Category: The Basics

Rising Gas Prices

There has been a lot of angry discussion recently about why gas prices are going up. In our area, they are are up 7% in just the last week. Many predict they will to go higher still. I understand your anger, but after you scream and yell and stomp your feet you must face the problem and decide what to do about it.

How is this going to affect you?

If your gas budget has been $200 a month you are going to be $14 over budget if prices stabilize. Or, maybe you operate a small business with a $2000 a month fuel budget, in which case it’s a $140 problem. Either way you must determine where you are going to get the additional money.

Maybe a 7% increase in your gas budget won’t break you, but that money comes from somewhere and living intentionally requires that you acknowledge the increase and make a decision what to do about it.

I have been told by small business owners about similar increases that they will “just absorb” them. What exactly does this mean? Does this mean they will reduce their profit predictions by the expense increases? That is a perfectly acceptable way to handle the increase if that’s what the owners want to do, or they could increase prices or they could reduce another expense or they could find another way (other than price) to offset this expense. The one thing they must do if they what to run an efficient and profitable operation is to make a reasoned decision about the situation. If you don’t take notice of a 7% increase for a single expense, what is your threshold, 10%, 20%?

Like a business, you personally need to be aware and decisive when the cost of an expense increases.

Here are some possible courses of action:

I will take the difference from my blow money. This means a couple less coffees this coming month or skipping a lunch out or missing a movie, if these are things you buy with your blow money.

I will drive a least 7% less. If this is your plan how will you accomplish it? How much is 7%? What trips will you eliminate?

I will carpool this coming month saving _______ miles, which is ___________% of my gas budget.

I will ride my bike either to work or for errands, saving _______ miles, which is ___________% of my gas budget.

I will use public transportation for the following trips_______________ saving _______ miles, which is ___________% of my gas budget.

This is what living intentionally is about. It is making decisions and controlling your life and your money, not just letting things happen to you.

The first step in all of this is to know what you have been spending on gas. Do you really know or are you guessing?  Can you quickly and easily tell me what you have spent the last year?

Be aware. Make decisions. Follow through.

A Tale of Two Families

Young Ned and his wife Sally really want a home of their own. Ned has been at the same job for a couple of years and Sally stays home with their 1 year old. They have been reasonably careful with their money. They have an old, but reliable, Honda Ned’s parents gave him when he graduated from college and no credit card debt. Ned makes $50K a year and Sally’s parents have given them $10K to use as the down payment. Ned and Sally go to an online lender to get pre-qualified for a mortgage. Using the lender’s  “Home Affordability Calculator” Ned and Sally are told they can afford a monthly payment of $1,499.76 including taxes and insurance.  Estimating taxes and insurance at $5,500, Ned and Sally start shopping for a $200,000 home.

Not too far away another young couple is dreaming of a home of their own as well. Paul and Janet have a new baby and are finding their tiny apartment rather cramped. Paul makes $50k a year but has 15% of his pay going to his 401K. Paul and Janet never see that money, so they budget as if it doesn’t exist.

Paul and Janet have recently struggled and sacrificed to pay off the credit card debt they ran up when they were in school.

Janet has been reading money management books and knows that they should put at least 10% down on a house and that their mortgage should be no more then 25% of their take-home pay. Using Paul’s take-home pay after taxes and the 401K deductions, Janet calculates a maximum mortgage payment of $764.  She knows they can afford a $100,000 home with a 15 year mortgage.

Before they can go home shopping, they know they must save the down payment and build their emergency fund to equal at least three months of expenses.

Paul takes on as many overtime hours as he can get at work and Janet takes the baby to the neighbors three times a week to watch their 3 year old. With this additional income and cutting their expenses as low as they can go, Paul and Janet are able to save $2000 a month for 8 months.

