Know Your Dreams Before Using a Line of Credit

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Know Your Dreams Before Using a Line of Credit

Knowing Your Dreams

Extra cash sitting in your checking account feels great but it they can really keep you from achieving your goals. Why? When you think you have extra dollars, you’re more likely to spontaneously spend those dollars when you see that special something.

What If You Knew . . .

What if you budgeted for those ‘spontaneous’ moments and you knew how much you needed to save today to achieve tomorrow’s dreams? What if you knew how much faster you could achieve your dreams by keeping those extra dollars working for you all the time?

Use ‘These Are My Dreams’

Download CashMap Consulting’s free ‘These Are My Dreams’ template to help you focus on achieving your dreams. Click on the link to view the template. Before you begin:

  1. Identify how much money you have left after you pay your bills. Don’t forget to set aside some ‘fun money’. Enter your monthly amount in the green box near the bottom of the page.
  2. Write down your dream and when it will happen and;
  3. Write down how much your dream will cost if it happened today.

Three Steps to Success

  1. Costs rise so you’ll need to know how much money you’ll need on the day you want your dream to be a reality. Use the link, ‘Future Cost’, to Dan Peterson’s Free-On-Line-Calculator.com. Click on ‘skip to calculator’. In the field, ‘Lump Sum’ enter the cost of your dream from item three above. Enter the number of years to achieve your goal. In the field, ‘Compound Interest Rate’, enter the percent increase you believe prices will increase annually. (My guess is 2.5 percent) In the field, ‘Frequency of Interest Compounding’, in the drop down menu select ‘daily’. When finished, click on the button, ‘Calculate Future Value of Lump Sum’. Enter this amount in the ‘Future Cost’ column next to your dream.
  2. If you have savings for this dream, enter how much you’ve saved in the column, ‘Savings You Have For Goal’.
  3. To calculate how much you’ll need to save each month, click on ‘Per Month’ in the heading, ‘Save this Amt Per Month’. This will take you to bankrate.com’s ‘Savings Calculator’. Check with your financial advisor for the amount to enter for ‘What interest rate do you expect to earn on your savings’. Personally, I use 6 percent. In the field, ‘How much money can you spare for your first deposit or investment?’, enter the dollars you’ve saved. Enter today’s date for your first deposit. Click on the ‘Calculate’ button. This is the amount you’ll need to save each month to achieve your goal.

Complete these steps for each of your goals. The total amount you need to save is at the bottom. Below the total, is the total dollars you have left after your bills and the dollars you’ve put aside to achieve your goals. These are the dollars you have left.

In my next post we’ll look at how to use this tool when prioritizing your goals and using a line of credit.

 

Know Your Dreams Before Using a Line of Credit Part 2

I’ve Got More Dreams Than Money – Now What?

Rest assured, you are not alone! After you’ve written down and priced each of your dreams, there’s a very good chance that the total dollars you need to save each month is more than what you have to spend. This means you don’t have the dollars to accelerate paying off any debt or to boost your savings. What do you do? To see the example that I created, click on the link and view the template that I’ve created. View the tab at the bottom of the page labeled ‘Example’ and look at row 28 in column I. You’ll see I’m short by $64.05.

By the way, I’m assuming that I have an emergency fund totaling $16,100. This means if the unexpected happens, I have already saved six months of living expenses.

Four Potential Solutions

To solve your problem, you can choose from any one or all of the following alternatives.

  1. Earn more income;
  2. Reduce your expenses;
  3. Adjust your dream and lower its cost and;
  4. Postpone the date for some of your dreams.

Creating Your Positive Cash to Use in Your Line of Credit

Your first priority is to create positive cash flow. Begin by reviewing your income and expenses. It’s ideal if you can increase your income and reduce your expenses. Next, review each of your goals and ask yourself, “If I don’t achieve this goal how will I feel?” If each goal is important, take a second look at your current living expenses.

  • Save your receipts. At the end of each week, ask yourself if the item you purchased more important than any of one your goals.
  • Your answer will enable you to either reduce your expense or adjust your goal.

In the worksheet labeled ‘Example 2’, the following changes were made. These changes created $350.53 in positive cash flow.

  1. By either reducing my expenses or increasing my income, my positive cash flow in the green box increased by $200.
  2. I postponed my vacation one year and reduced the cost by $1,000. This reduces how much I need to save each month from $214.48 to $116.28.

I now have $350.53 to use to either accelerate getting out of debt or to boost my savings. For either alternative, I’ll use my line of credit to keep my dollars working for me 24/7.

Working Lazy Dollars Using a Line of Credit

What difference will $350.53 make? My 30 year 4.15 percent mortgage of approximately $240,200 will be paid off 14 years early and in fifteen years I’ll have saving totaling $291,560. Take a look at the CashMap. (Note: For those of you looking at this solution after March 2014, with each succeeding month, CashMap recalculates the savings using the current date loan schedule.)

If you’re more comfortable investing the $350.53, no problem! The important point is you’ve created positive cash flow and you’re keeping every hard earned dollar working for you.

Thanks for joining me. I’d love to hear from you. Please send your questions, topics or suggestions to dennis@cashmapconsulting.com. You can also follow me on twitter at cash_map.