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.

How low can you go?

I want to teach you a cool game. The winners of this game get huge cash prizes; I won a paid-for house.

The game is called, “How low can you go?”

To play, we need to create a low or no-income budget.

I hear some of you saying, “Wait, what, another budget? I haven’t done the first one.”  Well, since this one is easier than your real budget – get going.

In some instances this really is a worst-case budget – as in you have unexpectedly and unhappily lost your source of income. In other cases this is a best-case budget – as in you have joyfully taken the leap to a new venture or retirement. Either way, let’s play the game.

If you lost your income, how little could you live on?

With no income, entertainment becomes a walk, a bike ride, a trip to the library. So scratch the movies, the bars, and the vacations.

Eating on as little as possible does not involve fast food or restaurants or steaks. E-Mealz (a really cool menu planning system) can provide menus and shopping lists that will feed a family of two for as little as $30 a week.

If you had no income would that AC be set to 68? Would you be jumping in the car and motoring across town 4 times a week; or might you consider exploring the use of the city bus?

Really get radical here – consider what you spend on clothes and nails and hair color; how can you look presentable for less?

Itunes, Netflix, Redbox ? Not with zero income.

Take a look at that cell plan; you have no income. You don’t know when you will have some again. Can you get it lower? Do you really need it?

Do you have an extra room? What if you got a roommate? No, not forever, could you do it for a while if you needed to?

Things you can’t give up:

Insurance: you need health coverage. If you have dependents you need term life. If you drive, you need auto and if you own a home you need homeowners.

Taxes: you must pay you property taxes, auto tags and renew your license etc.

If I stayed in our home (paid for), kept both cars (paid for) and the cell phones I could go as low as $2,100 a month.

Fully half of my as-low-as-I-can-go expenses are insurance (home, car, health and life) and taxes (property, tags). If I needed to go lower we could easily live with one car (saving insurance, tag and maybe some gas) and ditch the cell phones. But to go any lower than that would require a housing change.

Ok here’s the fun part.

It’s just a game (hopefully you haven’t lost your income or if you have you had already worked out a plan) but what if you played for real? What is the monthly difference between your as-low-as-I-can-go expenses and you normal expenses?

What if you went only half way to as-low-as-I-can-go and applied the rest of the money to reducing debt or increasing savings? If you played for 6 months what would your financial picture look like? How about a year?

This is how we paid off our house. We played the: “How Low can You Go?” game for two years. It really wasn’t about huge sacrifices because it was just a game; we knew we didn’t have to live that way but we wanted to win.

Riding the bus or your bike, going to the library, carrying your lunch, having friends over for dinner and a board game instead of going out is not a drag. After you do it for a while, you may find parts of your low income life that you actually enjoy more than your old free-spending ways.

Can you beat me?  What’s your as-low-as-I-can-go number?

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.

The Two Yous

You suffer from a split personality.

There is the “Thinking You” that wants to lose weight, stop smoking, read books or save money.

Then there is the “Impulsive You” that eats cake, smokes- but only when drinking, watches hours of mind-numbing TV or can’t resist a $6 Starbucks on the way to work.

The “Thinking You” is always yelling at the “Impulsive You”:  “Have some self-control.”

“Smart You” may win for a while but when you’re tired, or hungry or lonely or sad, YOU are going to lose.

Keeping a grip all the time is exhausting. It’s no fun and it doesn’t work. It is true that once new habits are well established things get a lot easier, but in the beginning before your desired behavior is a habit, it can be a battle.

So, how do you win?  Easy, you cheat.

If you need $150 a paycheck to go into savings to cover those non-monthly expenses like insurance, taxes, vacation and Christmas you have two choices. You can cash your check and wrestle “Impulsive You” for the $150 or you can, either through direct deposit or automatic transfer, have the money put where it belongs before you ever see it.

If the morning Starbucks is not in your budget but you routinely find yourself there, try one of these solutions:

  • If you can budget one a week you may be able to pacify “Impulsive You” by saying we’ll stop on Friday.
  • If your to-go cup is full with really good home brewed coffee when you leave the house, there is less reason to stop.
  • Can you take another route? Maybe pick up a co-worker on the way and enjoy some conversation instead.

Nobody knows “Impulsive You” like “Thinking You”. Plan around your temptations. Self-control is not an endless resource. At any given moment you’ve only got about a cup of it, use it up and you are at “Impulsive You’s” mercy for the rest of the day. When you know a situation saps your self-control, avoid it. Automate important or difficult processes so you don’t need to re-make your decisions every month.

Remember the kids that stared at the marshmallow? They ate it. They used up all their self control and the marshmallow was still sitting there, so they gobbled it up. The successful kids distracted themselves by looking away or singing songs.

Take a lesson from the 4-year-olds and learn to distract the “Impulsive You”.