Ned & Sally end up with a $200,000 home. Their mortgage payment is $1,019 a month and taxes & insurance add another $450 per month. Paul & Janet have found a nice little starter home for $100,000. Financing their home over 15 years gets them a lower interest rate and shortens the term by half. Their mortgage payment is $671 and taxes and insurance add $200 a month.

Ned & Sally                        Paul & Janet

Take Home Pay $3550 $3056
Housing Cost $1469/41% $871/29%
401K After 5 years $0 $43,436
Interest paid on Mortgage after 5 years $45,614 $16,185
Principal Paid after 5 years $15,526 $24,083
Net Worth Increase $25,526 $77,519

Ned & Sally’s budget allows them to live on $2031 after housing costs.  Paul & Janet get just a hundred dollars more but their utilities and maintenance costs are about half of Ned & Sally’s. They have their retirement saving working for them and enough room in their budget to save and pay for a better car.

Paul & Janet were careful, after learning their lesson with credit cards, not to be lead astray by lenders who make more by lending you more. By the time they managed to pay off the old debt, they could not even remember what they had bought. They swore it would not happen again. They vowed to live on less then they make, to save aggressively and to give. We hope Ned & Sally get a wake up call soon.

The Long Haul

I sometimes struggle with consistency in my efforts – and I bet you do to. Making the decision to change your financial future isn’t all that hard; a moment of clear thinking is all that it takes to understand that you can and should be doing more with your money. Setting up a plan to accomplish your new found goals isn’t all that hard either; you know you need to spend less then you make, pay off debt, and save.

The hard part is to follow the plan long term – way past that first month. Why is this so tough?  Because in order to accomplish this, or any other behavior changes long term, you must change the way you think. That’s hard enough by itself; but you also have to maintain this new attitude in the face of incredible pressure from others to go back to your old non-thinking, fun-loving, easy-spending ways. Dang it! How’s somebody supposed to do that?

Slowly

In our enthusiasm for change, or distaste for the stuff required to accomplish it, we often try to do it all in one night. So, you know that debt it took you 4 years to accumulate? Chances are you are not going to wipe it out tonight. And, if you did by some unexpected windfall have the ability to do so, chances are you would just run it up again. We need to change our thoughts and behaviors and the best way to do that is a little at a time.

Your first spending cuts should not be to expenses that are near and dear to you. Cut things you won’t notice  much or  find lower cost substitutes. In an earlier article, I named my first three cuts; I substituted purchased books for library books; I ironed my own shirts and we changed our phone service.  The phone service never bothered me for a minute; the books took a little effort; but I found that if I kept several unread library books at all times, I could easily talk myself out of the temptation to pick up a paperback when I was out. The shirts were a different story.

Of the three cuts, eliminating the laundering of my shirts offered the least significant savings, but it may have been the most important in terms of behavior change. Every Sunday, I spend 45 minutes ironing my shirts for the upcoming workweek. Sometimes I really do not want to iron those shirts, but once I get started, it’s not so bad. This active participation serves to remind me what our financial goals are and what we are willing to do to achieve them. If I spend four hours a month saving $35, I am much less likely to go over budget for something unnecessary. If you don’t have shirts to iron, what can you do that you used to pay someone to do? Find a way to be happy accomplishing the task and remind yourself about the mission you are on.

When you are comfortable with the first round of cuts, you can start round two. Don’t be in a hurry, deeply cutting an expense that you really care about can led to rejecting the whole plan.

Together

Work has always been important in our house. Much of our fun has been working together on projects. We can even find enjoyment in everyday chores of cleaning or yard work as long as everyone participates. In our house, you won’t find anyone kicked up in the lazy boy while the vacuum is running.

The same goes for financial goals, we are all pulling in the same direction. Change is so much easier when you surround yourself with others on the same path. Seek out friends and family that can understand and support your efforts. It’s imperative that your spouse or significant other is on board; fighting their reluctance while trying to change is like waging war on two fronts. Put your whole plan on hold and get on the same page. You might have to go slower than you want in order to walk together – but it will be worth it.

