Benefits And Drawbacks Of Spending Cash

Posted by The Happy Rock on June 29, 2007

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In honor of the upcoming cash spending experiment I wanted address the benefits and drawbacks of spending cash. I will revisit this list after the cash experiment to see if I have anything to add or critique.

Benefits of Spending Cash

First and foremost, spending cash makes it impossible to spend more than you have. Going into debt is impossible with cash.
Forces us to face the consequences of a purchase up front rather then delaying it until after it is too late. Thinking through the consequences of a purchase may change your decision. By consequences, I am talking about making needless purchases, over-priced purchases, impulse buys, and even spending money that should have been designated to other areas. With plastic a lot of this information is gathered well after the purchase, and by that time it is usually too late.
Spending cash constantly reminds us of the value of a dollar. Buying a fancy $4 Starbuck’s coffee on plastic can become so much of a habit that we become oblivious to the fact that real money is changing hands. The consumer industry would love to make consumption as much like a video game as possible, they benefit when you forget what your money is worth. In this day and age with direct deposit, automated payments, and credit cards it is possible to earn and spend money without ever physically seeing any of it. It even kind of sounds surreal when you describe that way.
Spending cash hurts. This may not hold true when buying a pack of Wrigley’s Juicy Fruit, but it sure does when filling up an SUV at Sunoco. Psychologically, parting with cash is much tougher than swiping a card.
Paying with cash is faster. No waiting for signatures or authentication. Hand over the the cash, get some change, and you are done. Stores have ‘Cash Only’ lines for this reason.
A fringe benefit is that paying with cash can put more profit per purchase in the store owners pocket by avoiding the credit card company fees. For me I would rather give a little mom and pop shop some extra profit than line the pockets of the credit industry. This point maybe nullified if spending cash significantly lowers the overall spending in a given store.

Drawbacks of Spending Cash

Convenience, Convenience, Convenience. The hassle of finding proper ATMs, making sure you have enough for large purchases, and saving receipts to track your purchases makes using plastic make more convenient. Spending cash seems annoying, but I will see how annoying it is during the cash only experiment.
Security. Lost your wallet? You can probably kiss your cash goodbye. Plastic affords you extra security measures that cash just can not offer.
Credit card rewards. If spending cash proves to cut my spending by more than 1%, rewards won’t matter. I included it because rewards are where the credit card users get all worked up. They get quite passionate about their rewards. Free money, right? I suspect the credit cards companies are armed with more information than the consumer. We will see if credit card companies have done a good job blinding us with rewards.

» Filed Under Cash, Credit Cards, Experiments, Psychology of Debt

Save Yourself 18%? Cash Only Spending Experiment

Posted by The Happy Rock on June 27, 2007

With June drawing to a close, I wanted to lay out the plan for the cash only spending experiment in July. I talked about the impetus for the experiment in the ditch the credit card and save post.

Using the scientific method here is the break down of the experiment :

Goal : Test whether spending only cash will save 12-18% as Dave Ramsey suggests.

Hypothesis : Spending only cash will reduce the amount of money consumed in a given month.

Control : Currently the plan is to compare the cash only spending to the average of the previous 2 or 3 years of July spending, which was 95+% on credit and debit cards. I need to dig into the numbers a little more to find the baseline numbers that will account for things like vacation and other irregular spending. I may end up using an average of the all the summer months, but I will flesh that out in a later post.

Experiment : Spend only cash from July 1st to July 31st. This includes everything except bills which will still be paid online or by check for lack of a cash alternative. At first, I thought I would still pay gas with plastic, but ultimately that defeats the purpose of the test. Shelling out 50$ cash to fill up will have a physiological impact.

I do not plan to budget at all, since we only do post spending tracking as it is. I want to try and replicate previous years spending conditions as much as possible. The plan is to have plenty of cash on hand to spend on anything we want, just like we did with credit and debit spending. We will save all receipts and I will enter them into Microsoft Money every weekend.

Analysis : I hope to show the effect that spending cash will have on different categories of spending and on the overall budget.

