Many programs for people trying to improve their finances fail to include long-term planning and coaching in their curriculum. Teaching people to create a working budget is the first step to financial planning and is crucial to reducing debt. However, budgeting alone will not lead to financial self-sufficiency. People living paycheck-to-paycheck experience constant financial pressure, leading to stress and unhappiness. Making long-term financial decisions is more difficult when you are under constant stress. To manage the stress caused by finances, behaviors and beliefs about finances have to be challenged. Healthy financial planning has to include financial coaching, financial literacy, and healthy banking relationships.
Group Discussion: Share whether or not your parents discussed finances openly when you were growing up. Do you discuss finances openly with your family now? What has shaped your conversations—or lack of conversations—about finances?
Creating a budget is the first step toward financial planning. Although most people do not feel comfortable talking about money and their behaviors concerning financial decisions, you must break through this mental barrier and commit to being open about your habits. Awareness is the first step in making changes to any habit or behavior. Sometimes awareness can increase stress because you may realize that you may not be able to cover all your expenses. This is temporary. Balancing monthly expenses and cultural expectations can be a challenge with low-wage jobs and irregular work hours. Selecting which bills to pay and which to cover next week or next month may be your first step to financial planning. Using a phone app, writing down all expenses, or using online banking to track spending are necessary steps to get started on your financial plan. Explore budgeting options with your Personal Development Coach to discover what is right for you. Do not be discouraged if the first method you try does not work for you. Learn from that experience and pivot to another method. Once you have an understanding of your income each month, the next goal is to assign all of your income to a bill, debt, or budget item. If you have all your bills paid, create a savings plan prior to spending any funds on personal wants. Even a small amount dedicated to savings will begin to change your perspective on long-term potential.
No matter where you are financially, it is empowering to be aware of where your money is going. This will allow you to separate needs (food, shelter), wants (new phone, eating out), and obligations (debt) so you can set priorities. You will most likely notice that your spending is not matching your priorities or your vision you created last week. Once you begin to track your spending, you will discover small amounts that add up to large portions of your monthly budget. You will also be able to identify your recurring payments and obligations that have fixed due dates and amounts. These expenses typically have fees if you pay late. Late payments will also negatively affect your credit score. Managing common budget obligations can save you money and improve your credit score.
Now that you have itemized your budget as items that you need, want, or are obligated to pay, be honest and begin to look at things that you are buying impulsively. What can you eliminate temporarily to help manage your expenses? Do you have bills such as car insurance or cell phone plans that you may be able to lower through negotiation or by exploring more affordable options? Is there anything left to add to a savings account? It is important to put any amount left over each month into savings. It is a good behavior to start, even if it is only $5 each month!
You are always responsible for paying your obligations on time. However, when your income doesn’t cover your expenses, you can either find methods to increase your income and resources or decrease your expenses. In some circumstances, that may not be enough, and a short-term plan will be necessary to make it through the month. Knowing which obligations to pay first and which to pay late is important. Take time to prioritize your bills into two categories – essential and non-essential. Essential bills need to be paid first to ensure that your basic needs are met. Once your essential bills are paid, pay your non-essential bills. Regardless of your ability to pay, stay in contact with the creditor, company, or organization you cannot pay. Sometimes you may need to call a debt collector to create a repayment plan. Do not ignore obligations you cannot pay. Instead, call and explain that you will miss a payment or be late on a payment and the reason. Communication is always the best choice.
Short-term loans have expanded and regulations vary greatly state to state. These short-term loans are often called payday loans, cash-advance loans, or installment loans. The name comes from the idea that the loan’s principal amount (the initial amount of the loan without interest) would be paid by the borrower’s next paycheck. Many buy-here, pay-here and rent-to-own furniture and appliance stores operate in a similar manner. These types of loans evolved to fill the gap for individuals who have low credit scores or limited borrowing history, making them high-risk borrowers. Most banks do not offer small, short-term loans, especially to unbanked individuals. The very high-interest rates and the fees for extensions begin to add up making it very difficult for the borrower to pay off the loan. The loans are considered unsecured personal loans and they do not show up on a borrower’s credit history, even if the payments are all made on time. When paid off quickly, they do not harm the borrower’s credit score, but they also do not improve the score. When they are not paid off or go into default, they do get listed against the borrower’s credit and will harm their credit score. Due to the many pitfalls of these types of loans, they are now called predatory loans. Talk with your Personal Development Coach about resources in the community that may be able to assist you if you are trapped in a predatory lending cycle.
Your local bank or credit union may offer payday lending alternatives. Many banks are working to reduce the need for payday lending by offering lower-interest loans to individuals working to repair their credit. In order to repair your credit, you have to pay down debt, consolidate payments, and potentially get more credit through credit repair programs. These are often small loans kept with the bank that are placed into a savings account and basically repay themselves. As you make additional payments on the loan, you are also building savings. Improving your credit is essential to buying a new home or car, finding a place to rent, and even the amount of your deposit required to turn on utilities at a new location. Your credit has an influence on more than you might imagine. We will talk more about how to engage with a bank to repair your credit.
As you become financially empowered, you may have a few hurdles to overcome. One of these barriers is called the Cliff Effect. The Cliff Effect is a combination of financial supports that change as you begin to move toward financial self-sufficiency. When you have increases in pay through promotions, increased education, or improved employment, you will begin to lose your eligibility for programs like food stamps, childcare subsidies, insurance, subsidized housing, and the Earned Income Tax Credit (EITC). As your opportunity for a pay increase approaches, it is important to review your total income with all forms of assistance to make sure the raise will cover the drop in assistance you will lose. Often a fifty cent or one dollar raise seems very exciting—an answer to financial health. However, due to the Cliff Effect, it may result in a great reduction in benefits, greater than the raise. The Cliff Effect leaves many hard working families upside down and many have to refuse the raise until it is great enough to cover the lost benefits. For some, reentering the workforce may cause the same concerns. The way these systems are set up, they actually discourage people from improving themselves or entering workforce development programs. Meeting the basic needs for your family is your first priority. Food, healthcare, affordable safe housing, and quality childcare are necessary for anyone to reach their full potential in the workforce. Understanding and preparing to overcome the Cliff Effect can improve your health and wellbeing
Small-Group Discussion: Describe how the Cliff Effect has influenced your personal choices. Have you turned down a raise or declined a job to maintain financial assistance? How have you overcome the Cliff Effect in the past?
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Your Income and Expenses
Use the next two forms to complete an assessment of all of your income. Include all sources from your employment, all government assistance programs, and any expenses covered by your friends or family. Then list all of your expenses. If the expense changes month to month – such as gas or groceries – use your best guess regarding the average amount of money you are spending in these areas monthly. As you work with your Personal Development Coach throughout the RISE program, you will track these variable expenses and get a more accurate reflection of how much you should be budgeting in these areas. In addition, include any outstanding loans or items in collections to create a full description of your current financial status. You must begin your journey to financial empowerment by having awareness or a clear picture of where you are starting.
1. Complete any missing parts of your budget and be prepared to work with your Personal Development Coach to review the budget.
2. Continue to use the free online resources to check your credit report and make sure you have all
your debt listed. Remember you can use resources like Credit Karma, Nerd Wallet, or Experian
mobile apps for quick, free access. (Note that your free reports may not be as accurate as a full
credit report assessed by a bank.)
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RISE Foundations Class Four PDF
Financial Empowerment reference