Crash Budgeting

Posted By Paul

As someone who has spent nearly all of their adult life budgeting, saving towards goals, AND trying to live a fairly healthy lifestyle, I was intrigued by the thoughts that came to me after reading the following article:

Why Budgets Fail: Leave My Latte Alone

It's a list of reasons why people are unable to stick to budgets and ways to help. I noticed the entry in the article called the "Gung-Ho Backfire":
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The Gung-Ho Backfire - You set up a strict budget and then wonder why you can't stick to it. By trying to cut spending too drastically, you create an unsustainable budget that is sure to buckle under pressure.
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I realized that the unhealthy approach described here was like the "crash diet" for saving money, where you create a goal that is so hard to maintain that you are practically guaranteed to fail.

For example:

I had a friend who was carrying some credit card debt that they wanted to eliminate (a great goal for sure). I was talking with them about the budget they had set up and discovered that they had set a goal of putting aside a certain amount of money each month to pay off their credit cards (I think it was something like $500 a month). I told them that I thought this was a great goal and since their debt wasn't huge they figured that they would be able to pay it off in about 6 months at this rate.

What actually happened? Well the first month went well. They managed to hit their goal and pay down their debt by $500.

The next month an unexpected car repair came up and since they didn't have a "rainy day fund" set up that had to come out of the money they hoped to set aside for their credit card debt.

The month after that they decided to splurge a little since the last two months had been all about saving, saving, saving. So they went on a shopping spree that ended up eating the savings for that month.

Things got worse after that and before long the budget and goal were simply forgotten.

I realized just now that this whole experience felt a lot like someone who was going through a crash diet.

By creating this specific savings goal my friend had slashed their budget to the bone. They had left no money for incidentals or the occasional bit of fun. Sort of like the crazy diet where you decide you'll only eat celery in anticipation of the pounds melting off of you.

The car repair was kind of like the holiday season or the vacation where you find it impossible to stick to your diet. So you get discouraged and feel like a failure, and you feel like maybe the goal is impossible.

The month where they decided to treat themselves is like the cheeseburger and ice cream sundae splurge after the miserable time spent on your crazy diet.

What follows is the same phenomenon you see with crash diets where the person can't stick with the diet and ends up quitting early. They often lose the dramatic results they gained at the start of the program (my friend quickly re-accumulated the credit card debt and then some).

At the time I thought the problem was that my friend didn't have the discipline to follow through on their plan, but now I think that a big part of the problem was that they set their expectations too high (just like with a crash diet).

You might be able to live the "pinch every penny" lifestyle like that for a while, but when you just can't keep it up anymore you give up on the plan AND the goal. This is too bad since the goal was probably attainable if you had just been able to accept a more moderate change with less dramatic results.

By creating such a hefty savings goal my friend had put budget constraints on them that were so strict that they couldn't follow them for more than a couple of months. If they had set a savings goal of $250 a month they might have been able to stick with their program and payoff their debt. Sure it would have taken twice as long but they would have reached it. It's the same way with a more moderate weight loss program where you make more moderate changes. Your results won't be as dramatic but at least you'll create a system that you'll be able to live with and maintain.

Maybe the problem with "crash dieting" and "crash budgeting" is that the goal is to create a temporary process so that you can fix a problem and then forget about it. What you really need in both cases is a long term plan that you can maintain so that the results actually last.

Article: Overcome marriage money challenges

Posted By Paul

I read an article on the dollar stretcher that I really liked. So many aspects of the article reminded me of things that my wife and I do to handle money in our marriage, such as:

-Using rewards credit cards (never carrying a balance but splurging with the reward money)

-Saving up for expensive items (which also gives you time to decide if you really want or need the item in the first place)

Worth a read for all married couples, whether or not spending is a source of friction in your marriage:

Overcome marriage money challenges

Article: Back To School Shopping On A Budget

Posted By Paul

I was reading an article in the newspaper talking about how many children and teens are developing frugal shopping habits because their parents are encouraging them to stretch their back to school budgets.

There were kids talking about how they were avoiding clothes that had the brand name right on them and were focusing more on trying to get as much for their dollar as possible by checking out the clearance rack and so on.

It was exciting to hear about children developing good spending habits early, and I noticed that the common thread among the children in the article was that they were given a spending limit by their parents and therefore were motivated to stretch their dollars as far as they could.

