Think Small - The Pieces Add Up
September 20th, 2007
If you look at the buildings around you they’re made up of many parts, most of them very small. The tallest skyscrapers are not built out of one large piece of concrete but are built in stages with lots of small amounts of concrete and steel. This simple fact is something that we need to keep in mind when considering many things in life, especially our personal finances.
Personal Finance covers a wide range of topics from debt to investment and for the average person it impacts their whole life. If you’re reading this and are in debt, did you accumulate this debt in one fell swoop? Chances are that you didn’t. Yes there maybe big ticket items that you purchased such as your car or your house but aside from those pretty much everything else is a collection of relatively small items. The $20 you put on your credit card here and there over time added up to the $1,000s that you owe on it now. Thinking small can put something like this into perspective and help you realize where your spending is exceeding your income and what you can do about it.
These small amounts all add up to very large numbers over time. If you were able to save $5 a week on groceries you’d be looking at $260 over the course of the year which could be used to pay down debt or make an investment. Saving $5 a week on something like groceries isn’t a challenge at all. If you’re one of the many people that routinely eat out for lunch then you’ll notice that by the time pay rolls around you’ve spent a lot of money on those lunches, I spend $35-40 a week on lunches for example. Using my example it adds up to over $2,000 a year. My relatively inexpensive $7-8/day lunch quickly adds up to a whopping $2K! I’ve been writing about this topic for over a year now and this example is still staggering for me.
Compound Interest and Saving
Looking at this from the point of view of saving money and compound interest if you’re able to save as little as $50 a month you’ve saved $600 over the year. Continue to do this over a few years and you’ll start noticing the compound interest kick in. At a fairly standard 4% interest you’re making $24 in the first year alone. Again if you continue adding and re-adding these small numbers over the course of a couple years this can add up to very large numbers. If you were to continue to save that $50 per month for 5 years with that 4% compounded annually you’d be looking at $3,379 and by the time year 10 rolled around you’re at $7,491 and you’ve made $129 in interest. Now that kind of money may not be enough to retire on but it’s definitely a perfect example of the power of small numbers.
Breaking Goals Down to manageable chunks
Another way that small numbers work to your advantage is in making the larger sums more manageable. You can take your goal of saving $5,000 which can be daunting for many people and break it down to setting aside a little over $400 a month which is much more reasonable than the initial sum. This applies to most goals that you come up with, breaking them down into manageable chunks means you’ll be better able to reach them.
You can see the power of small numbers all over the place, from business applications to learning languages. Simply keeping this in mind can help you get your spending under control and help you save a sizable chunk of money in the event of an emergency. Getting the large windfall of cash is a great thing but is far less likely than saving $5 a day over the course of a year (which translates to $1,825 over a year).
Posted in Budgeting and Planning, Commentary, Debt | 5 Comments
Controlling ATM Fees
September 18th, 2007
ATM Fees have been in the news lately and the Blogosphere (at least the PF one) has been reacting. The Bank of America has raised their ATM fees to $3 which I have to agree is a bit on the excessive side. So why is the reaction so negative? Well first off I think that the other banks out there will follow suit on this and they’ll all be charging this amount soon.
Why is this such a big deal?
Well if you’re like me you look at your bank statement and notice all of the little dings associated with bank fees and ATM fees. It’s one of those hidden costs that no one really thinks about when they’re taking money out of the bank machine. When we step up to an ATM and pull money out it’s because we need it then and there now rather than using another form of paying for our purchases (debit or credit).
How do we control ATM fees?
Very simply either use credit cards, wisely, which can be problematic in it’s own right or we need to learn to control these fees. The simplest way to control them is to carry cash around with you. If you take out some cash when you’re at your bank you can reduce your reliance on other bank’s ATMs. If you know you’re going to need money take some out rather than scramble last minute to find an ATM only to realize later you just paid $3 to take out $20!