Simply

Keep your plan simple. Do one thing at a time. It’s really easy to get sucked into trying to accomplish a whole lot at one time. It won’t work. Diluting your effort across a whole bunch of goals means nothing gets accomplished quickly. We need some quick wins to stay motivated. Focus with laser intensity on one small goal at a time and get it done.

The Monster under the Bed

Whatever sneaky, creepy, grow in the dead of night, problem you have, there is there’s a way to solve it and keep it from ever coming back.

Some problems seem to just sneak up on you; that little bit of credit card debt that quietly over months or years somehow becomes $10,000. Those papers that you just can’t find a minute to deal with that take over your desk and then the credenza and then the multiply creating several baby piles on the floor. Maybe your sneaky problem is that 5 extra lbs that is now approaching 50.

These types of problems grow because when they are small they don’t really command our attention. “It’s no big deal, I’ll handle it next month” is what we think about the $300 credit card balance we don’t pay off. And then, next month rolls around and something else seems more fun or more important and that $300 becomes $360. Before we know it, that little non-problem has become something big and daunting. Now it’s an unruly monster that is going to take a lot of time and effort to tame. Our issue that was once too little to worry with has now become a problem too big to tackle – so we continue to ignore it and it continues to grow.

Awareness and Your Accountability Partner

To avoid being blindsided, regularly take stock. In our house, we have a budget meeting the last day of every month. Sometimes I’m lazy or disinterested and don’t want to attend. My accountability partner makes me. We spend 10 minutes and look to next month’s spending, deciding on any unusual or large purchases. We also record the current balance of all our accounts and calculate our net worth. It is quickly clear if we are headed in the direction we want to go. I also use Mint.com – who’s annoying little emails tell me in real time if I’ve exceed a budget amount; allowing me to get back on track before the next budget meeting.

Your accountability partner can be your spouse or a friend or family member. Just someone you can trust that will help make sure that you actually do the necessary regular measurement.

Cut the Monster down to Size

“That’s great!” you might say, “I’ll measure weekly from now on to be sure my monster doesn’t grow. But what am I supposed to do with the 500lb beast I have right now?”

My advice is to shave – don’t chop. Drastic changes in diet or lifestyle rarely work. It doesn’t take long before you think, “I’d rather be broke and happy”. So start small. Make a few cuts this month, see how they feel and make a few more next month.

Some of my spending that was cut first in the first round:

Books – I had a book-or-two-a-week habit, usually on impulse. I still read a lot and I still buy some books, but most of the time I read library books – Savings $50 per month.

Cleaners – I like my shirts crisp. I used to have five shirts a week laundered and pressed. I wash and iron my own shirts now, frequently hanging them on the clothesline when the weather is nice. Not only do I save the money not taking them to the cleaners, but my shirts last longer – Savings $35 per month.

Phone – We dumped the home phone for our cells and the real fax line for an internet fax service and bundled our business line in with the cable – Savings about $100 per month.

We went through several rounds of cuts and what works for us is: If something really matters to you, be OK with spending money on it – but cut sharply on those things that aren’t crucial to your happiness.

No matter what you issue is; whittle away at it, charting your progress as you go. Regular measurement insures that monsters don’t quietly grow under the bed.

Charting your progress makes it much easier to stick with your plan. A little success is very motivating.

I Can’t Pay

If you are currently in the very uncomfortable position of not being able to pay all your bills on time, here’s how  to get through this valley with the least amount of pain and scarring,

Do not allow the current situation to redefine who you are.

You are a person of integrity. Your word means something; you take care of your family; you honor your commitments. This doesn’t mean that you never stumble or lose your way. It does mean that when you do fall short of your own expectations you change course and re-commit.

Protect your relationships and rely on your faith during this rough spot.

Take Responsibility

If they hadn’t cut your bonus, eliminated your job, if housing prices hadn’t crashed, if you mother hadn’t gotten ill…. you would not be here. But it happened and you are – so start right here today with where you are. You made a promise you cannot keep and now you need to get to control over the situation.