As a new parent I think a lot about how I might instill good values (including good spending habits) in my child. When I was in my tween and teen years I was never told: "You can only spend $100 on back to school clothes this year." I was told something like: "Let's go to the store, we need to go and get you some shoes and a winter coat."

Of course I remember that I really disliked clothes shopping (still do) so if my folks had told me something like "You have $100 to spend on back to school clothes." I probably would have just asked to wear my ratty jeans one more year so I could spend the money on comic books.

However, many teens are more concerned about clothes than I was, so I think it's a great system to provide your child with a spending limit so they can start to understand the benefits of making their dollar go farther.

Here is the article in full:
Frugality is cool in back-to-school shopping

Transaction rearranging for overdraft fees.

Posted By Paul

I read an article that stated how many banks will rearrange the order of transactions as a way to charge you overdraft fees.

Here is a hypothetical example. Say you have $50 in your account and then you use your debit card that day:

8:00 AM $10 Breakfast.
noon $25 at the grocery store.
6PM $50 dinner

So you figure that the 6PM transaction should be considered an overdraft, you feel stupid but oh well it's just one time.

Instead the bank decides to process the transactions for the day in this order:

6PM $50 dinner
noon $25 at the grocery store.
8:00 AM $10 Breakfast.

So now you've overdrawn your account twice, causing you to incur the penalty twice.

If this sort of thing happens over the weekend you can end up with multiple overdraft penalties that easily add up to $100 or more.

You may call this unfair, maybe even think it's the banks setting you up so they can steal more fees from your account, but at the time of this posting this practice is perfectly legal.

My take away from all this? This is all just one more reason to avoid living paycheck to paycheck. The scenario I drew out above becomes a non-issue if you just put a buffer in your checking account to avoid this sort of thing.

Back before online banking was common I knew people that would subtract $100 from their balance in their checking account ledger. That way they always had a $100 buffer in their checking account just in case.

That system or the equivalent is still a great thing to do today. If you find yourself in a place where you are constantly worried about overdrawing your account then you are probably living a paycheck-to-paycheck lifestyle. Overdraft fees are just one more symptom of a problem that comes down to how you handle your money. I would suggest in the short term to make a real effort to build up a checking account buffer (this can be as easy as cutting out Starbucks or Netflix for a while and putting the money towards your checking account).

In the long term, you should look over your financial life and see how you can improve it. Maybe one of my really early posts:

My Financial Philosophy

Is a good place to start.

Article: Do the right thing in a recession

Posted By Paul

This is an article I found on CNN Money that I thought did a great job of addressing the "moral hazards" of money. There is lots of info out there on how best to deal with your money from a fiscal standpoint, but this article addresses what you should do from a moral standpoint.

I liked the fact that the article highlights the idea that you shouldn't feel too guilty about the financial impact of dropping a service (housekeeper, landscaper, etc.) if it's a service that you can't afford right now. I also liked the fact that it specifically calls out that when making choices your first obligation is always to the loved ones that you support.

I also liked the fact that it mentions the idea that helping someone out of a financial bind isn't always helpful in the long run. This reminded me of a previous post:

Millionaire Next Door Review Pt 3: Economic Outpatient Care

The idea that by helping someone out of a financial bind you are shielding them from a lesson that perhaps they needed to learn.

Here are some highlight quotes from the article:
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Where should your budget ax fall?
But there are three principles to keep in mind. One is that sacrificing is a necessity, not a punishment. It's to be expected of everyone, and you can't feel guilty about not underwriting what you can't afford. Second, family comes first. As concerned as you may be about your housecleaner -- or your favorite charity -- your first obligation is to the loved ones who depend on you.

Finally, remember: Opportunity is priceless. Sell your jewelry, sell your car -- whatever you need to do to be able to invest in your child's future.
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What do you do about budget-busting friends?
There is absolutely no disgrace in looking a friend in the eye and saying, "I'd love to do that, but right now I can't afford to." If your pals aren't understanding, shame on them.
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Who should get your bailout bucks?
As for others more worthy, try to help them (a) if you can and (b) if their request seems reasonable -- reasonable to ask of you and reasonable in that the situation genuinely merits intervention.

The quotes make more sense in context of the full article:

Do the right thing in a recession

Article: Get your spouse to stop overspending

Posted By Paul

Here is an article I enjoyed that was talking about managing a spouse who is more free with spending than you would like.

