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Debt management includes budgeting, managing cash-flow, reducing/eliminating debt, building cash reserves, your FICO score and taxes.


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Use this with your clients: Expenses, Assets & Debt Reduction Worksheet & Calculator template


Budgeting

“When you budget, you're spending on paper, on purpose, before the month begins. It simply means, spending your money with intention.” -Dave Ramsey

“What some people mistake for the high cost of living is really the cost of high living.” -Doug Larson

“Most of the great investors are misers.” ―John Train

  • Spend less than you make. Manage the rest.
  • If you don't manage your cash-flow, it will end up in the wrong place.


Spending / Loan / Debt Management

“One of the dumbest things you can do with money is spend it.” ―Robert Wilson

"If you take care of the pennies, the dollars will take care of themselves." ― Russell Sage

“Get out of debt, and stay out of debt. Keep your nut as low as you possibly can, especially in 'good times'.” ―Nick Murray

“If you buy things you don't need, you'll soon have to sell things you do need.” ―Warren Buffett

“Do not save what is left after spending. But spend what is left after saving.” ―Warren Buffett

“Most people spend money on things they don't need, with money they don't have, to impress people they don't know.” -unknown

“The poor get poorer by acting rich, and the rich get richer by acting poor.”

“What leads most people into debt? Trying to catch up with people who are already there.” -unknown

“Never spend your money before you have it.” -Thomas Jefferson

“If you wouldn’t buy it at full price, don’t buy it on sale.”

“People who live far below their means enjoy a freedom that people busy upgrading their lifestyles can’t fathom.” ―Naval Ravikant

“Live like you're broke, invest like you're wealthy.”

  • Your goal should be to eliminate all debt, with the possible exception of your mortgage.

  • Transfer high-interest, non-deductible debt, to a low-interest, deductible debt.


Debt Stacking

  • Pay off your debts like a snowball!
  • Once you pay off a debt you continue to apply the now-eliminated-payment to the next debt in your stack.
  • Continue until all your debts are eliminated. During this process you are paying the same overall monthly amount.
  • Start either with the highest interest rate (APR), or the smallest debt and work from there.
  • For a debt-stacking tool, use our Debt Reduction Worksheet spreadsheet. It is a Google Sheets Template.


War Chest

“No matter how touching someone's story is, never touch your emergency funds.”

Read Nick's ATY 030 January 30 - War Chest PDF

Get one year's living expenses (not necessarily "lifestyle" expenses) in the American Funds Tax-Aware Conservative Growth and Income Portfolio as quickly as you can, even if you have to live on coffee and rice while you're saving toward this goal. This will give you piece-of-mind, and let you weather out the "financial storms", and avoid liquidating your retirement accounts. Cars break down, pipes wear out and break, and kids get sick. Build yourself a "reserve account" to pay for these unexpected events.


FICO Score


Range of Credit Scores

Credit scores can range from 300 to 850 points depending on the score system. The higher the number the better your credit score. Each lender determines what it considers a good or bad credit score. However, there have been several general score range breakdowns to give you an idea if you have good or bad credit.

  • 700 - 850: Excellent/very good credit score.
  • 680 - 699: Good credit score (Average American score is 682).
  • 620 - 679: Average/OK credit score.
  • 580 - 619: Low credit score.
  • 500 - 579: Poor credit score.

300 - 499: Bad credit score.

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What Determines your Credit Score

Although there is some distinction between a low credit score and a bad credit score, it is important to note that many lenders consider consumers with scores under 620 as credit risks.

Payment history

Your payment history contributes a whopping 35% to your FICO score calculation, according to Fair Isaac. That means that making consistent on-time payments, or not making them, is the single biggest factor that can cause an increase or decrease to your score. This effect tends to dissipate over time, so the more recent the late payment, the bigger the effect on your score.

Credit utilization

Your credit utilization percentage, or your total amount of credit card debt divided by your total credit limit, makes up 30% of the FICO score. You can increase your FICO score by improving your credit utilization percentage, preferably to less than 30%. Once the percentage gets as low as 10%, you will not get much more improvement from a FICO score standpoint, but you’ll gain peace of mind knowing that you have little to no credit card debt hanging over your head.

Length of credit history

The FICO score calculation likes to see credit histories that extend many years, and it assigns 15% percent weight in its calculations to your length of credit history. If you have a card that you rarely use, consider holding on to it if you have had it a long time, because closing the account entirely could dramatically reduce your average account age.

A consumer’s particular credit mix and the amount of new credit he or she has taken on make up the remaining 20% of a FICO score.


Improving Your FICO Score

  1. Check your credit score. To improve in any area, the first step is to take stock of your situation. Knowing your score will let you know whether you have to improve and, if so, by how much.
  2. Check your credit limits. Your monthly credit card statements tell you how much your credit limit is, and how close you are to it. This is important so you don’t accidentally make a purchase that puts you over the limit for a particular card. Going over your credit limit raises a red flag to credit agencies and can negatively affect your score.
  3. Consistently pay bills on time. Set reminders. Create a spreadsheet. Enroll in auto-payment. Do what works best for you, but be timely in your payments.
  4. Ask for a credit limit increase. Call each of your credit card companies and ask whether it will raise your credit limit. This will immediately improve the credit utilization portion of your FICO score calculation.
  5. Optimize your credit utilization percentage. Use extra money each month to pay down your credit card balances, and resist the urge to put any new charges on your credit cards until you get comfortably in the 10% to 30% credit utilization range.
  6. Be patient. Depending on your financial situation, increasing your FICO score could take several months to several years. The benefits of doing so can last a lifetime, however, so stick with it.


Taxes


Tips to simplify your 1099-taxes

  • Have your taxes done by a professional. Do NOT do them yourself, don't use software, and don't use the "chain stores" such as H.R. Block (that's like using a Robo Advisor).
  • Hire your tax professional for an hour and ask her questions about what is and isn't deductible and other 1099-related questions.
  • Use a designated credit card for all of your business deductions. Do not use the card for any non-business expenses, and try very hard not to pay your business expenses with any other method other than this card. Give your tax professional the yearly statement of this card.
  • Begin paying your estimated taxes at the beginning of the year (based upon last year's taxes), and pay them ASAP.
  • If you're part-time, consider raising your W2 withholdings to off-set your 1099 income.