Demystifying The Budget - Don’t Be Afraid

Posted on May 10, 2008

I am not sure many other finance terms inspire more fear than the word ‘BUDGET’. Ok, well maybe bankruptcy, foreclosure, and a few others, but you get the point. Some people even will physically squirm when they think about having to adhere to a budget.

I am here to squelch some of those fears and I am not even a fervent budgeter. A budget is nothing more than a plan for your money. That’s it! There isn’t anything magical, nothing scary, no straight jacket, just a plan.

Here is the formal definition :

Budget : a scheme or method of acting, doing, or making developed in advance

That captures what a budget it beautifully. You decide were your money should go before you spend. You can be objective and rational about were you money is going, rather than being ‘forced’ into decisions at the cashier’s counter. You also have a metric to help keep you accountability and give you feedback on how your spending is proceeding. Just, list your all your bills, debt, and goals like savings and divide up your monthly take home pay between the categories however you see fit.

One of the big concerns people have is that it will take the joy out of spending and turn them into a cheap miser, but the only way that will happen is if you let it. You are free to budget however you want. If you want to spend $500 a month on movies and eating out, by all means. I think what most people realize when they start to budget and track their spending is that you have more money than you think, or at least it will feel like you have more money.

Another concern is that you will miss something or not budget enough money. I am hear to tell you that a budget is a continual process. You will make mistakes. You will blow the budget, but with each mistake you will be able to budget better and better. Adjust and tweak is the name of the game.

So don’t be afraid, be willing to try it for a few months. Here is an online budget calculator from Crown Financial that will help provide a little context.

» Filed Under Debt Elimination, Financial Succes, Planning

Debt Is The Symptom - Fix The Problem

Posted on April 13, 2008

“Symptom - A characteristic sign or indication of the existence of something else” Source

Picture yourself driving down a familiar street. Out of the corner of your eye you see a huge nail in the road. You swerve, but only enough to drive directly over the nail with your tire. Arghhhh! You don’t hear a pop or a hissing, so you continue on. Everything seems fine until two weeks later when you go to leave for work and your tire is flat. It has been long enough that you forget about the nail, so you borrow an air compressor from a friend and fill up the tire. Everything is fine for four weeks, until you notice the flat tire again. You fill it and go on your way. The tire seems to stay inflated long enough that you just keep filling the tire, rather than actually getting the tire fixed. The flat tire is the symptom of a bigger problem that needs to be fixed.

Debt is just like the flat tire. Debt is almost always just the sypmtom of a larger behavior or planning problem. Although the symptom is usually what attracts our attention and keeps of from creating behaviors that will allow us to be financially successful. People all kind of things to get rid of debt: hire a consolidation company, transfer to a HELOC or a 0% credit card, sell houses, sell cars, ask for more loans, marry, and even declare bankruptcy. All of those methods never really address the huge nail in the tire that is causing the leak. If you don’t fix the source of the problem, you most likely won’t stay out of debt long.

It is often tricky to identify the cause of the problem, but it can be a wide range of things. Depression, no budgeting, no planning, lack of self control, retail therapy, coveting, lack of knowledge, and lack of caring can all lead us into debt. The tried and true debt snowball or similar debt reduction methods that require hard work and discipline usually help change our behavior along the way. That is why they work, and that is why playing games to get out of debt usually fails.

Debt is not your problem. You must address your behaviors that got you there.

» Filed Under Debt Elimination, Financial Succes, Psychology of Debt

The Lost Art Of Saving To Pay Cash For Purchases

Posted on March 16, 2008

Somewhere while I was digging out from $70,000 in debt, I learned that you had to be able to save and actually pay cash for purchases in order to avoid debt. Growing up this was not something that had been instilled into my thinking about money. It is something that doesn’t get much attention, but it is a needed tool in order to achieve financial success. So, let’s talk about it.

The whole system starts by extending your financial vision past the current day and thinking about purchases and bills that will be due months down the road. Then you just need to divide the bill/cost by the number of months until you need the money to come up with the monthly bill amount that will get you enough cash in hand.
For example, we know that we will need a new TV by Ferurary when US cable/antenna service switches from analog to digital. We expect to pay about $800 for a TV, so we divided that by the 12 months in the year and added that $66 dollar monthly bill to our list. Each month I transfer the money from our checking account to an ING Savings account labeled TV. When the time comes we should have all or most of the funds needed.

It really does feel good to have a plan for your money. I remember the feeling like we had really turned the proverbial financial corner when we started putting away $100 a month for auto insurance rather than paying the $3 a month service for so that we could do payments.

If you are still getting out of debt, the same strategy applies. If you don’t plan for future expenses, you will find yourself back in debt when these so called ‘unexpected’ expenses come up. With a little planning and discipline you start to realize that they aren’t unexpected at all, and that by having a plan for your money you can be in control rather than your bills.

» Filed Under Credit Cards, Financial Succes, Psychology of Spending

How To Get Out Of Debt Faster - Big Shovel Edition

Posted on November 18, 2007

One of the best tips for digging out from under a mountain of debt is to get a bigger shovel. Outside of finding deep meaningful motivation for getting out of debt, increasing the amount of money you put towards debt each month will probably the next biggest catalyst for overcoming debt. Note that if you haven’t truly figured out your financial purpose, you may not have the motivation to finish the job. But if getting out of debt is truly important, why only use your current income to get you there? Here is a list of some ways to create more money to help bust your way out of debt.