It's a short article but it reminds me of what one married couple I know did as a way to manage their money. They had a fairly common system where one spouse (in this case the wife) handled most of the day to day money issues (she wrote the checks for the utility bills and mortgage, etc.). The husband was sometimes prone to overspending and that frustrated her.

What she did was that she made sure that the husband helped with the check-writing (she wrote the checks and he entered them into the checkbook), so that he could see and realize that they were spending too much money. By actually seeing the checkbook balance shrink (and sometimes go negative) he was able to see the consequences of his actions. Prior to that his spending was something he would hear about through his wife but it never sunk in until he got involved in the process.

Here is the article:
Get your spouse to stop overspending

Article: Marriage And Money

Posted By Paul

A great article on The Dollar Stretcher about dealing with money in your marriage.

I liked the fact that it called out some specific points such as how money should be viewed as a "we" issue instead of a "me" issue. The author specifically mentions secretly hiding money from your spouse as an unhealthy way to deal with money problems in a marriage.

I also liked that he mentioned that you should try to appreciate the differences in the ways you and partner view money. Usually in these sorts of articles the partner who is more comfortable spending is presented as a problem that needs to be managed. I liked that the author says that:

"If you're a penny-pincher and you'd married another miser, you'd likely never enjoy the fruits of your hard work!"

I also really liked the fact that the author suggests that couples formulate financial goals together. That can take the form of a budget that BOTH people agree on, and that this budget can include fun things as well.

A good article for newlyweds or anyone married couple that is struggling with money issues:

Marital Bli$$

Stuff to look at when it's time to cut back....

Posted By Paul

Hi Everyone,

It looks like there might be crazy times ahead for the economy, so I thought I'd start making a list of easy things you can cut if you need to tighten the belt.

Here we go:

Cable - if you ever need to save a few bucks, it's easy to either cut back on your cable package or get rid of it entirely.

Gym memberships - though I think it's good to exercise and stay healthy, a gym membership can always go if money gets tight. See Matt's earlier post: Budget For Fitness Without A Contract

Smoking - okay, I'm not a smoker and never have been, so I don't know first hand how hard it is to quit, but if you do the math, it's really hard to justify smoking when money is tight.

Newspaper and magazine subscriptions - when money is tight, you can always cancel your subscription (or just not renew it).

Home internet - unless you have a home based internet business, you can always cut your internet service.

Redundant phone plans - do you have cell phones and a conventional line? It might be possible to cut out one or more of the lines.

Expensive car washes - you can always increase the interval between car washes or wash your car yourself.

Expensive hair care - you can try out a cheaper haircut, or just go a little bit longer between haircuts.

Starbucks - see my earlier post: Starbucks

Spa stuff - I know that monthly massages/facials/etc. are awesome, but they're also expensive.

Movies - read my earlier post: No More Movies

Dining Out - cut back or just try to find cheaper places.

Maid/Yard Service - If you have one or both, consider getting rid of them and do it yourself. View it as exercise (see gym membership above).

Storage fees - If you are paying for storage, take a moment and see if what you are storing is really something you can't bear to part with.

One idea that works pretty well for me is that if I decide I want to try to scale back, it doesn't mean I have to cut something out entirely. I can just find a cheaper option or maybe scale back on the frequency. For example make a plan to cut back on movies and rent DVD's instead. If you enjoy a monthly spa trip because you enjoy getting pampered as a treat, consider trying a cheaper treat like a manicure. You don't have to cut out treats, you can just make an effort to find cheaper treats that are still fun.

Cost + Subscription = Adding insult to injury

Posted By Paul

A product model that you see all the time is the system where you get the initial product cheap (or free) but the supplies that you need to purchase to USE the product are either less affordable, or downright expensive. According to an article on Wired (called "Free! Why $0.00 Is the Future of Business" which can be found here) one term for this is "cross subsidy" (where you get one thing free or cheap, but you need to buy another thing to use it).

One thing I've been seeing more and more are cool gadgets that are sold under this model EXCEPT the initial price tag for the item really isn't that cheap.

These types of devices are dangerous and thinking hard about them are a great way to take a frugal approach to life. Here are a few modern toys that come with a hefty initial price tag AND a monthly service fee:

iPhone - Yes, they are cool, but not only does the phone itself cost quite a bit ($200-$300), but they require a high cost data plan that seems to be about twice that of a normal cell phone plan ($70 per month per line for the iPhone, as opposed to most cell plans that cost $30-$40 per month per line). Just imagine what you could do with an extra $30-40 per month. If the whiz-bang technology is your thing and you can afford it then go for it, but give it some thought first.

