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Enrichment NightBYU 162nd Ward

Budgeting (is a “good” word not a “bad” word)

and the Financial CrisisNovember 13, 2008

Abstract

Some think that budgeting is a bad word, that it is something that is hard and restrictive. I submit that budgeting is not only a smart thing, but a critical part of becoming financially self-reliant and something we have all been commanded to do. In addition, one of the reasons for this financial crisis has been because of our lack of financial discipline.

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Objectives

A. The Top 10 Reasons Why I Don’t Budget

B. Understand Budgeting

C. Understand the Budgeting Process

D. Understand the Financial Crisis and What You Should Do

E. Understand the Principles of Personal Finance

A. The Top 10 Reasons Why I Don’t Budget

1. I don’t have any money

• I plan to stay that way 2. I like being poor

• The meek will inherit the earth, right? 3. I love my credit cards

• I want to spend my money before I earn it 4. I don’t want more money at retirement

• I want to flip burgers for the rest of my life 5. I want to have money stress in my life

• It makes life more interesting

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Top 10 Reasons Why I Don’t Budget (continued)

6. I don’t want to spend time managing my money

• I want my money to manage me 7. I don’t want to be happy

• I want to be miserable like everyone else 8. I hate paying taxes

• If I budget I will have more and pay more taxes 9. I like being in debt to other people

• I don’t like being different 10. I don’t have to have a budget

• The prophets have not said I must have one

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Top 10 Reasons I Should Budget

1. I will have more money2. I will be responsible for my spending3. I will spend less on things I don’t

need4. I will have more money at retirement5. I will have less stress

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Top 10 Reasons I Should Budget (continued)

6. I will know where my money goes7. I will be happier8. I will pay more taxes9. I will be out of debt 10. I will be following the Savior’s and

the prophet’s counsel

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B. Understand Budgeting

What is a Budget?• It is the single most important tool in helping you

attain your personal goals.

• It is the process of planning your spending

• It’s making sure your resources are used for the things that matter most—your personal goals

• Budgeting is a star to set your sights by, not a stick to beat yourself with

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Budgeting (continued)

President Spencer W. Kimball said:• Every family should have a budget. Why, we would

not think of going one day without a budget in this Church or our businesses. We have to know approximately what we may receive, and we certainly must know what we are going to spend. And one of the successes of the Church would have to be that the Brethren watch these things very carefully, and we do not spend that which we do not have. (Conference Report, April 1975, pp. 166-167.)

If the brethren watch these things very carefully, shouldn’t we?

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C. Understand the Budgeting Process

• The Budgeting Process• 1. Know what you want to accomplish (your

goals)• 2. Track your spending (your expenses)• 3. Develop your cash budget• 4. Implement your budget• 5. Compare it to actual expenses, then make

changes where necessary to achieve your goals

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1. Know What You Want to Accomplish

Know and write down your goals• What do you want to accomplish

• Do you want to:• Graduate from college• Prepare to be a worthy spouse• Get a great job• Send kids to college and on missions• Return to your Heavenly Father

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2. Track Your Spending

There are different methods to track spending:• Checks and credit cards

• These expenditures leave a paper trail• Cash

• Record expenditures in a notebook• Computer programs, i.e., Quicken, Money

• These are very useful, especially if tied to bank and credit card companies

• The goal is to generate a monthly income and expense statement

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3. Develop your Cash Budget (the better way)

What is a Cash Budget?• A plan for controlling cash inflows and outflows

• Its purpose--To help you spend money for what is really important to you

Income:

• Examine last year’s after-tax total income and make adjustments for the current year.

Expenses:

• Identify all fixed (“must have”) and variable (“would be nice to have”) expenditures

• Look for ways to reduce your variable expenses

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Budgeting: The Old Way

Available for Savings

Personal Goals

Income ExpensesTithing

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Budgeting: The Better Way

Income Expenses

Personal Goals

OtherSavings

Pay the

LordPay

Yourself

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The Better Way

Before• You paid the Lord first, lived on the rest,

and whatever money was left at the end of every month went into savings.

Now• You pay the Lord first, yourself second, and

then live on the rest--your priorities are now in order• And now you have twice the chance of

achieving your personal goals

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The Better Way (continued)

Elder L. Tom Perry affirmed this when he said:• After paying your tithing of 10 percent to the Lord,

you pay yourself a predetermined amount directly into savings. That leaves you a balance of your income to budget for taxes, food, clothing, shelter, transportation, etc. It is amazing to me that so many people work all of their lives for the grocer, the landlord, the power company, the automobile salesman, and the bank, and yet think so little of their own efforts that they pay themselves nothing. (L. Tom Perry, “Becoming Self-Reliant,” Ensign, Nov. 1991, 64.)