Saving money with Cash
I’m sure that there will be people out there that disagree with me when it comes to relying on cash but it can save you some money. If you can reduce the ATM fees that appear on your statements by say 10 ATM fees per month you’ve just saved $15-30 depending on the bank you use. As with most small amounts you can easily neglect this money but if you take it over the longer term it all of a sudden makes a considerable difference. That $15/mo over the course of a year translates to $180 and at $30/mo its $360. Where you might ignore $15 or $30 as a convenience fee the $180 to $360 all of a sudden doesn’t seem that small. By controlling your ATM use you can reduce your debt. If you happen to use an ATM a significant amount this can save you a lot of money.
Carrying cash around brings with it it’s own problems in that people no longer feel safe having $200 in their wallet. Chances are you don’t need quite that much and if you do need the money carry one credit card for the larger purchases. Both cash and credit cards require some self control to ensure you don’t overspend but they’re a much better than paying the banks an excessive fee for a convenience.
I’ve always seen ATM fees as excessive, even at $1 per use I think is a bit much since by volume of use alone the banks are profiting at less than this per transaction. Banks make money hand over fist yet they insist they need to increase fees on basic services. The worst part of this whole equation is the fact that this is going to impact everyone especially people for whom $3 can make a difference when it comes to basic expenses such as food and shelter.
Posted in Saving Ideas, Commentary, Debt | 5 Comments
Social Pressures To Spend your Money
September 17th, 2007
From a young age we are conditioned by society to act a certain way. Part of this is the normal aspects of fitting into a society: fighting, theft and vandalism are taught as being socially unacceptable. On the same token we’re conditioned to spend our money a certain way. We are inundated by the media and our peers with all of the things that they spend their money on while at the same time being pressured into a purchase because NOW is the only time we can purchase an item.
When you spend too much money you’re forced to borrow it from somewhere and this comes with a cost, interest. By the time we finish school the pressure to spend has translated into credit cards and fancy items in our homes. Its socially acceptable to be in debt while we go through our daily lives. If this was debt such as a mortgage then I would say this isn’t nearly as much of a problem as it is. But the latest cars, computers, and electronics have little value when it comes to re-sellability.
Yesterday I wrote about accepting financial responsibility for your actions and we’re told that this isn’t important by the media and that we really need to buy the latest Blackberry because Paris Hilton has one. The pressure to keep up with the proverbial Jones’ is in my opinion so strong in our society is hamstrings us financially from a young age. If your neighbor happens to make a lot of money and can reasonably afford a BMW or a Porsche that doesn’t mean you can or should. Unfortunately we are all fixated on status symbols, too fixated because we can’t afford those status symbols.
Succumbing to the social pressures to spend money is something each and every person has to deal with in their own way. I no longer look at what my friends are spending their money on because I can’t afford the big screen TV or take an exclusive trip to Hawaii at the moment. I also don’t look at the media when it comes to the Hollywood stars; they have money to spend without the fear of not having money for food. But that doesn’t mean that I don’t want what both of these groups have or do – I’m just being responsible not to put it on credit when I know I’d have difficulty paying it down. Its not necessarily the most popular choice in my mind but it is unfortunately a necessary one.
Maybe the coverage that the sub-prime mortgage market is getting right now will have an impact on spending. Maybe we’ll start realizing the buying a car that costs as much as a house in some parts of the country might be too much? Then again that would be asking too much.
Posted in Commentary, Debt | 6 Comments
Accepting Financial Responsibility
September 16th, 2007
As we get older in life we are tasked with more responsibility over our worlds. When we’re children we’re responsible for very little but by the time we’re making money we’ve got obligations and a responsibility to those obligations. Financial responsibility is no different; once we’re at the point in our lives where we’re making money our financial matters are our responsibility. We have to take that responsibility and accept it.