Bodybugg - A device a I saw recently that is used for monitoring your calories burned. It's a really cool fitness device, but in order to use it you have to pay a $15 a month subscription fee on top of the $300-$400 initial price tag. If you ever decide that you don't want to pay the $15 a month then the device becomes essentially useless.

Satellite Radio - The receivers aren't cheap, and there is a monthly subscription fee involved. Not as bad as many other subscription based services but it's still another bill every month.

Not to say that owning any of these things make you a bad person. If you want some toys, and can afford them without putting your financial well being in jeopardy then go for it. Deciding to splurge on something doesn't necessarily make you financially irresponsbile (see my earlier post Know Your Indulgence), but I think that any non-essential item that requires a decent initial cost AND a monthly fee should be given some serious thought.

One way I like to think of these purchases is by taking the service cost of an item and adding it to the initial cost, and then see if I still think it's a good idea.

For example, let's say you're thinking of getting an iPhone, but you're not sure if you want to spend the money. Another way to look at the purchase is by taking the service cost and imagining it as part of the initial cost. Assume a 2-year service contract and an extra $30 a month for the iPhone plan over a typical cell plan, then that's $720. If the iPhone service still only cost you the same as a regular cell plan per month, but the device itself cost you $920-$1020, would you still buy it?

On a related topic is an earlier post:

Beware Of Subscriptions

So the economy is bad, now what?

Posted By Paul

So I've been thinking a lot about the recent downturn in the economy. Specifically I've been thinking about how I want to react to it and what I should do.

Then I remembered something from a book I've read (and recommended in earlier posts). The book is called:
The Millionaire Next Door

One thing it talks about in the book is playing "offense" and "defense" with your finances.

The idea is that offense is about bringing money in. Getting raises, making sure your investments pay off, anything that is designed to bring in money is considered offense.

Then there's defense. Clipping coupons, finding ways to lower your utility bills, and good old not buying stuff all count as defense. They don't bring money in, they keep it from going out.

The book suggests that the best thing to do is to always keep an eye on both aspects of your financial life, because playing great defense without a good offense (or vice-versa) doesn't really help you much.

So I've been thinking that with the economy slowing down, my wife and I are really focusing a lot on defense, since the potential for good financial offense seem smaller and smaller (stock market isn't doing so great, interest rates are down, and I'm not assuming that I'll get a great raise this year).

So what sort of things can you do to focus on defense? Well the first thing we've been doing is watching our expenses closely. We still have a social life, but now dinners at fancy restaurants have been replaced with more casual dinners like pizza at someone's house, or picnics in the park (which it turns out is just as much fun and much cheaper). We've also been scaling back on movies, instead we've been watching DVD's that we rent. Not to say that we won't check out some of the big summer blockbusters, but it definitely won't be a movie every weekend (which you know isn't too hard for me, if you've read my earlier post No More Movies).

The second thing we've been doing is watching the monthly expenses, trying to see where we can save a few bucks. We've cut out fancy cable packages, we don't have gym memberships, we are a cell phone only family, and our big extravagance is a one disk membership to Blockbuster Online.

The third thing we've been doing is that just for now we're taking a very frugal look at one time expenses, trying to determine if we want to spend the money now, or wait until later. One example is that my passenger window on my car is having trouble (the glass is intact but it won't roll down), and normally I'd probably pay to have it repaired immediately, but for now I'm going to just live with it in the hope of either getting some time to try fixing it myself or maybe find a way to get it repaired on the cheap.

It probably sounds like my wife and I are pinching every penny, but I really don't view it like that. We still get to go out and have fun with friends and family, but by making a few conscious decisions to tighten the belt, we can have that fun and still keep saving. It lets you feel like you're in control of your finances in uncertain times, and once the economic climate improves then we can splurge a little more, but with the current outlook (and a baby on the way) every dollar we save lets us sleep a little better.

I guess our philosophy when it comes to playing financial defense is: "Spend as if you were poorer than you are, so you'll never have to be that poor for real."

Not very catchy, but a good way to live when economic forecasts are gloomy.

Tracking income and expense with Yodlee

Posted by Matt

This is a topic I've been waiting to post on for a long while now. After lots of looking and testing, I think I've finally found a system for tracking my finances that works for me.

Like most people, I started out with a check register. This was a great way to keep track of what went in and out of my account, but building a budget from the information it contained required a lot of extra effort.

