“A budget is telling your money where to go instead of wondering where it went.”
— Dave Ramsey
A monthly budget allows you to see all of your expenses for the month. Some expenses are fixed meaning they are the same every month while others are variable. A fixed expense may be something like a car note or rent. These expenses don’t change and will be the same every month. Variable expenses differ from month-to-month and may include a water or electric bill. The bills will vary from month-to-month depending on how much water or electricity is used.
In a 2015 interview with ESPN’s Michael Rothstein, Detroit Lions wide receiver Ryan Broyles revealed that he lives on a budget of $60,000 a year. Although his contract is worth $3.6 million over 4 years, he along with his wife came to the conclusion that they could live on far less than that. Broyles is perhaps one of the few athletes (and entertainers) who has elected to live so frugally. It’s a smart move, one that he and his family will appreciate long after his career is over. “I studied as much as I could... [and] talked to people wealthier than me, smarter than me. So that definitely helps,” said Broyles after attending an NFL rookie symposium.
When further analyzing Browles’ monthly budget, his savings rate is quite impressive. Assuming he makes about $900,000 a year and pays 40% in taxes, he brings in about $45,000 a month. When you subtract out his monthly budget, $6,000, he saves close to $39,000 a month or $468,000 a year. If he is able to sustain this savings rate over the course of his contract he will have saved $1.8 million! This is money that can be used to start a business, pay for his kid’s college education, and much more. It’s a great head start!
Cost of Living
“Try to purchase a home in New York City with a budget of $140,000 and the options are pretty limited–a 375-square-foot apartment in Queens….. But in Knoxville, Tennessee, $140,000 buys a 1,750-square-foot, four-bedroom rambler on a pretty, tree-lined street.”
— Forbes Magazine
March 3, 2014
The cost of living is what it cost to live in a particular area. These costs include a person’s rent, food, insurance, utilities (water, electric, gas) and other living expenses. The cost of living is different depending on what part of the country you live in. Some cities are more expensive than others. For example, New York City, Los Angeles, and San Francisco have the highest cost of living expenses while Harlingen, Texas and Memphis, Tennessee have the lowest. The cost of living is determined by a city’s location, proximity to the coastline, availability of housing and jobs, as well as many other factors.
Checking and Savings Account
“I once watched a young man receive his first NBA check for $40,000. He went to the bank and cashed the check. He proceeded to immediately deposit $40,000 in one hundred dollar bills into his pocket.”
— Anonymous NBA Coach
Checking and savings accounts are where you deposit the cash from your paycheck. Checking accounts allow you to deposit your paycheck and write checks to pay bills. For example, if you earned $6,000 in salary in a month you could then deposit it into a checking account. If your water bill cost $100 for the month you would write a check for $100 and your checking account would be deducted by $100. You would then have $5,900 in your checking account. Some people use a debit card to deduct money directly from their checking accounts instead of writing a check. In a typical month, checking accounts will have the most transactions.
A savings account is different from a checking account. Savings accounts allow people to save money and earn interest. For example, if a person has $10,000 in an account that pays 1% interest over the course of a year, they will have earned $100 and will have $10,100 in their account. Savings accounts are safe, low risk, and allow a person immediate access to their money. The downside of savings accounts is that you don’t earn as much interest as other types of investments (stocks, bonds etc.). The advantage of a savings account is that you always have access to your money and you won’t lose money like you can with money in the stock market.
Whether you are depositing $40,000 or a few thousand, it’s not a good idea to walk around with large sums of money. When you receive your first pay check open a checking and savings account. Get to know them well, they will be a vital part of your life.
Why are Bank Statements Important?
“So he took the money. Or more precisely, Summit did; his bonus went right to Brown and Jones, as did his bank statements and all other financial documents. ”
— Excerpts from ESPN The Magazine article called “How to Scam an Athlete”
A bank statement provides a snapshot of the activity on your checking, saving, and other accounts you may have with a bank. In 1995 a player named Corey Jenkins was selected by the Boston Red Sox in the first round of the Major League Baseball draft. Jenkins received a $575,000 bonus check. The first part of Jenkins’ bonus check, $288,000, was gone within two months. The second installment, which amounted to $287,000, vanished within three months. According to ESPN The Magazine, James Brown and Marion Darnell Jones, owners of a sports agency called Summit Management, had direct control of Jenkins’ money and bank statements. The FBI later stated that Brown and Jones had moved the money into their personal accounts to use to scam other athletes. They were able to do this because Jenkins signed a power of attorney agreement. This allows a person to sign documents on your behalf. Eventually, Summit Management was shut down and a federal grand jury indicted Brown and Jones on 56 counts of fraud and money laundering. Brown was sentenced to 21 months in prison, Jones received 41 months. Only three years after signing with Summit Management, Corey Jenkins mother’s house was repossessed and he ended up having to pay $40,000 in back taxes, interest, and penalties. They eventually won a judgment against Summit in the amount of $440,000; but they will probably never see any of that money.