Make a Realistic Plan

 

Winning the lotto, scoring a new job that pays twice what the old one does, or selling your car for twice what it’s worth, are examples of events that are not likely to happen.

You need to create a Crisis Spending Plan based on your actual income.

Develop your plan starting with basic food – no restaurants, no fast food, no steaks, no beer, just beans & rice, mac & cheese, PB&J; cut the budget to the bone.

Next you need to pay your utilities, water, electric, gas, not cable not internet. If the utilities are behind, catch them up before doing anything else.

Shelter is our next priority. Pay your rent or your mortgage.

Finally, secure your transportation. Make your car payment; get your bus pass; set your gas money aside.

Now that you have your four walls (food, utilities, shelter, and transportation) in place, you can start your battle against your debt.

Who Gets Paid?

 

Make a list of all of those you owe; how much you owe them and how far behind you are.

If you can’t make the minimum payments on all your debts, you may choose to pay them each their pro-rated share of the money you do have available.

List each debt. Divide each debt by the total debt to get the debts percentage of the total. Multiply each percent by amount of money you have available to pay debt. This will give you your new payment. Send a copy of your worksheet with each payment.

Like this:

Contact your Creditors

 

Some creditors will be much more willing to work with you if you can state your hardship case and your plan for overcoming it. Some won’t. Typically credit card companies, big banks and Sallie Mae don’t care about your problems and will treat you in whatever way they think is most likely to get them a payment. They may appear to be warm and understanding today and then become belligerent and abusive tomorrow.

If you owe money to local businesses or individuals, you may be able to negotiate a payment plan.

As much for yourself as for the creditor, always communicate honestly with the creditor. Calmly tell them why you haven’t paid, when you expect to send them some money and how much it will be. Send them a copy of your pro rata worksheet with any payment that is less than the minimum.

When Sears calls about the past due payment on your credit card, your side of the conversation could sound like this:

Yes, I’m aware that the payment is late. My hours have been cut at work and we are unable to pay all our bills. When I am paid next Friday, we will be sending you $21.06.

No matter what they say, you stay calm and repeat that’s all your able to do. Keep your four walls in place and do not put your family in jeopardy because of some collectors ranting. Never give them electronic access to your accounts.

Once you have a written plan in place – follow it.

Get a Runny Go

When we were kids we had this funny phrase: “Runny Go”. It referred to the backing away from a hill and pedaling like crazy so you could maintain just enough momentum to get over the top. Starting at the bottom of a big hill from a dead stop, without a Runny Go, is torture. You have to stand up in the pedals and grind so slowly. If you let off at all, gravity pulls you back down the hill. Lots of things in life may require a Runny Go, including your first successful budget.

Instead of starting from a dead stop, spend a month building up some momentum. The goal is not to cut expenses – just record them. But if you feel the need to cut something, it is not against the rules.

Do a look back budget (time required 1-3 hours)

Set up your budget on paper or excel and do the last two-three months using your bank statements, credit card statements and memory, as best you can. Make a “don’t know” expense for the money you cannot account for.

Keep a journal (30 seconds for each purchase)

If you have expenditures you cannot account for, keep a little journal for the rest of the month – where you write down every dime you spend. It doesn’t need to be fancy, just scribble down what you spent the money on. Or, you can take a picture of every purchase as it happens.

Set aside 5 minutes every day

Spend 5 minutes updating your spreadsheet using your journal data

Mark the calendar

The expenses that destroy most budgets aren’t really unexpected; they just occur at irregular intervals. Pull out next month’s calendar and mark it up. Have company coming in? That will affect the food budget and maybe the entertainment budget too. Car insurance or tag renewal due? Write it down.

Armed and ready

As you approach the end of the month, you are getting ready to crest the hill. Gather all this new information and use it to make your budget for next month. Doing this prep work will make producing your first real budget much easier.