One Financial Fool’s Guide to Personal Finance Terms, Part One

Posted on December 6, 2007
Filed Under budget, debt, savings |

Budget

This is what they used to call a spending plan. Rather like the word diet, it conjures up horrible pictures of eating beans and hot dogs. In today’s gentler world, a budget is called a spending plan and you simply plan out how you want to spend your money. Like any plan, it is a work in progress and changes from month to month as you learn more about how you spend your money.

Credit Repair

If you are totally over your head, the creditor calls are driving you insane and you don’t feel you can negotiate with them, this is one avenue that can offer relief. When you hire a Credit Repair or Credit Counseling Service, they take the calls and deal with the creditor. You make payments to them and when you have enough money in your account, they negotiate a settlement with your creditors. This should be a last resort.

Credit Report

FREE!! You will want to get a copy of your credit report to see if there are any unknown nasty little bills hanging around out there. You can order it free online from www.FreeCreditReport.com You can also use this as a guide to paying off creditors.

Debt Consolidation

This is a type of loan which some people choose in order to pay off loans, bad debts, etc. It is one method of repairing credit but be cautious that you are not just moving debt from several sources to one with a higher interest rate and longer repayment period. In most cases, it is better to use one of the debt repayment plans such as the Rapid Repayment Plan or the Debt Snowball to pay them off one at a time.

Debt Free

Not impossible by any means, this is the goal. It can mean either having no consumer debt (credit cards, student loans, unsecured loans) or it can mean having no debt at all. Quite a few people do not consider a mortgage when they are planning to pay off or down their debt.

Debt Snowball

Dave Ramsey’s Debt Snowball is a plan to pay off debts. Dave recommends paying off the smallest bills first. This gives you momentum and helps keep you motivated to pay them all off

Emergency Fund

An Emergency Fund is basically a savings account that you keep to pay for those emergencies that you used to pay for with a credit card. The initial goal is somewhere between $500 and $1000 depending on your income level. It provides a small amount of security and financial peace while you are paying off debts. In the latter stages of financial freedom, an emergency fund can be increased to 6 months of living expenses in case of loss of income or some catastrophe. You can see my ideas for creating an emergency fund when you have no money here.

Financial Peace

This is going to vary for everyone but it basically means that you have enough money to pay your bills, you are comfortable with your retirement savings, and you have enough to get by for a period of time if you lost your job.

Freedom Account

Once you have developed a spending plan, you will have an idea of how much those irregular payments are for things like insurance or property taxes. Your Freedom account will consist of small but regular payments to pay those bills. You will also want to set aside money for Christmas, birthdays, car repairs, etc. Michael at “It’s Your Money” explains it in detail.

Rapid Debt Repayment Plan (RDRP)

Mary Hunt’s Rapid Debt Repayment Plan differs slightly from the snowball approach. Mary recommends paying off the bill with the shortest repayment period. Once the first bill is paid off, you allocate the money you were paying monthly to the next bill, and so on. (If I have screwed this up, forgive me but Mary’s articles can only be viewed by paying members so this description is second hand. If someone can explain it better, please leave a comment)

Spending Plan

This is a kinder, gentler name for a budget. This is where you figure out where all your money goes every month and then develop a plan. Hopefully your spending plan will reduce waste and enable you to pay off your debts and increase your savings. Take it from this financial fool, just writing down every penny you spend every month will be an eye opening experience. It was for me.

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Comments

2 Responses to “One Financial Fool’s Guide to Personal Finance Terms, Part One”

The Chef on December 7th, 2007 10:03 am

What if you have money (excess) and you dont know what to do of it… what would you call that? I am experiencing the same. No financial peace as per your definition

Just a request: Please allow comments from bloggers other than Blogger.com. Currently you allow comments from google/blogger account holders and I have a wordpress based blog.
Financial Fool on December 7th, 2007 11:46 am

Chef, Right now, I personally would call that heaven but I am sure it is frustrating for you. I am still struggling with too much month for my money.

I have learned that blogger is somewhat limited in many ways but I do have the comments set to allow anyone. You just have to click the button to nickname. Unfortunately, that doesn’t give you the option to enter your URL or email.