Cut Costs – You should be tracking your weekly and monthly expenses, and testing them against your desire to get out of debt. Things like cable, eating out, and movies are all taking away from the amount of money that you can snowball towards your debt.

Ebay, Craigslist, and Garage Sales – Often our debt gets us a bunch of stuff that we don’t need. Look around your house and consider selling everything that isn’t a necessity. Use the extra cash to put towards your debt. This step also has the added benefit of helping break the pattern of materialism that runs counter to getting and staying out of debt.

Extra Job - Yes, I know you don’t have time or you don’t want too! But deliver some pizzas or packages, shovel some snow, or cut some lawns. Remember that this is a short term solution, to a huge problem. If you change you spending behavior in the process, you shouldn’t ever have to get a second job again. You will reap the benefits of putting forth the extra energy early in the process, and then you can quit your second job and be debt free!

Ask for a Raise – Consider asking for a raise, or taking on more responsibility at work. A positive outcome would have compounding benefits for not only ditching the debt, but also for the rest of your life.

Tap into your Savings – By savings I mean liquid accounts, not things like 401k. This one is usually mathematically logical, because the interest rate on our debt is worse than the rate on the savings. Even if it isn’t, I still argue that changing your financial behavior and dumping debt will radically change you perspective and life enough that you will overcome and surpass that lost savings in no time. This one comes with a caveat though. If you aren’t truly committed to staying out of debt and changing your financial behavior, keep the money in the bank. You will probably find yourself in debt again, but now you don’t have the money in the bank.

Now go out and kick those debt reduction plans into high gear!

» Filed Under Debt Elimination, Financial Succes, Materialism, Psychology of Debt

Can’t Believe Everything You Read: 1953 Yale Goal Study

Posted on November 13, 2007

“Scientists surveyed the Yale class of 1953, and found that 3 percent had written down financial goals for their futures at their college graduation. When the group reconvened in 1973, this 3 percent of the class that had started their careers with some kind of plan controlled more combined net worth than the other 97 percent combined.” - Ririan Project : The 7 Habits of Highly Successful Moneymakers

After I read that, I started scribbling down my goals! Just kidding, but that is some inspiring evidence for writing down your financial goals. Such good evidence that I wanted to take a look at the study to get a better picture of what was going on. I went on a search.

What I found was that Zig Ziglar and Tony Robbins quoted the same study in their writing, but I couldn’t find any information on the real 1953 Yale study. It turns out that the story is urban legend, passed from one self help guru to another. Here is an article at Fast Company that does a great job trying to find the real study and wading through the folk lore.

Ok, now that was disappointing. It doesn’t mean the Yale story hasn’t helped many people over the years, but it really takes some credibility away from the story and some of the famous self-help gurus who quoted it. In the age of the internet it is pretty easy to find answers, but it is also easy to get duped. Now go out and right down some financial goals! I will bring some hard evidence on the affects of goal setting in a future post.

As a side note, I also found that the subliminal advertising message scare was based on another urban legend that sited a movie theater that generated increased profits from telling people to “Eat Popcorn, Drink Coke”.

Source: If Your Goal Is Success, Don’t Consult These Gurus
Source: Self-Help Snake Oil and Self-Improvement Urban Legends
Source: Snopes - Subliminal Advertising

» Filed Under Chasing Dreams, Financial Succes

I Want To Be Rich Someday! How To Set Solid Finance Goals

Posted on July 25, 2007

This is a guest post by Mark over at @ Financing Your Family, a newer blog that focuses on helping readers to be “smarter with their money, closer to their family, and willing to work towards worthwhile goals”. Lend him some support by checking out his site.

When I talk with people about there financial goals, there is one thing that tips me off as to whether or not they will be successful or not, and that is how they describe their goals. Some examples of goals I’ve heard are: “I want to be rich someday,” “I want to have kids,” and “I don’t want to work for a large company.” These are all financial goals to be sure, but when people tell me that these are their goals, I usually think that they just don’t really care about their lifestyle that much.

You see, all of the goals I just named are what I call, No-thought goals. These are the hasty kinds of goals that cause people to start businesses in areas that can’t support that type of business. They strip away any semblance of plan by being short and edgy. I can’t call them bad goals because they are all good things to the person saying them. They are just poorly worded.

So, let’s break apart one of those goals, “I want to be rich someday” for example:

How is rich defined? In dollars? $1,000,000, or $1,000,000,000? In possessions?
When is someday? 5 years? 10 years? retirement?
Who is I? If it’s just you, do you not want family? Do you judge wealth by family?

All of these questions (11 total in 10 seconds typing) need to be answered by the goal statement. So put some thought into it. A revamped goal statement for “I want to be rich someday” could be: “Twenty years from now, my goal is to be earning more than $80,000 a year, with a combined total net worth in excess of 4.2 million dollars, so that my family can live the life they deserve.”

The keys to making your goals good ones are:

Thought- take some time to consider your wants and needs.
Who- who will it impact? These people should be included in the goal-setting process too.
What’s the time frame? Put a deadline on your goal.
Be specific, words have many definitions, this helps narrow down your meaning.

The goal process is one that is overlooked by so many people in America, but good goals are what keep you from debt, from foolish spending, and from poor investments.

If you enjoyed the guest post, please consider checking out Financing Your Family or subscribing to his feed.