So, I tried out a spreadsheet. Once I put the data into this structured format, it was much easier to categorize and manipulate. In the years since, I've grown to love using spreadsheets, but this method still requires that I manually track every bit of income and expense.

So, the next things I tried were financial software packages (first Quicken 98 and later Microsoft Money) that allowed me to connect my computer directly to the bank to download my transactions. No more data entry! These were both pretty great applications and I'll assume that the refinements that have been added over the last decade are at least partly responsible for their dominance in the market. Unfortunately, not only did I have to pay for the software but back then, I also had to pay the bank a monthly fee to access my account information. Anyone else remember back that far? If it helps, I was downloading the data with a dial-up modem.

So, why haven't I switched back to one of those applications now that free "Internet Banking" has become de rigueur? Well, the short answer is that I'm a picky person. I find that I'm always wanting to "tweak" software and that led me right back to the spreadsheet. There, all my "control issues" are satisfied.

"But wait", you're thinking, "I thought you didn't like doing the data entry?" Well that (finally) is where Yodlee comes in. I'll explain how in a minute, but first, some background information.

Yodlee is a company that provides financial applications to both institutions and consumers. The application I use is called "MoneyCenter" and is essentially an online place to track just about any type of financial account you can think of. Below is a list of the types of accounts that I track with it, but that does not include all of the types of accounts to which it CAN be linked.

• primary bank checking account
• Internet savings account
• mortgage accounts
• 401k plan
• 529 college savings plan
• credit card
• credit card rewards program

I added these accounts to my "dashboard" by providing my online usernames and passwords. Once they are all in the system, Yodlee automatically connects periodically to keep the information on the website up-to-date for you. This allows a whole host of features, but I'll describe the ones I've been using the most.

Net Worth Statement - this allows me to see my entire financial portfolio in one place. There is even an option to include estimates of equity in holdings that do not have an online account associated with them, like I do with our houses (I just had to; seeing all the associated mortgage debt was too unbearable otherwise). The net worth number is also tracked and graphed over time.

Transactions - here is where I get to finally connect back to my beloved spreadsheets. Yodlee pulls in all of the transactions for my various accounts and I can export them to a spreadsheet. What really helps is that Yodlee can be configured to automatically categorize the transactions. For example, I've specified that any transaction that comes through with a description containing "Pride Disposal" is automatically categorized into my "garbage bill" category. Some categorization even takes place without any work necessary by the user; Yodlee is very good at putting transactions from large restaurant franchises into the "Restaurants/Dining Out" category, for example.

At the end of each month, I log in to Yodlee, make a quick run through the transactions to make sure the categorization is accurate (I'm still refining my categorization rules), and then export the transactions in spreadsheet format. I copy that data into a sheet stored on my computer, which has a series of processing rules to display the categories in a way that makes the most sense to me. Many (most?) people can skip the exporting and spreadsheet tweaking steps as Yodlee has another great feature for organizing your data, namely...

Spending Reports - This is where the site gets fancy. The first thing you see on this screen is a pie chart showing a breakdown of all of your spending, along with a table alongside it that shows the breakdown of your expenses. You can use a variety of filters on the report to limit it to the previous week, month, year, etc. or show the activity from a defined group of accounts. Even cooler: say you are surprised by the dollar amount next to Restaurants (like I usually am)...you can simply click on that category name and instantly see all of the transaction details for that category in the specified time frame. Awesome!

This post is much too long already, so let me just quickly mention some of the other features.

• Yodlee Bill Pay - pay your bills online
• Budgeting - set targeted amounts for spending and track progress
• Alerts - receive emails based on custom rules (large withdrawals, exceeding budgets, etc.)

By using this system, I've reduced the amount of time spent recording/categorizing financial records, while simultaneously gaining instantaneous access to the current and historical status of all of my financial accounts. If you're really nuts about finances and numbers, the tool is worth checking out, especially considering that it is FREE!

I should also mention Mint, though I won't do a detailed review here. I tried out the Mint website because it offers similar functionality to Yodlee (it may even use Yodlee behind the scenes), but also does a very basic analysis of your accounts to find money-saving opportunities. The ones it found for me were invalid and I wasn't that impressed with the site's categorization. Also, it only allowed connections to bank and credit card accounts when I tried it out. Sorry, Mint, you had your shot.

