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Money Problems – Day 2: What’s Going Out?
Today, I continuing the series, Money Problems: 30 Days to Perfect Finances. The series will consist of 30 things you can do in one setting to perfect your finances. It’s not a system to magically make your debt disappear. Instead, it is a path to understanding where you are, where you want to be, and–most importantly–how to bridge the gap.
I’m not running the series in 30 consecutive days. That’s not my schedule. Also, I think that talking about the same thing for 30 days straight will bore both of us. Instead, it will run roughly once a week. To make sure you don’t miss a post, please take a moment to subscribe, either by email or rss.
On this, day 2 of the series, you need to gather all of your bills: your electric bill, your mortgage, the rent for your storage unit, everything. Don’t miss any.
Go ahead, grab them now. I’ll wait.
Did you remember that thing that comes in the plain brown wrapper every month? You know, that thing you always hope your neighbors won’t notice?
Now, you’re going to sort all of the bills into 5 piles.
Pile #1: These are your monthly bills. This will probably be your biggest pile, since most bills are organized to get paid monthly. this will include your credit cards, mortgage(do you rent or buy?), most utilities and your cellphone.
Pile #2: Weekly expenses. When I look at my actual weekly bills, it’s a small stack. Just daycare. However, there are a lot of other expenses to consider. This stack should include your grocery bill, gas for your car, and anything else you spend money on each week.
Pile #3: Quarterly and semiannual bills. I’ve combined these because there generally aren’t enough bills to warrant two piles. My only semi-annual bill is my property tax payment. Quarterly bills could include water & sewer, maybe a life insurance policy and some memberships.
Pile #4: Annual bills. This probably won’t be a large pile. It will usually include just some memberships and subscriptions.
Pile #5: Irregular bills. The are some things that just don’t come due regularly. In our house, school lunches and car repairs fall into this category. We don’t have car problems often, but we set money aside each month so our budget doesn’t get flushed down the drain if something does come up.
Now that you have all of your expenses together, you know what your are on the hook for. Next time, we’ll address income.
How to Save
Saving is hard. For years, we would either not save at all, or we’d save a bit, then rush to spend it. That didn’t get us very far. Years of pretending to save like this left us with nothing in reserve. Finally, we’ve figured out the strategy to save money.
First and foremost, make more than you spend. This holds true at any level of income. If you don’t make much money, then you need to not spend much, either. Sometimes, this isn’t possible under current circumstances. In those cases, you need to either increase your income or decrease your expenses. Cut the luxuries and pick up a side hustle. The wider the gap between your bottom line and your top line, the easier it is to save.
Next, make a budget and stick to it. There is no better way to track both your income and your expenses. I’ve discussed budgets before, so I won’t address that in detail today. Short version: Make a budget. Use any software you like. Use paper if you want. Make it and use it.
Pay yourself first. The first expense listed on your budget should be you. Save first. If you can’t afford to save, you can’t afford some of the other items in your budget. Cut the cable or take the bus, but save your money. Without an emergency fund, your budget is just a empty dream when something unexpected comes up. And something unexpected always comes up.
Automate that payment to yourself. Don’t leave yourself any excuse not to make that payment. Set up an automated transfer to another bank and forget about it. Schedule the transfer to happen on payday, every payday.
Now comes the hard part: Forget about the money. Don’t check your balance. Don’t think about it in any way. Just ignore it. For the first month or two, this will be difficult. After that, you’ll forget it exists for a few months and come back amazed at how much you’ve saved.
If you don’t forget about it, and you decide to dip into the account, you are undoing everything you’ve worked so hard to save. Do yourself a favor and leave the money alone.
Fall From Grace
When you accumulate a certain level of debt, it feels like you’re wading through an eyeball-deep pool of poo, dancing on your tiptoes just to keep breathing. Ask me how I really feel.
It shouldn’t be a surprise that I’m in debt. We have gone over this before. The story isn’t one of my proudest, so I’ve never talked much about how it happened.
