarked.
And then simply use the envelopes to fund your daily spending. When the amount that you've set aside runs out in that category, well, spending in that category is done. This is a good method for those who may want to take a more disciplined approach or maybe you want to see what your trends are, what you're really spending money on each month for a while to get a better idea of your spending habits. The last approach is Hybrid Budgeting.
This approach really combines elements of each of the budgeting methods that I've just covered. Whichever you choose the best budgeting approach is willing to be one that you can stick with, but it has to allow you some flexibility so that you can continue to see and make your financial progress.
So, you may already have your own expense categories for your budget already designated.
But if you don't, here's an example of worksheet that you can use as a guide on what to include. In addition to your budget, you're going to want to also have a spending plan. Now, these are not mutually exclusive.
You want a spending plan because what this is going to allow you to do is to be able to determine how much you can save each month towards a savings goal. And the first step to that is to take your total monthly income, subtract your total monthly savings goal, then subtract the total monthly basic expenses and then subtract your discretionary monthly living expenses. And that's the key.
Discretionary means you may not need that expense every month, or it may not necessarily need to be as much as what designated as often. This is important because once you start the spending plan, and then it's completed, you're actually going to see that last row. You see that in orange?
This is how much you can save every month.
It's telling you; this is how much you can put towards that savings goal.
And for an even greater impact, take some time to look for areas where you can trim your spending and make room for even more savings.
It's very satisfying when you look at that orange box, and you see that there is actually money that can be set aside for something that you want to spend money on.
Alright, so you've got your budget built, you've created your spending plan, one of your savings goals is certainly most likely to be saving for retirement. So, let's talk about that because if there is one savings goal, everyone should be working towards that is saving for retirement. Whether it is near or far, here are some best practices for funding it. First, consider saving for retirement as a necessity because it is. I meant it when I said earlier that it was the longest vacation you'll ever have to pay for.
When looking at future income sources to fund retirement, it's clear that most of the income that you could expect to need as income in retirement most likely will need to come from you. Whether that's money saved, like, in an employer sponsored retirement plan or an IRA, or whether it's income that you will receive from employment through retirement or social security. The good news is the sooner that you save for it, the less you're going to have to spend out of your own pocket later.
Some other good rules of thumb to keep in mind are look at savings as an expense, just like any other expense.
Student loans, utility bills, rent -- pay yourself first.
Treat saving for retirement as if it was A1 top priority, a bill that must be paid each month like all of the others. Also, don't wait to begin participating in your employer sponsored retirement plan or funding an IRA.
Trying to play catchup later is not nearly as effective or impactful as you saving sooner and smaller now.
Playing catchup is more expensive, and you'll miss out on the opportunity for compounding growth that time affords. Even with that said,
Don't get discouraged no matter what age it's never too late to begin. Something saved is better than nothing saved. And lastly, adjust your contributions as money becomes available. For example, if you paid off a loan, you followed the debt strategy.
You no longer need to funnel money to that expense or for daycare. This could be a perfect time for you to increase your retirement savings contribution. You won't miss it.
Your budget total expenses will remain the same. And it will allow you to reach your goals faster. Alright, we have covered a lot of ground.
So, let's review. This is a good time to make note of any action steps that you may want to consider taking for yourself to either create a money management plan, or even ramp up an existing money management process that you already have. Step 1:
Create your financial goals. Plan and track your spending habits. Contribute to a retirement plan, and be flexible. It is okay to adjust your plan.
Consider trying something new, like a different approach, the budgeting methods that I talked about, a new financial app. Something to keep your money management process fresh, but most importantly effective for you.
Remember to congratulate and reward yourself for any progress that you make even if it's small. Someone once told me, when asked, how do you eat an elephant?
The answer is one bite at a time, of course. So, celebrate any small successes, bon appétit. Thank you for joining today's session on the Basics of Money Management.