Post Experiment : I will report status throughout the month and then final wrap-up in August. If the experiment proves successful and doesn’t need a follow-on month, we will move to a cash only envelope system to test the added benefits of the extra planning and control.

» Filed Under Cash, Credit Cards, Experiments

Take A Break And Give Yourself Credit

Posted by The Happy Rock on June 25, 2007

As The Rockette, The Pebble, and myself traveled down to the New Jersey shore for a weekend of camping at the Frontier Campground, I was thinking about a few articles I had planned. I didn’t bring the laptop, but I was all set to outline a few articles. I made an off-hand comment to my wife about how I haven’t been able to get to anything done on my ‘in between MBA classes to-do list”. At Drexel University I get about a 1.5 - 2 weeks off in between quarters. Since two classes takes about 9-15 hours a week for classes, assignments, and reading, there are a lot of tasks that get prioritized out. Class starts again tomorrow(only 6 classes left), and I haven’t been able to get anything off of my list. To that, my wife replied with this gem, “sometimes you just need a break”.

Simple, direct, and to the point. Sometimes I get so wrapped up in plugging away and just dealing, that I needed my wife to remind me that I could give myself permission to take a break. Without that little exchange, I would have potentially ruined a beautiful weekend by carrying my to-do list baggage around. From that point on, I decided to leave ‘life’ at home, and enjoy the moment of the vacation. The simplicity of tent camping provided a nice get away. Without the to-do list encroaching on my personal space I was able to find space for reflection. Here are a few take away insights :

Take a Break - For those of us who put constant pressure on ourselves to perform and grow, take some time to refresh yourself. Even though it is tough to pull ourselves away, it is important. We can even hinder our growth and performance, because of sub-par energy and our to-do list baggage.

Give Yourself Credit - I am constantly looking forward, so much so that I don’t take the time to look back. I was able to find some time to reflect over the weekend. These past two years have been amazing. New father, amazing son, nearing the end of an MBA, finished getting out of 70k in debt, changed my energy and productivity habits, and gave some tangible shape to my life’s dream. That kind of perspective can’t be beat. Seeing what the last two years has brought, I am even more energized for the future.

This is part of the reason the Dave Ramsey method works well. The baby steps method provides built in moments to reflect and see how far you have come. Each time a debt get crossed off, we are forced to deal with the positive changes. The process happens more often in the early stages of debt reduction, which is generally the time we need the most encouragement. This reflection gives us passion for the future and our bigger debts.

Reevaluate - Take some time to think about your routine and your tasks…how does it align with your goals? Often stepping back to view your life from a distance, can help see new areas for improvement. Being stuck in the trenches allows only a limited view of the landscape. For example, people trying to get out of debt often get focused on small value tasks like selling clutter on eBay, when they need to focus on dumping the 20,000$ car or changing jobs for more income.

Plan Some Space For Reflection - The time was so needed and useful, that I need to consciously plan space for reflection on a regular basis. The idea of taking a few hours alone once a month with the sole purpose of reflection will be a good place to start. A reflection day.

» Filed Under About Me, Motivation, Productivity, Psychology of Debt

Friends Matter: Friends Accept Us The Way We Are, But…

Posted by The Happy Rock on June 21, 2007

We want people to accept us, it is a fact of human nature. Time and again you hear people sharing the same thought on friendship, “I want a friend that accepts who I am”. That sounds noble and uplifting enough, but let’s take a deeper look into that idea. Think about examples of people for whom nothing is ever expected. What becomes of the child whose parents give them everything, yet don’t expect anything?

Your dog Max accepts you, and so does a car salesman, or even a drug dealer. The question remains, “is that enough?”. I say no. Personally, I want to have friends that accept me the way I am, but love me enough to not let me stay that way. I want friends that will smack me over the head when I buy a 36″ TV on credit while having no income. I want a friend who calls me to task when I am not a man of my word. Someone who tells me I am not being patient with my son. Friends who are willing to step in and take your keys when they think you have had too much to drink. These are the types of friends that challenge us and help us grow. These are the types of friends that you need around when you are climbing out of $70,000 in debt. These are the types of friends that surround successful people.