Our debt was entirely our fault. We messed up and dug our own poo-pool. There were no major medical bills, no extended unemployment, just a strong consumer urge and an apparent need for instant gratification. Delayed gratification wasn’t a skill I’d considered learning. The idea of it was a thoroughly foreign concept. Why wait when every store we visited offered no payments/no interest for a year? We didn’t give much thought to what would happen when the year was up.
We got married young. We bought our house young. We started our family young. We did all of that over the course of two years, well before we were financially ready. Twenty years old, we had excellent credit and gave our credit reports a workout. Credit was so easy to get. By the time I was 22, we had a total credit limit more than twice our annual income. We fought so hard to keep up with the Joneses. A new pickup, a remodel on our house. Within a month of paying off the truck, I got a significant raise and rushed out to buy a new car.
Every penny that hit the table was caught in a net of lifestyle expansion. I was bouncing on my tiptoes.
Four months into my new car payment, I was laid off. There’s me, hoping for a snorkel. A week later, we found out our son was going to be a big brother. Our pool had developed a tide.
We killed the cable and cut back on everything else and…managed. Money was tight, but we got by. I got a new job, but had we learned any lessons? Of course not. We got a satellite dish, started shopping the way we always had. Times were good, and could never be bad. We had such short memories.
Fast forward a couple of years. Baby #3 is on the way while baby #2 is still in diapers. Daycare was about to double. Daddy started to panic. I built a rudimentary budget and realized there was no way to make ends meet. There just wasn’t enough cash coming in to cover expenses. That’s when I made my first frugal decision: I quit smoking. That cut the expenses right to the level of our income. It was tight, but doable.
There was still one serious problem. Neither one of us could control our impulse shopping. For a time, I was getting packages delivered almost every day. It was never anything expensive, but it was always something. Little things add up quickly.
Last spring, I realized we couldn’t keep going like that. I started looking into bankruptcy. Somehow, we managed to toss ourselves into the deep end of the pool. We had near-perfect credit and no way to maintain it.
While researching bankruptcy, I found our life preserver. We put together a budget. We cut and…it hurt. It’s taken a year, but every bill we have is finally being tracked. We have an emergency fund and we are working towards our savings goals. It hasn’t been an easy year, but we are making progress. We’ve eliminated 15% of our debt and opened out budget to include some “blow money” and an occasional date night. We are always looking for ways to decrease our bottom line and increase the top line. Most important, we are actually working together to keep all of our expenses under control, with no hurt feelings when we remind ourselves to stay on track.
We are finally standing flat-footed, head and shoulders above the poo.
Update: This post has been included in the Carnival of Personal Finance.
Totally Money Carnival #5, the Superbowl Edition
Welcome to the Totally Money Carnival #5, the Superbowl Edition. It’s my privilege to be the first outside host for this carnival.
I don’t watch the Superbowl. I’ve never been into spectator sports unless I have some skin in the game. If I’m playing, or have some money riding on the outcome, I’m watching. Other than that, I’ll usually pass. Yesterday, a bunch of grown men in tights earning envy-inducing amounts of money ran around for a few hours in front of people, some of whom paid 5 figures for the privilege of watching. Yay!
Editor’s Picks
http://www.youtube.com/watch?v=hpjaOUjUPUc
Mike Piper presents Protecting Your Private Files posted at Oblivious Investor, “How can you keep your sensitive documents (scanned tax returns, for instance) both backed up and protected in the event of computer theft?” Ed. I love this solution, and I use it. All of my tax returns, online receipts, and documents I don’t want to lose get treated this way.
Suzanne K. presents The Psychology of Why You Can’t Budget—And Five Tips to Help You Do It posted at PsychologyDegree.net. Ed. I’ve always been a fan of trying to understand what makes people tick.
Silicon Valley Blogger presents Prepare Your Tax Return: Tax Products vs Tax Pros posted at The Digerati Life, saying “If you don’t enjoy preparing your taxes, you’re not alone. There are various ways to get your tax returns done. How do you go about preparing your taxes: DIY or with the help of a pro?” Ed. Tax time sucks. If we abolished payroll deductions and made everybody in the country write a check to the IRS every year, there would be a revolt on the next April 15th.