5. Compare Your Budget to Actual Expenses

Compare your budget to actual expensesLearn what you can do better next monthMake changes where necessary to achieve

your goals

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Final Remarks on Budgeting

Elder Marvin J. Ashton stated:• Some claim living within a budget takes the fun out

of life and is too restrictive. But those who avoid the inconvenience of a budget must suffer the pains of living outside of it. The Church operates within a budget. Successful business functions within a budget. Families free of crushing debt have a budget. Budget guidelines encourage better performance and management. (italics added, Marvin J. Ashton, “It’s No Fun Being Poor,” Ensign, Sept. 1982, 72.)

D. Understanding the Financial Crisis

• The financial crisis was the result of four key events• Individually, the events would have had an impact,

but not as major an impact as they have

• Collectively, they all hit at near the same time, magnifying the results of each of the individual events

1. Excessive Individual and Corporate Debt

There has been a reduction in financial discipline• Instead of budgeting and saving, individuals

borrowed to get what they wanted• When credit card’s limits were reached,

individuals borrowed from their home’s equity (i.e., home equity loans) to finance their spending

• As individuals borrowed more , the value of their home equity declined, eliminating their ability to borrow

• As debt levels increased, this put individuals and families at risk should a major economic crisis occur—which happened

2. A Major Downturn in the US Housing Market

The US housing bubble burst• Home prices had risen, due to increased demand

from two-income households• Borrowers believed that housing prices would

not decline, because they hadn’t in 70 years• They were wrong

• Borrowers took out loans larger than they could afford, hoping that an increase in the value of the home would bail them out

• When credit contracted and debt levels increased, people could not pay their mortgages, many defaulted, few would (or could) could purchase houses, resulting in a major housing price decline

3. Risky Lending Practices

1. Mortgage brokers• Made money on originating loans

• They were not held accountable after the loan was made

• As long as the buyers of these mortgages, Fannie Mae and Freddie Mac, would continue to buy all the loans Mortgage Bankers would originate, Mortgage Brokers would originate as many loans as they could, regardless of the riskiness of the borrowers

Risky Lending Practices (continued)

2. Freddie Mac and Fannie Mae• These are private sector companies with a

government mandate to “expand home ownership”• Private sector but public sector ownership—not

a good combo• The company’s goals were to encourage

home ownership—almost at any cost• Political pressure was on to lend to low-credit

borrowers even though they were risky• Political pressure caused Fannie and Freddie

to lower their lending standards and not account for the risk of these loans

4. Risky Borrowing Practices

1. Investment bankers• Had financial incentives to process loans regardless

of risk

• Did not evaluate the riskiness of the loans they sold—they trusted others to evaluate the loans

• In addition, they packaged these risky loans with a credit derivative, and sold them to investors as investment grade

4. Risky Borrowing Practices (continued)

2. Investors• Relied on sellers and third-parties to determine

riskiness of loans they purchased• Did not evaluate the riskiness of the loans

themselves3. Mortgage brokers

• Were driven by financial incentives or originate as many loans as they could

• In addition, they encouraged borrowers to take out larger loans as they made more fees

• Moreover, they encouraged lower-credit borrowers to take out loans beyond normal prudence limits, putting borrowers at risk should economic conditions deteriorate

4. Risky Borrowing Practices (continued)

4. Borrowers• Did not understand the riskiness of the loans they

took out

• They borrowed more than they should have

• They borrowed beyond traditional income limits, from 28% in 1995 to over 50% in 2008

• Having borrowed so much, they were not prepared for the problems that would come

The Impact

1. Shrinking credit markets• Credit has become harder to obtain

2. Derivatives curse• Credit derivatives have become a bad name

3. Loss of confidence• What started small event has mushroomed to major

proportions as these four events hit at the same time

4. Stock market meltdown• Loss of confidence in the market and fears of an

economic recession has had a major impact on financial markets

What Should You Do?

1. Keep your grades up• School will help you prepare for life.

• Life will still be around when you are done

2. Do not go into debt • Debt is acceptable for only an education and a modest home

3. Do not use credit cards as loans• Remember credit card money is not your money

• Credit card debt is still debt

4. Save a minimum 20% of what you earn • It will make a difference in your life

Ten Principles of Personal Finance

1. Its not what you earn, but what you save, that helps you acquire wealth

2. Its not what you save, but what you become, that makes you more like the Savior Jesus Christ

3. Your priorities are critical, so keep them in order: pay the Lord first, yourself second, and then pay your other bills

4. Nothing you have is your own—it is all God’s: live by the principles of ownership, stewardship, agency, and accountability

5. You make a living by what you earn, but a life by what you give—learn to give more

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Ten Principles of Personal Finance (continued)

6. Knowledge is critical to survival, so stay up-to-date about economic conditions and financial laws and vehicles

7. Use marginal costs, opportunity costs and time value of money calculations when making financial decisions: then overlay those with the gospel of Jesus Christ

8. Plan your financial future early by prayerfully establishing goals and plans to achieve them, and then achieving them with God’s help

9. Take advantage of government-given opportunities to tax-shelter income: be wise with what God and man has given you

10. Develop expertise in financial matters then heed your own advice: you are responsible for your spiritual and financial success