Acceptance is not enough, real friends want the best possible life for us. Not the best life they think we should have, but the best life for us. I didn’t marry my wife, because she was the same as me, or because she is beautiful (although she is darn beautiful). I married her because she opens up my world, makes me see the world in new ways, and challenges me, but always always wants the best for me.

The real challenge is to evaluate your relationships, not only by how much they let you be you, but also how much they want you to experience the best. These type of relationships, like most things in this world, don’t start with other people, but with ourselves. We need to invite this type of accountability and friendship.

Be willing to take all criticism, whether right or wrong, and respond positively.
Be honest and open up about your dark sides.
Truly value other’s opinion. People won’t share if they don’t think you’ll care, or if it will break down the relationship.
Finally, we need to be able to lovingly accept others the way they are, and encourage them to change (if they want it).

Related Reading : Scott Young’s 10 Steps to Honest Feedback

» Filed Under Accountability, Chasing Dreams, Favorites, Friends, Motivation

Friends Matter: Support And Education Through Friendships

Posted by The Happy Rock on June 19, 2007

In the previous post on how friends can shape our perception of reality, I ended with an example about my goal to become an entrepreneur. I came to the conclusion that there is not anyone in my life that can really understand and support that quest; they are all 9-5′ers. Some may even provide resistance. The truth of the matter is that we need some friends in our lives that will be able to challenge us, teach us, and relate to our unique struggles.

I think most of us know this instinctively, but the real work comes when we have to overcome our social awkwardness to seek out these types of relationships. Sometimes we are blessed with friends in our proximity that align with our goals. Often though, this is not the case. These are the times that we need to search out our needs and pursue relationships that will encourage success. This is one of the reasons the blogging community is thriving. It offers easy access to these types of relationship. If I decide to get out of debt, I can easily connect with real people who have gone through or are going through the same journey. They will teach us, support us, and even learn from us. In that vain I have added some entrepreneurship blogs to my reader, but I also plan to try and connect with a person or two in my area. Websites like Meetup can be a valuable tool in forming these types of relationships. Even going to church or community events can be a great place to start your search.

I won’t lie, this will be a goal that stretches me. I am working hard to become more outgoing, but I am far from extroverted. The reason I will succeed is because I realize these types of relationships will be an integral part of achieving my dreams. The passion for the dreams is what will drive me to step out of my comfort zone.

Let us end with an example. My friend Double Eagle over at Life In The Rough has a dream to be a golf pro. An awesome dream, but a dream that will require friends for support an learning. A dream like this will only happen if him to step outside his ‘normal’ circle of friends. Creating opportunities to train under professional golf pros, creating relationships with other aspiring golf pros, and interviewing pros that have been through a similar journey will be invaluable to chasing his dream.

» Filed Under Chasing Dreams, Friends, Living with Purpose, Productivity

Friends Matter : Social Networks Shape Our Perception

Posted by The Happy Rock on June 18, 2007

This post will be part of a larger series called Friends Matter, which will discuss some of the ways that our social networks can support or hamper our personal journeys.

“She has been starting to run with a bad crowd.” At some point we have all heard a parent respond to a question about their teenager’s objectionable behavior with this common phrase. The underlying principle is that ‘who we associate with can play a big role in our choices and actions’. Ironically, we don’t see parents responding with “He has fallen in with a good crowd” when someone complements their son’s good grades, but we will leave that for another day. Parents believe rightly that a child’s friends have a huge impact on their choices, although somewhere along the line we tend to think we matured into free thinking adults. The truth is we need to be aware of the influence that can come our social networks.

Picture a single guy, Jim, who has friends that go into debt for very nice items, such as sports cars, plasma TVs, and golf memberships. Normal to Jim is a world in which people should have these items. Jim’s opinion of what is ‘normal’ is very much influenced by the people around him on a daily basis, and to a lesser extent by the people and images that bombard his life from outside his normal routine. How hard do you think it will be for Jim to get to a place were he desires to be debt free? He is stuck needing items that he can not afford to fit in with his peers, or he must break ‘tradition’ and risk not fitting in. How hard would it be if he started to date a woman who didn’t own a credit card and only bought things that she could afford? Much easier. The take away is that the values of the people that surround us inevitably bleed into our own philosophies.