Kevin McKee presents How To Know if Your Job is Expendable posted at Thousandaire, saying “When businesses start doing poorly, some people are at risk of losing their job, while others are safe. Find out which category you fall in with these simple questions.” Ed: I was given a demonstration that defines expendability in the workplace. Fill a glass with water and place it on the counter in front of you. Stick your finger in the glass. Now, pull it out. See the impression you’ve made? I’ve done the rockstar bit, and I’ve been in positions that were necessary for the profitability of larger divisions of large companies. It doesn’t matter. Corporate loyalty is a joke.
Budgeting
35% of people who attend the game write it off as a corporate expense. (source)
Miss T presents 5 Ways to Lower Your Monthly Bills | Prairie EcoThrifter.com posted at Prairie Eco-Thrifter, saying “Believe it or not, there are lots of ways to save money, no matter how much of it you have- or don’t have.”
Credit
http://www.youtube.com/watch?v=jRYLhkOV2so
Tim Chen presents Pentagon Federal Offers Best Gas & Airfare Credit Card Rewards, Period. posted at NerdWallet Blog – Credit Card Watch, saying “There is only one credit card in America that offers no strings attached 5% cash back at any gas stations (excluding the likes of Costco) – the Pentagon Federal Platinum CashBack. It also gets you 2% back at grocery stores.”
Miranda presents Accelerate Your Credit Card Debt Pay Down posted at CreditScore.net, saying “Use these techniques to pay down your credit card debt faster.”
Buck Inspire presents Moving Up and On From Prepaid Debit Cards posted at Buck Inspire.
Ryan Hudson presents How I Got a Credit Card Late Fee Waived posted at Best Credit Cards IQ, saying “Don’t take accidental late fees laying down. Do something about it. Here’s how I got rid of my late fee.”
Debt
No network footage exists of Super Bowl I. It was taped over, supposedly for a soap opera.(source)
John presents Get Out of Debt Fast – How to Speed Up the Process posted at Passive Family Income, saying “There are quite a few people today that are beginning to dig their way out of debt. They have monitored their spending, created a budget, and have done the best that they can to stick with it. But, as many of you have experienced, the excitement of becoming debt-free gets pretty old after a while.”
Finance
http://www.youtube.com/watch?v=VRDx18GYITw
Mike Collins presents Defined Benefit vs Defined Contribution posted at Saving Money Today, saying “Understanding the different types of retirement plans.”
Boomer presents 10 Ways For Women To Obtain Financial Empowerment posted at Boomer & Echo, “It’s not that difficult to get your financial life under control (your control). Remember, a man is not a financial plan.”
Frugality
The Super Bowl is measured in Roman numerals because a football season runs the span over two calendar years. This year the season began in 2010 and ends in 2011. (source)
Madison DuPaix presents Substitute, Improvise, and Make Do With What You Have posted at My Dollar Plan, saying “So often, when we run out of things we need, we run to buy something or spend money when we don’t have to. Find out how you can avoid this trap.”
Money Beagle presents The Power Of The Free Calendar posted at Money Beagle.
Amanda L Grossman presents Homemade Diversion Safes: Save Money by Making Your Own posted at Frugal Confessions – Frugal Living, saying “You can purchase your own home security money safes (diversion safes), but I thought it would be more frugal and fun to think of ones to make on your own. See what I can do with a used deodorant!”
Money Management
http://www.youtube.com/watch?v=KQkK1UCH1EU
MoneyNing presents What Would You Do with a Million Dollars? posted at Money Ning, saying “I know what I would do with a million dollars. How about you?”
Other
More drivers are involved in alcohol-related accidents on Super Bowl Sunday than any other day of the year (except St. Patrick’s Day), according to the Insurance Information Institute. (source)
Joe Morgan presents Is Gen Y Irresponsible, Or Is It A Matter Of Perspective? posted at Simple Debt-Free Finance, saying “Generation Y has a reputation for having a sense of entitlement, but here’s one reason it may just be a matter or perspective.”