Debt for example doesn’t happen over night, people who find themselves very deep in debt have no one but themselves to blame for their situation. They spent more money than they had or than they made. They were irresponsible and now they struggle. I know I’m one of those people but unlike a lot of people when I’m asked how I got into debt my answer is: “I was stupid with my money” where a lot of people blame this circumstance or another. When it really comes down to it there will be times when you need to spend more money than you have but if you’re not willing to accept the repercussions of your own actions then maybe you shouldn’t be taking them.
Another aspect of the financial responsibility for me is the social pressures to spend. Keeping up with the Jones’ has always been a fact of life but when you’re pressured to keep up with the Hilton’s that’s a completely different story. Regardless of if we like it we’re all influenced by our peers and the media to some extent. We see what those around us have and sometimes we can’t help but want something similar. This is a fact of life and as long as we accept our financial responsibilities and live within our means we’re far less likely to find ourselves in debt to our eyeballs.
Accepting responsibility is hard. Even something as simple as admitting to yourself that you’re the cause of your own financial troubles takes time and a certain amount of bravery. Unfortunately getting into a financial mess is far easier than getting out of one. Knowing just how much you owe banks and other people is a frightening concept because you are forced to admit that you made mistakes and are likely going to make them in the future. Without accepting responsibility for your actions and yourself you’re never going to be able to get out of debt and into a situation where you don’t have to keep up with the Jones’ on debt but with excess money.
Taking the lazy way out by floating along and not accepting financial responsibility for your actions is foolhardy and you’re left with no one but yourself to blame. Circumstances will come up that will force you to spend money you don’t have, deal with it! Living in fear of your debts is not a way to live; I know I’ve been in that situation. I’ve accepted that I’m bad with my money and this blog is partially to help me keep myself in check. I’m using the experiences of other personal finance bloggers to accept responsibility for my spending and to improve it.
Accepting the issue is the very first step to being able to fix it.
Posted in Commentary, Debt, Financial Situation | 7 Comments
The Emotional Impact of Debt
August 16th, 2007
Many people ignore the emotional impact of debt but its very real and very powerful. Not knowing how you’re going to pay off all the bills that are due during the course of the month while at the same time finding the money for food and gas. Living paycheck to paycheck for a couple months isn’t the end of the world and happens to most people when they first start out but imaging trying to do it for years and decades at a time, struggling to make ends meet. This has a very profound impact; at least it did on me.
Knowing that you have to juggle payments just to make everything work is never a fun task, you stress about which bills to pay when, which ones you can short pay to leave you enough money for gas so you can keep your job. The job becomes almost like a prison, you can’t leave it regardless of what’s happening. Uncertainty and fear really start to plague you; frustration at the whole situation sets in and if you aren’t careful you can fall into depression. Now it’s not that bad on a regular basis but the long term emotional impact of debt isn’t something that we can just ignore either.
When you’re just out of school, typically you have a few debts and flexibility in your life, but as we get older we inevitably settle down and take on more responsibility such as buying a house, starting and raising a family, or getting married. All of these are examples of the on goings of regular daily life; having to deal with the stress of debt and juggling everything just isn’t fun. If you’re there keep the stress in check because it can consume you and further impact your life.
Another thing about debt and getting out of it slowly is the fact that the light at the end of the tunnel can seem so far away that it makes you wonder why even bother doing anything about it. Knowing that you’re going to be paying off a credit card for 2 or 3 years not being able to spend money on yourself is definitely a motivational killer. The debt drags you down you have to fight to keep yourself above it and moving forward. Every step forward means you’re that much closer to your end goal even if it might be very far away. Taking a step back will often mean you’ll need to take 2 or 3 forward to get back to where you are now.
Struggling with debt is something that many people do every day, they don’t think about the emotional impact it has on them and they just blindly blunder through life (unfortunately too many people do this in general). With no motivation and frustration setting in people just fall into the status quo and just keep at it, shells of what they could have achieved and become. I’m still in debt and slowly getting out of it but I’ve been further in debt where it sapped me of all motivation and backed me into a corner, a shell of what I could have become because of the fear and confinement of my debts. Keep the emotional impact of debt in mind; if you’re aware of it you can build a support structure to make sure it doesn’t drag you down further. Your family and friends have probably been in a similar situation at some point in their lives or might even be there now. Your friends won’t be upset with you if you don’t want to go out because you have no spare money and if they do then really are they friends? Lean on these people when you need a little extra support and remember each step forward is one in the right direction.