Let me close by acknowledging that not everyone is nearly so obsessed with tracking numbers, but I really believe that everyone should have at least some kind of rudimentary system. Any of the options mentioned above is better than nothing. You have to know where the money is flowing in order to ensure (as I said back in my second post on this site) that you have more money coming in than going out!

Budgeting With No Receipts

Posted By Paul

I heard a very interesting tip for budgeting that a friend of mine is using. The situation is that they are hoping to set up some real budget rules AND stick to them. Part of the work is that they want to dramatically reduce the amount of money they spend on meals out. This is a busy family with a child, so it's easy to pick up a dinner here or a lunch there.

So their plan is that they are going to determine how much they can spend on their meals out for the next 3 months and they are going to buy gift cards at the various restaurants they frequent that total that amount.

The idea is that once the gift cards are empty, then they're done eating out.

One downside to this system is that it assumes that you go to just a few restaurants, but I would bet that many busy families with children (especially if they have children that are picky eaters) could come up with a short list of restaurants that they go to 90% of the time.

Another downside is that if you come in under budget you can't turn the gift cards back into cash, but assuming that the gift cards are ways to set a limit and make sure you don't exceed it, then this isn't such a bad idea. I do like the fact that if you're not the kind of person who likes to save and track receipts, this system gives you a simple way to set a limit and stick to it.

I had never heard of this system before, has anyone else out there tried it?

Frugalizing a friend.

Posted by Matt and Paul

Recently we were asked by a good friend of ours to go over their finances and see what we thought.

In exchange for our advice, our friend said that we could post any lessons learned to our blog. So here goes:

Generally our friend was a breeze to Frugalize, mostly because they were already there. Here are some of the highlights we saw:

-They were totally aware of their monthly expenses. They couldn't quote their monthly expenses for car insurance from memory, but they were able to put their hand on the right document within minutes. The key point here is that THEY KNEW WHERE THEIR MONEY WAS GOING.

-They had a great emergency fund in place.

-They had medical insurance.

-They were saving.

-They had zero credit card debt.

-They were living within their means (which you could probably assume from the fact that they had no credit card debt and had been able to save).

This person had the kind of finances that I HOPE every American does, but everything I read suggests that they are by far the exception.

So to be honest we could have stopped at this point and said to our friend that all was good, but we kept looking for small details that might be helpful. Here's what we found:

1) Since they drive an older car, and plan to drive it into the ground, we suggested that they reevaluate their car insurance, and possibly drop their comprehensive and collision coverage (see previous article from Matt: The diminishing returns of comprehensive auto insurance coverage ). If they didn't want to drop the coverage entirely we suggested that they at least increase the deductibles to save some money on their policy.

2) They had a universal life insurance policy that had a death benefit of $15k and cost them about $90 a year. We suggested that they cash out the policy. If they wanted to have life insurance then that's fine, but since they were single and had no kids we didn't see the need to pay for life insurance. The way the policy is written, if something tragic did happen to our friend, their parents and siblings would split the $15000, which is a pointlessly small amount in relation to the rest of their estate.

3) Since their income varies somewhat we suggested that they increase their rainy day fund.

4) We helped them clarify their savings goals. They were doing a great job of saving so we just had a quick discussion about what they were saving for. The rainy day fund and retirement came up immediately (which is great), and they were also interested in saving up for the purchase of a new car someday. We suggested that they open a dedicated "new car" savings account. Separate savings accounts facilitates tracking progress toward each goal.

5) We suggested that our friend could simplify by getting rid of some credit cards that they never use (keeping a few for convenience). It's possible that this could negatively impact their credit score, but their credit was already good so we felt it would not be a problem.

One final thing that we learned from this experience is that good intentions are important, but thinking about and talking about personal finance are part of the equation too. Not everyone finds personal finance as interesting as Paul and Matt do, obviously, but it seems that the American public's reluctance to discuss personal finance could really be holding us all back. We (Paul and Matt) found it immensely valuable to be able to bounce ideas off of each other and I hope our friend feels that they have gained from joining the conversation as well.

Starbucks

Posted By Paul

I've never specifically talked about this but as I talk all the time about living a frugal life I feel like it's worth mentioning gourmet coffee specifically.

I hope I don't sound too preachy, but recently I've noticed a lot of people that are on a tight budget but get Starbuck's (or the equivalent) every single day.

I really like several of their drinks (I tend toward the ones that are warm and frothy and end with 'ucino'), but I choke every time I realize how much they cost.