I read a comment on the topic of getting rid of TV from the household that echoed this principle very well. Just one Christmas after removing the TV from the house, the parents were amazed at how content their children were with the meager gifts they could afford. The parents had removed part of their children’s social network that provided them with a significant amount of input. The images on TV had bred a discontent for the lifestyle that the parents could provide. TV wasn’t encouraging the children down a path that meshed with the parent’s vision, so it was cut off.

A good place to start can be to ask ourselves these two questions: What are the players in our social network saying to us? Does it align with my vision for the future?

Here is a quick application from my life. Part of my dreams includes working from home and starting my own business, yet all of the people around me are in 9-5 jobs. Although I enjoy my circle of friends, I would be ‘abnormal’ with regards to my career vision. This says to me that I should augment my network with some entrepreneurs and other people who have transitioned to earning a living from home.

» Filed Under About Me(Goals), Friends, Materialism, Psychology of Debt

6 Reasons To Buy A Starter Home

Posted by The Happy Rock on June 14, 2007

I proved in my article about delaying gratification how buying a starter home could save you large sums of money. I want to reiterate the financial benefits of not over stretching ourselves and the drastic difference it can make in our long term wealth. It would take a whole other post to explain how helpful it has been to start a marriage with low financial stress, and how big an impact it has made in our wealth and vision for the future.

With that said, let’s look at some of the other benefits of buying a starter home. I am speaking from personal experience, since The Happy Rockette, The Happy Pebble, and I still live in a 900 square foot condo. Here is what we have learned:

Buying a home is a learning process. You first home purchase will teach you a lot about the location, types of houses, and features that you are looking for. It is makes financial sense to learn these things with a less expensive property rather then your ‘dream home’. You learn to drive in a beat up 1978 Chevette, not a Porsche. The same principle applies to a starter home. When you go to buy your ‘dream home’, you will have a much better idea of the qualities that will make you truly satisfied.
You will make mistakes. Most people under estimate the true cost of ownership by overlooking costs like taxes, association fees, lawn care, utilities increases, and maintenance. Learn what it takes to own a house without the stress of a huge mortgage payment. You will create a tangible framework from which to envision the three hours every 10 days that it will take to cut the backyard of you ‘dream home’.
Be a low-stress handyman. Try fixing some things yourself. You can educate yourself and save a lot of money, while not feel like you are ruining your dream home. Personally, I have had a chance to do some small projects around the house, most notably a successful granite tiling of the kitchen counters. I got the experience of planning home improvement projects on my own and convinced my wife that I could do a job well.
Be content. Buying a starter can help you avoid the consumerist mentality. We have realized that we can be happy anywhere. Our dream home won’t make us happy, we control our feelings. We have mostly broken the desire to keep up with our peers. Sure we would like to be able to entertain better, but sitting on the floor or the couch for dinner keeps it real. Setting frugal patterns early in your life will really provide a big return on invest throughout the rest of your life.
Simplify. Small spaces help breaks the clutter habit. A smaller house helps break those hording tendencies, and makes you think through what items are ‘keepers’.
Finally, a starter home helps you to truly appreciate the ‘dream home’. By the time you get to your ‘dream home’, you know exactly what you want and you will have earned it. Not to mention the fact that your finances will be in a vastly superior state. *Note that renting versus buying a starter or dream home will also depend on an array of other factors such as market potential, taxes, income levels, length of stay, and a variety of personal issues.

» Filed Under Materialism, Psychology of Debt, Real Estate

Delayed Gratification Will Save You Money

Posted by The Happy Rock on June 12, 2007

Remember the ‘Marshmallow Test‘? It was a study from the 1960’s which found that preschoolers who were able to delay gratification at four years old were more likely to be socially competent, assertive, trustworthy, dependable, able to cope, and likely to embrace challenge. The ability to control our impulses will encourage success in most areas of our lives. Our relationships, careers, money, and wealth will all be positively affected by being able to delay our gratification.