As you can see reading and understanding bank statements are a crucial component to the well-being of your financial health. You should check your bank statement often so that you know how much money you have, where you are spending your money, and whether there is any fraudulent activity occurring on your account.
“In a 2012 Rutgers University survey of college graduates, 40% said student debt was making them delay large-scale purchases, such as a house or a car. ”
Credit cards allow people to purchase items on credit. For example, when you use a credit card to purchase something, the credit card company pays for the item. At the end of the month, they send you a bill for all of the items you purchased with a particular credit card. In most cases, if you pay the bill at the end of the month you will not be charged interest. If you pay part of the bill you will be charged interest. Interest is a small amount of money, usually between ten-percent and twenty-percent, that the credit card companies charge for the privilege of paying on credit.
Credit cards have several advantages and disadvantages.
Allows you to purchase items without having to pay on that day.
Owning a credit card takes self-control and responsibility. Misusing one can lead to unwanted financial trouble and a low credit score.
Why Does a Credit Score Matter?
“The best protection against identity theft is bad credit.”
Your credit score is the most important piece of financial information you have. Credit scores, also known as your FICO score, determine whether you will be able to purchase a home, car, or other major, high-priced items. A lender such as a bank or credit card company use credit scores as a predictive tool to determine if a person is likely or unlikely to pay back a debt.
A good credit score says that you have a history of paying back your debts on time and will allow you to purchase items at a very low interest rate. Conversely, a bad credit score says that you have a history of either paying back debts late or not at all. A bad credit score will either prevent you from purchasing items or will force you to have to pay a higher interest rate on items you purchase.
For example, a person with a good credit score that buys a television for $1,000 with a credit card at a 5% interest rate will pay $1,050 (plus sales tax). A person with bad credit might pay $1,200 (plus sales tax) for the same television. The difference in price is because the person with a lower credit score has a higher interest rate which is 20%. Conversely, the person with the higher credit score is paying a lower interest rate; 5%. In this case, the person with bad credit is paying $150 more than the person with good credit.
Why You Should Have A Living Trust
“The 22-year-old guard.... is taking a pass on his guaranteed $4.5 million, two-year contract—for now. The millions will be going into a trust fund set up by his family, and he can’t tap it for at least three years.”
— 2013 CNBC article on Philadelphia 76er guard Michael Carter-Williams
Anyone that has a significant amount of money or extensive assets (property) should have a living trust. A living trust is an arrangement that allows a third party to hold your assets on behalf of a beneficiary. For example, lets say you establish a trust and in that trust you direct the trustee to, in the event something happens to you (death or incapacitation), pass all of your assets (money and property) to trusted family members. This could be your wife, your kids, or both. It can be anyone you designate.
The benefits of a living trust are enormous when compared to a will. For instance, the estate of a person who dies with (or without) a will has to be analyzed and approved by a probate court judge. It will be subject to court fees and estate taxes. This process can take months and in some cases years. In contrast to a will, a trust will allow assets to pass to family members without having to go through probate. Most importantly it gives you full control over what happens to your legacy and all that you have worked hard for.
There are several individuals that provide trust services. However, when it comes to a living trust do not seek the cheapest price. Select a reputable person or company. You should pay a few thousand dollars.
In a similar scenario, in 2013 Philadelphia 76er guard Michael Carter-Williams signed a two-year, $4.5 million contract. Soon after the deal was inked his family established a trust that stated that all of the money from his NBA contract would go directly into the trust. He can’t take out money for at least three years. This means that a third party is responsible for making sure that no money is taken from the account. He is currently living off of the money from his endorsement deals from Nike and trading card company called Panini America.