So for me those fancy coffee drinks are like a beer or an ice cream cone. It's something I get after work with friends, or when I want to go out for a little treat. I can't believe people who get one of these big $5+ drinks EVERY DAY on the way to work. If you can afford it, then go for it, but I have actually heard people say that they need to cut back on their spending but their daily coffee drink was a necessity.

That to me is just crazy (and more than a little irresponsible). If you need a caffeine buzz (or just like a hot drink in the morning), well most workplaces have coffee for free, and even if the coffee is bad there's no reason you can't just make a cup at home in the morning and fill a travel mug.
Or even better, try to kick your caffeine addiction.

Folks who list Starbucks as a necessity when doing their budgeting are in conflict with the first rule of

My Financial Philosophy

That rule being: Never confuse "need" with "want."

The "R" Word

Posted By Paul

So the word recession is being tossed around a lot recently, mostly with a lot of speculation as to whether or not we're in a recession, or headed into one.

So what exactly is a recession? I don't want to go into the definition of recession too deeply (here is the link to the wikipedia definition), but for me when I start hearing the word recession tossed around a lot it means that I get a little nervous.

So what do I do to try to assuage my nerves a bit?

The first thing I do is check my savings account. When people start talking about a recession it's nice to know that my emergency fund is in place.

Then I try to decide if I want to bulk up my savings a little bit. Like my wife and I can decide to skip a few dinners out so that we can put an extra $50-$100 in savings. This helps me feel confident that I can weather the economic storm.

Next I look at everything on the purchasing horizon and decide what can be put off. I'm not talking about canceling your plan to have dinner with friends next Saturday, more like your plan to buy a new big screen TV. Not to say that you can't buy that TV (provided you can afford it) but take a moment and decide if you might want to have the money in the bank for now and buy it when the economic landscape is a little more cheery.

I also look at ways that I can save money if things get extreme (like I lost my job). This is pretty easy for me to do right now since I did lose my job just two months ago (so it's all fresh in my mind). You don't have to implement the extreme measures, but it might help with peace of mind to have them planned out in case it comes to that.

Finally I thank heaven that my wife and I don't have a back-breaker mortgage or a bunch of credit card debt. It's good to know that in case of a rainy day my wife and I can tighten the belt and get by pretty well for a long time if we need to.

Also by living a frugal lifestyle things like an increase in gas prices or the cost of milk doesn't hurt us as much as it would if we were barely making ends meet.

If you plan your finances well then a recession will hopefully just be a minor annoyance as opposed to a rocky time in your life.

Financial Choices, Good vs. Better

Posted By Paul

I was working in the yard and thinking about how I view savings and investing, and my rambling thoughts started to take shape into a set of rules that I call 'Good' and 'Better'. The idea is that in my opinion people spend a lot of time focusing on the wrong financial view.

Good: Focusing on making sure you income is growing.
Better: Focusing on making sure you are living within your means.

I've known a lot of people who were incredibly focused on their incomes. They wanted to make sure that they were constantly making more and more money year after year. Now I certainly agree that income is important (and so is income growth), but I often see that in all that focus on income sometimes people lose sight of the basic idea of living within their means. For example, someone works feverishly to make a great salary and because they work so hard and burn themselves out to make that money they spend lavishly on cars, boats, and all kinds of toys to make the most of the their limited free time. These toys require even more money to maintain the lifestyle so they have to work even harder. The result ends up being that their finances turn into a very fragile house of cards, and just one layoff or recession results in financial ruin.

Good: Bargain hunting to make sure you save money on purchases.
Better: Focusing on simplicity to make sure you don't buy a lot of stuff you don't need.

You ever see the one where someone buys some expensive toy that they really don't need and can't afford, and they work VERY hard to make sure they get a good deal? Remember that getting a great deal on something you don't need is still more expensive that not buying the thing in the first place.

Good: Focusing on finding ways to save pennies here and there.
Better: Focusing on ways to save LARGE amounts of money.

I've always thought it was odd to see people who will save and return their aluminum cans religiously for the nickel deposit on each can but will then turn right around and spend $100 a month on a premium cable package they rarely use, or blow $200 on an impulse buy. I don't mean to say that you're a bad person if you have cable, or if you indulge on a fun purchase. The point I'm trying to make is that it's great to work to save your pennies, but it makes very little sense (cents?) to save your pennies if you're wasting dollars.

Good: Focusing on your investments to make sure that you are getting good returns.
Better: Focusing on making sure you're saving a lot.