As an example let’s look at two similar families who want to own their $300,000 dream home. They both have a $60,000 down payment ready, and the ability to handle $1,438 a month. Family 1 decides to purchase their dream home right away. They take out a 30 year mortgage at 6.0% interest. With a $60,000 down payment and minimum payments of $1,438, they completely own their house in 2037.

Family 2 decides to ease into homeownership and purchase a starter home for $150,000. They take out a 30 year mortgage with a down payment of $60,000. They make minimum payments of $539 and put another $900 towards principal. The first house is paid off in a little over 6 years. Assuming a conservative annual rate of return of 3% on real estate and subtracting selling fees, they have a down payment of $173,413. Finally, they take out a mortgage (20 years @ 5.7%) on their now $358,000 dream home. Their dream home is paid of in 16 years. Family 2 owns their dream home in 2029, eight years earlier. If they save the $1,438 in a high yield account to finish out thirty years they will not only own their home, but also have about $144,000 cash in the bank. The numbers get even more exaggerated if they keep saving and you run the numbers out 20 more years. Family 1 will have $540,000+ in the bank, while Family 2 has $1,000,000. Delayed gratification and compounding with time are quite helpful.

I kept the example simple, but it shows how much delayed gratification can influence positive results in our lives and our money.

» Filed Under Favorites, Materialism, Personal Finance, Psychology of Debt

Having Goals Is Great, But Having Purpose Is Better

Posted by The Happy Rock on June 10, 2007

Consider two similar working mothers: one who wants to get out of debt because a few of her friends starting getting our of debt. The other woman decides to get out of debt, so that she can provide a more secure environment for her children by quitting her job to pursue a life goal of staying at home full time. If you had to bet on which one will succeed at becoming debt free, which one would it be?

Maybe the example is too simplistic, but I hope the point is clear. Having goals is very helpful, but having purpose will change your life. The woman who feels called to be at home with her children will be motivated far beyond that of the first woman. If we can begin to define answers to the questions ‘who are we?’ and ‘what are we meant to do in life?’, our lives will begin to reorient themselves around these answers. Purpose fuels our passion, which in turn should lead to making measurable goals. The goal becomes important, not because it is a ‘good’ goal, but because it is a step towards achieving your deep fulfilling purpose in life. When the goal is the end in and of itself, there is nothing to motivate us. We are limited to the extent that our self discipline will keep us on track. I know for most that this isn’t a promising picture.

“Ever more people today have the means to live, but no meaning to live for” -Victor Frankl(concetration camp survivor)

If you connect with these words, then there is no better time to start trying to find the deeper meaning in your lives. It may take us years, even a lifetime, but our lives will never again be the same.

» Filed Under Energy, Favorites, Living with Purpose, Motivation, Productivity

Ditch The Credit Card And Save Yourself 12-18%

Posted by The Happy Rock on June 10, 2007

I admit it, we do 95% of our spending on plastic. We have been using our debit and credit cards for years to pay for just about everything. The discipline is there, so everything is paid in full at the end of the month. $20-$40 cash lasts me the whole month. The system works for us, because we have discipline and are not big spenders. Also, downloading the transactions to Microsoft Money is a quick and convenient way to track your spending.

With that in mind, I remembered Dave Ramsey saying that you spend 12-18% less when using cash. Spending cash hurts. Here is someone offering me a better return than any savings account or mutual fund out there. I have always glossed over people saying that using cash saves you money, but I really should take a look at this. Any credit card rewards pail in comparison to 12-18%. I mean, credit card companies most likely offer the rewards since it provides a net benefit to their bottom line. Maybe part of the benefit is that people spend way more than the 1-5% reward that they give back. Plus without using credit there is no chance that I can go into debt.

Where I am going with this? The same place we should all go when someone positively challenges our way of doing things…to the laboratory. Experimenting with potential growth areas is must on our journeys toward freedom. The great thing about experiments is that if they fail or we don’t like them, we can easily resume our old ways. If I can save even half of the suggested numbers, it will probably be worth the effort. I will have to do some more research on ditching the plastic, but my first thought is for plastic free July.