Saving
http://www.youtube.com/watch?v=_78ylMLa0JQ
Ryan @ MFN presents Roth IRA Qualifications posted at The Military Wallet, saying “Are you qualified to open a Roth IRA? Find out income and contribution requirements to see if you are eligible!”
Brian @ BeBetterNow presents Money’s Golden Rule: Spend Less Than You Earn posted at Be Better Now, “In the end, most personal finance advice boils down to spending less than you earn. Here’s another article to reinforce that.”
Spending
http://www.youtube.com/watch?v=g364TG_8Qmw
Barb Friedberg presents Wealth in Life: 25 Cheap Ideas for Fun posted at Barbara Friedberg Personal Finance, “Join in to build a massive list of low cost fun!”
Taxes
http://www.youtube.com/watch?v=R55e-uHQna0
PT presents Tax on Unemployment Compensation posted at PT Money, saying “A detailed look at what taxes are due on your unemployment compensation.”
Ken presents Important Tax Update for 2010 You Don’t Want To Miss posted at Spruce Up Your Finances, saying “A few of the tax provisions applicable to tax year 2010 such as the extension of tax filing date, expanded tax benefits, phase out on some limitations, etc.”
Fanny presents Top 10 Tax Deductions for Parents posted at Living Richly on a Budget, “Being a parent is one of the most important roles in life. Why not take advantage of all the deductions you qualify for?”
Thank you all for participating! Next week’s host is Saving Money Today, so be sure to submit your posts.
A Moment of Clarity
- Image by Matt Stratton via Flickr
Ten years ago, I buried myself in debt. There was no catastrophic emergency or long-term unemployment, just a series of bad decisions over the course of years.
We bought a (short) series of new cars, a house full of furniture, electronics, hundreds of books and movies, and so much more. We threw a wedding on credit and financed an addition on our house. We didn’t gamble or drink it away, we just spent indiscriminately. We have a ton of stuff to show for it and a peeling credit card to prove it.
What changed?
In October 2007, we found out brat #3 was on the way. Don’t misunderstand, this was entirely intentional, but our…efficiency caught us by surprise. It took several years to get #2. We weren’t expecting #3 to happen in just a couple of weeks. #2 wasn’t even a year old when we found out she was going to be a big sister. That’s two kids in diapers and three in daycare at the same time.
The technical term for this is “Oh crap”.
I spent weeks poring over our expenses, trying to find a way to make our ends meet, or at least show up in the same zip code occasionally.
I finally made my first responsible financial decision…ever. I quit smoking. At that point, I had been smoking a pack a day or more for almost 15 years. With the latest round of we’re-going-to-raise-the-vice-tax-to-convince-people-to-drop-their-vices-then-panic-when-people-actually-drop-their-because-we-made-them-too-expensive taxes, I was spending at least $60 per week, at least.
Interesting side story: A few years ago, Wisconsin noticed how many Minnesotans were crossing the border for cheap smokes and decided to cash in by raising their cigarette taxes. The out-of-state market immediately dried up. Econ 101.
So I quit, saving $250 per month.
Our expenses grew to consume that money, which we were expecting. (Remember, we were expecting a baby!) Unfortunately, our habits didn’t change. We still bought too much, charged too much on our credit cards, and used our overdraft protection account every month. At 21% interest!
Nothing else changed for another year and a half. My wife would buy stuff I didn’t like and we’d fight about it. I’d buy stuff she didn’t like and we’d fight about it. When we weren’t arguing about it, we’d just silently spend it all as fast as we could.
Bankruptcy was looming. We had $30,000 on our credit cards and our overdraft protection account was almost maxed out. Have you ever thought you’d have to sell your house quickly?
One day, while I was researching bankruptcy attorneys, I ran across Dave Ramsey. When I got to daycare that evening to pick up the kids, I noticed they had The Total Money Makeover on the bookshelf, so I asked to borrow it.
I read the book twice, had a very frank discussion with my wife about the possibility of bankruptcy, and we set out on the path to financial freedom together.
What made you decide to handle your finances responsibly? Or, perhaps more importantly, what’s holding you back?