It's great to search around and find your best investment based on what you want out of it, but sometimes it can be overwhelming to try to find the perfect investment (mostly because there is no such thing as the perfect investment). Don't worry too much about finding the perfect mutual fund or that CD that gets you .1% more, instead focus on saving the money in the first place. The way I think of it is that if I have $1,000 and spend a lot of time finding a CD that pays me 5% on that $1000 as opposed to 4.9%, the result is that after a year I will have made $1 more. Instead of researching CD's as a way to squeeze every penny, if I could use the time to shave $10 off of my monthly budget then after a year I will have saved an extra $120!

Article: Capital Ideas

Posted By Paul

Wow, what an odd coincidence. The article that Matt just posted about was also sent to me by my sister and I wrote a similar "how I stack up versus the rules" article, I thought it would be cool to have both of our articles, so here is mine:

My sister sent me this article recently that I thought was interesting:

Capital Ideas

I thought the article was really interesting since it gave some guidelines for where you should be financially. I thought I would summarize the guidelines in the article and see how I'm doing relative to them.

"$10,000 is now about the average credit-card debt per household, according to cardtrak.com."

How Am I Doing?
I'm doing great here, credit card debt is 0.

"At 30, you should have your highest levels of debt (including mortgage, student loans and credit cards) to earnings, with total debt double your annual earnings. As you age, that figure should get smaller, and stay below 1:8. At the age of 45, debts should equal your annual salary."

How Am I Doing?
Since I'm sort of half way between 30 and 45, so I guess following the guideline would imply that I should have about 1.5 times my annual salary in debt. Assuming that since I'm married I should consider total household salary, then my calculations say that my debt to income ratio is almost exactly 1:1, so it sounds like I'm a bit ahead of schedule there.

"You should also aim to be saving 12 percent of your income annually, and the savings you amass should exceed your annual income in your 30s, says Farrell. By the time you are 40, you should have 1.7 times your income stashed away for retirement, and by 50, aim for three times your earnings."

How Am I Doing?
My wife and I actually save more like 15-20 percent of our salaries. It says that by the time you are 40 you should have 1.7 times your income stashed away for retirement. Currently my wife and I have about 1.85 times our salary in retirement accounts, so it looks like we're ahead of schedule there.

"Lenders (at least the sensible ones) like to see borrowers keep their housing expenses—including mortgage payments, insurance and property taxes—to 28 percent of gross income."

How Am I Doing?
I think a rough estimate is that our total mortgage, insurance and property taxes are about 10% of our gross income.

It looks like according to this article my wife and I are living a pretty savings heavy lifestyle. It looks like we're ahead of schedule as far as our savings and that our cash flow situation looks pretty good.

In fact my stats would look even better if the stock market hadn't taken such a beating in the last month or so.

Energy budget leveling

Posted by Matt

Paul wrote a post about budgets previously, but I just wanted to share one more bit of information that can make the budgeting process easier.

From Paul's post:

After a while I discovered that many of my utilities varied, but only a little each month (like my phone bill). Once I realized this I included the average amount as an expense in my budget and if my bill was less than the average one month I'd add the extra into my surplus and if it was more I'd subtract it.

Great idea, Paul. But our readers might point out that one category of utilities varies by more than just a little. If you're thinking "yeah, energy bills", then I feel your pain. The monthly gas bill in our last home went from the $20/month range in the summer to the $200/month range in the winter. That's an order of magnitude change! Having a nice cash reserve in savings keeps us from having to worry in months when our spending goes up, but if you need more stable expenses, check with your utility companies to see what kind of billing programs they offer.

Our electricity provider provides a couple of different options for paying an average payment each month, as does the local gas company. Check them out!

Article: Retirement Plan Interrupted

Posted By Paul

An interesting article on CNN Money about how stretching your housing expenses too far can put you in a tight situation:

Retirement Plan Interrupted.

Article: 6 Money Dilemmas

Posted By Paul

Found a cool article on CNN Money today that listed some of the classic "which should I do" scenarios and gave suggestions and information.

The six scenarios the article talks about are:

1) Pay off a credit card OR fund your 401(k)

2) Save in a Roth 401(k) OR a regular 401(k)

3) Lease a car OR buy a car

4) Prepay your mortgage OR invest

5) Buy a home OR rent a home

6) Take Social Security early OR late

Here is the link to the article:

Six Money Dilemmas