Technorati Tags: emotional impact of debt, debt, impact of debt, struggling with debt
Posted in Debt | 4 Comments
Saving Money or Paying Off Debt?
July 17th, 2007
This is a question I encountered in the past and one that has come up for me again since I’ve started looking at my cash flow. The question is a very valid one if you’re far enough into debt that the money you save each month would actually make a difference to your debt. My cash flow is completely off balance at the moment and I was contemplating stopping setting aside the $100 every month in an effort to bring this back into balance. But it got me thinking about the benefits of trying to save money versus keeping cash flow down and paying off debt. Both sides of the argument have their benefits.
Benefits of Saving Money
I was trying to come up with a list of benefits that setting aside that extra money could bring, here’s what I came up with:
- You have a growing nest egg
- The money gains interest as it grows
- Gives you the confidence of having an emergency fund
- Depending on where you save money it’s less accessible than credit
Benefits of Paying Down Debt
Conversely I also came up with a list of plusses to paying down the debt instead of putting the money to savings
- The $100/mo should go onto credit cards which can be used in the event of a real emergency
- Will help brining cash flow in balance down – increasing the likelihood of my not using credit cards
- Paid down debt means that interest is lowered over time
- Credit card interest is much higher than any savings interest, the difference is you’re loosing money
Risks to Keeping Cash Flow High
Unfortunately there are some additional risks if I were to keep my cash flow out of balance, which really made me think twice about keeping monthly savings going even by the $100/month.
- I might have to fall back on credit cards if I’m completely out of money (in an effort to keep the savings alone)
- The savings might be too inaccessible in the event of a real emergency – if you pay down your credit card debt you have this as a fall back in the worst case scenario
- The cost of interest on the cards doesn’t come close to matching savings growth
Other Options
I’m essentially looking at this from a black and white point of view, do I keep the $100 going to savings or to reduce my cash flow in an effort to keep my debt down. Personally this isn’t a question of if I put the extra $100 onto my credit cards but if I should keep it going into savings. One of my readers, David Hunter, left a comment suggesting a slightly different idea which was to cut back all luxury spending for 3 months to pay down the debt but to keep the savings going. Its an interesting idea in that dropping all luxury spending would bring my cash flow back into balance and pay down the debt some more. The unfortunately thing is that if I were to attempt this I’m sure it would fail and I would cave into some of my vices. I’ve started cutting back on these luxuries but to the point that I’m still enjoying them but I’m not bleeding out money for them. Take going out for example, between my wife and I we’ve stopped going out a couple times a week to maybe once and when we go out we keep it simple and look at costs.
I like the idea of going cold turkey on pretty much all-extra expenses but I also want to be realistic, I don’t want to slip in a fit of frustration, which might cost me more money. Its very similar to a person on a stringent diet who caves eating their favorite foods in a time of stress. I want to slowly reduce the luxury expenses so it’s not a shock and I find a nice balancing point between still enjoying the frivolous things in life from time to time.
Another option was to increase my income. I’ve started pulling together some ideas and plans for creating some passive income but these are still plans and ideas that haven’t been put into action. So the only other way to do this would be to change jobs, which I’m not willing to consider at the moment.
The Net Result?
For the next month I’m going to reduce as many of the luxury expenses as I can without feeling like I’m giving up too much. I want to see how much I can reduce while keeping my lifestyle somewhat similar. If it turns out I can bring my cash flow close to balancing then I’ll keep the savings going and further concentrate on cutting other costs. If it doesn’t work then the extra $100 per month will stop flowing towards savings; my cash flow needs to balance or I’m living beyond my means.
Technorati Tags: savings, cash flow, debt, luxury expenses
Posted in Debt, Financial Situation | 2 Comments
Cash Flow out of Control – Now What?
July 13th, 2007
In my last post I wrote about the differences and benefits between Net Worth and Cash Flow to the conclusion that both are useful but it’s the cash flow that will in fact determine what’s going on with your finances. I was going to use my own personal examples to illustrate cash flow until I came up with a rough cash flow on paper that made me pause to thing. Ok lets be realistic it didn’t make me pause, it hit me like a ton of bricks. I knew I was spending more than I was bringing in but I honestly didn’t think it was completely out of control and I have a feeling there might be more than one person out there in the same shoes I was in.
So my cash flow is off, it can’t be that bad can it?
Well in my case it really was that bad, after compiling the list of everything that I spend money on in a month I was about $760 off each month. I’m still using estimates at this point which I think I’ll stay at until I tabulate my spending at the end of the month and plan for next month. If anything that number is a bit conservative. Now comes the bigger question:
Why is it so bad?
Because I don’t pay close enough attention to my money is the first and most important answer. But that’s also not drilling into the actual cash flow to see what’s going on and why the spending is so high. Without turning this into a long list of line items here are a few things that I found that were a bit on the high side (and not necessary side)
- Smoking ($200/month) – smoking is expensive there’s no ifs ands or buts about it. The worst part about this type of spending is that you don’t see the money going out in big chunks but in small $10 increments.
- Lunches ($200/month) – Again this is something that can be trimmed down significantly by taking lunch to the office.
- The gym ($150/month) – ok before anyone screams at me about the high cost of that; this figure includes personal training sessions that have long been finished but need to be paid for. I’ve got 2 months left and I can leave the gym penalty free.
- Wine ($300/month) – I like my wine and I don’t always buy the cheap stuff.
I just pulled out a few things there and very quickly I can add up to that $760 that I’m spending over what I’m brining in which leads us to the next question:
So now what?
The list above really does hold an answer, but only a partial one. Quitting smoking isn’t necessarily an easy thing for everyone and it might take some time. I went through the items that really could be cut down without forcing me to completely stop enjoying my life and here’s what I came up with:
- Quit smoking – its time to get this out of my life ($200/month)
- Bring lunch on most days ($100/month) – I’m being realistic if I cut the cost in half I’m doing good.
- Pay off the gym now since I have some extra money and close it down. ($150/month)
- Cut the wine drinking – I’m thinking if I cut this down by half I probably won’t notice the difference as I have a glass with dinner ($150/month)
- Temporarily get rid of the $50/month going to mutual funds. Saving is incredibly important and if I was only $50 a month over on my cash flow this wouldn’t be an issue.
- Cut down going out and food costs wherever possible, about $100/month is reasonable without any impact to my current life.
Some of you might ask why I’m trying to reduce costs without impacting my life and the simple answer is I enjoy it and I want to see if I can take the cash flow situation under control without going to a dramatic extreme. I want to bring it into balance and then I’ll be able to realistically look at what I can do and what I am willing to do to increase my debt payments. If it turns out that I need to take some more extreme measures to just get it under control then I will.
The final point of now what is that going forward I’ll be using a cash flow statement on a monthly basis to track my progress and set my goals. Just getting it from being so far out of whack is the first step.
Technorati Tags: cash flow, spending, controlling cash flow, money
Posted in Debt, Financial Situation | 5 Comments
The Reality of Making Less Money
January 29th, 2007
Last Friday I posted about making money on the side, it’s becoming more and more apparent that I’m going to have to do something with regards to this. Over the weekend I deposited my paycheck into the bank and then promptly realized that I’m completely and utterly broke. The money I’ve got coming out this pay is pretty much the same if not a little bit more than the money in my account. It’s a very surreal feeling knowing that you have absolutely no wiggle room whatsoever.
It’s also very sobering knowing that taking a job that pays me less money has made such a big impact. It just goes to show that I haven’t really been paying attention to my spending habits enough. I received a comment to Fridays post suggesting that I look at reviewing my cashflow and trying to reduce it and invest what I can; a great suggestion but I’m not sure how much more I can eek out.
I guess I should have thought about the impact that changing jobs and the two-week pay gap would have. I think that this is something that most people forget when they’re changing jobs; I know that I didn’t keep it in mind as much as I should have. Thankfully in another pay or two things should even out and I should be able to pay for everything without running into the situation where all of my money the day I get paid.
Posted in Budgeting and Planning, Debt | 2 Comments
The Credit Card Trap
January 16th, 2007
Yesterday I wrote about living below your means and for many a big part of that is to not falling into the credit card trap. At this point I’m sure some of you are already nodding in agreement or even cringing. The credit card trap is where you get a card and you start using it as if it were cash in your wallet. Then instead of treating it for what it is you simply put money onto the card just to keep using it; like a revolving door.
Personally I’ve fallen into the credit card trap a couple times, mostly because of how easy it is to spend money using these little plastic monsters. The worst part of falling into this trap is that the bills you get each month really should jolt you into reality with their insanely high interest rates, but they don’t! They don’t because the interest has been cleverly broken down per month. Even if you’re carrying a $5,000 or even $10,000 limit your interest might be as low as $100/mo and your minimums payment at $150/mo if you’re on a low interest card and maybe double that if you’re not. This doesn’t seem as bad as if you saw the real numbers, for example on a $10,000 card with 18.9% interest you are paying $1,890 to the card company each year.
What happens when you max out your cards while living in the credit card trap is that you end up paying the minimums, maybe a little bit more, because that’s all you can possibly afford. Then what you do is plot and scheme just how much extra room, or available credit, you have left on the card for you to use right back up. When I fell into the credit card trap I put myself into almost $25,000 in debt, which I was able to float, meaning that I could pay my minimums and maybe a little more but that’s it. Years later I’m still carrying a chunk of that debt and that’s something many people who fall into the trap end up doing.
Unfortunately the credit card trap is deceptively easy to fall into because of low interest rates and low limits. I first fell into the trap with a $500 limit with 9.9% interest. That card became a $10,000 monster before long. The challenge is once you’re in the trap you need to get out and the only way to do that is to stop using the cards. Mine have a permanent home in one of my dresser drawers and only come out when I truly need to use a credit card or just in case of an emergency. It’s a slow process but knowing that the credit card trap exists is the first step, the second is just not using the cards!
Technorati Tags: credit card, credit card trap, interest
Posted in Commentary, Debt | No Comments
Living Below Your Means - A personal perspective
January 15th, 2007
This is a term that is often used when making reference to people making money and becoming wealthy. They live below their means, in other words they’re spending less money than they potentially could. Until I started reading all the personal finance blogs this term made sense to me but I really didn’t understand it. What does living below your means actually mean?
For me living below your means really translates to spending less money than I have in my youth. Living below your means is driving the same car for years, till it dies or you really need to replace it. It means cooking dinner at home and only pulling out your wallet when you really need to spend money on something instead of every time you simply want something. It also means doing all of the little things to save some money like going to the library, renting movies rather than going to the theater to see them.
I guess the big question is do I live below my means? I think the answer is finally starting to be yes. When I stared making money I started spending it as fast as possible, including credit cards. I know what it meant to live beyond your means; my debt increased and in the end I really had nothing to show for it. I’ve stopped hemorrhaging money, figured out where I’m spending all of it and brought all of that under some control. I am starting to live below my means and I finally understand what that means. It’s a very hard process to go from living beyond your means to controlling your spending to the point where you’re actually living on less than you make.
Technorati Tags: personal finance, living below your means, money, spending, debt
Posted in Commentary, Debt | 5 Comments
