Psychology of Money

Part 3: How to Follow and Stay on Budget

 

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Budget Part 3

 

Prior articles discussed 1.) Why you should have a budget  2.) What is a budget and how to get started. This article discusses how to follow a budget each month.

Most people easily grasp the first two articles, but few people actually follow or stay on budget. For people who really need a budget but ultimately fail to stay on one for the long-term, this article may be helpful.

Contract with Yourself (and Spouse). Tracking spending and staying within spending limits is very hard for many people; therefore, it helps to have a contract with yourself. If you are married, this agreement should include your spouse. If you work together, you will accomplish more than you could on your own.

  1. I will start a budget, and I will pay attention to it weekly and monthly.
  2. I will not spend more money than I make.
  3. I will be in financial partnership with my spouse with no secrets between us.
  4. I will not borrow to purchase items that depreciate in value.
  5. I will not let my emotions make me purchase anything, including gifts.
  6. I will not buy something that costs more than $50 without consulting my spouse, our budget and our financial plan.
  7. I will not purchase something that exceeds my budgeted amount unless it is out of my control (i.e. utilities, emergency medical expenses, car repairs).
  8. I will not purchase anything that I don’t really need, no matter how good the sale is.
  9. I will not purchase something to keep up with the Joneses.
  10. I will not purchase high maintenance items (i.e. pet, hobby) if I can’t afford the expenses that come with them.
  11. I will not apply for any new credit cards unless they have a lower interest rate than my current card.
  12. I will pay off all credit cards monthly (I will work toward paying accrued balances off, and I will never carry a balance again.
  13. I will not spend money on fun things unless I have paid my monthly bills.
  14. My spouse and I will both be the “fun police”, helping each other determine whether an expense is justified.
  15. I will include children in the budgeting exercise so that they learn restraint from our example.

Cash Flow Management Tips & Money Savings Tips. In addition to having good budgetary habits, it also helps to take advantage of money-saving measures. The following are a few of the things you can do to help you save thousands of dollars per year.

  1. Tax Advisers:  Use tax advisers to avoid overpaying taxes.
  2. Investments:  Utilize investments that have low to no commissions, fees and expenses.
  3. Borrowing:  Shop around for the lowest interest rates.
  4. Insurance:  Consult your eFinPLAN financial plan to determine the insurance you need, and meet with a professional insurance adviser to help you find the lowest prices possible. (eFinPLAN is not an insurance provider.)
  5. Living Smaller:  Live a lifestyle one to two notches below your income bracket. Smaller homes and cars, and fewer belongings require less money to maintain and insure.
  6. Low Price Travel: Camping or lower cost destinations (or off-peak weeks) often are more enjoyable than expensive resorts and tourist destinations.
  7. Transportation:  Transportation consumes a large percentage of family income; see the Transportation and Commuting article in the eFinPLAN blog.
  8. Food:  Pack your lunch, eat out less often and at less expensive establishments, avoid expensive beverages when you eat out (such as coffee), and shop at the least expensive grocery stores.
  9. Identify Wants versus Needs:  Because of quick credit extended to the last generations, people have learned to live above their means on a regular basis; therefore, many of us need to learn to identify what wants and needs really are. For example, having a manicure or buying season passes to your favorite sports franchise may be difficult to justify unless you can afford it.

Tips for Organizing Your Budget                                                                           

  1. Use technology or spreadsheets:  Obtain software (or use spreadsheets) that will help you pay bills and make and monitor a budget.
  2. Devote time to it:  Keep track of all expenses and enter them into your software program or monthly spreadsheets each week. Use services like Mint.com (free but they sell you {your information}, or Ynab.com, one-time small cost for PC and smart phones.
  3. Save all receipts, bills, household documents, and tax documents: Organize these items by category into an accordion file or drawer: e.g., auto, bank, business, credit cards, dental, medical, grocery, income, insurance, mortgage, utilities, general receipts, school information, and taxes.
  4. Balance your checkbook:  It is amazing how few people balance their checkbooks monthly. Budgeting software makes reconciling simple, but you can read the back of your statement or make an appointment with your banker if you need to learn to do this skill manually.
  5. Tax Time:  If you use budgeting software, you can run a tax summary report before you work on your taxes. If not, and if you itemize your taxes (Sched.A), you must total the appropriate columns in your spreadsheets, e.g., Medical expenses (Your accountant may provide you with an organizer to help you get ready for tax time).
  6. Set Expenses:  Remember to place quarterly and yearly expenses on the appropriate month in your budget so that you do not overspend. For example, annual insurance payments, quarterly tax estimated payments, annual homeowners association dues, etc.
  7. Debit Cards for couples:  Debit cards can make monitoring your spending very difficult, especially if both you and your spouse use one for the same checking account. Each spouse should regularly enter receipts into the budget spreadsheets or software and communicate any unexpected or extra expenses.
  8. Debit Cards for singles:  Make sure that you are entering each receipt into the budget weekly and/or enter each amount into your checkbook as you make purchases. Be careful of overspending with this convenience.
  9. Education for your children:  Remember to include annual expenses in your budget for ‘pay to play’ fees, sports or school uniforms, school books and lab fees, pictures, etc. We usually budget around $600 in August to pay the public school fees for two children. Budgeting becomes even more crucial when a child heads off to college.

Other Practical Tips.  In addition to having good budgetary habits, it also helps to take advantage of money-saving measures. The following are a few of the things you can do to help you save thousands of dollars.

  • Break Habits:  Smoking and excessive eating of pre-prepared and fast foods costs thousands of dollars per year.
  • Monitor Emotions:  Shopping provides only a temporary relief from depression or stress. The real stress begins when the bills arrive.
  • Support Groups: Support groups for individuals with compulsive behaviors may be offered at a low cost (or free) by community centers, the YMCA, or churches.
  • Library: Educational: Obtain books from the library from their large inventory of resources about budgeting, financial planning and spending less.
  • Library & Entertainment:  Obtain good books and DVDs from the library for a source of free entertainment.
  • Reduce or Eliminate Cable TV:  If you are in financial crisis, eliminate cable or other cost-based TV. If you do not want to do this, consider reducing channels to the basic programming. Your quality of life may go up by having less TV in your life when you consider some household’s over-consumption of news, violence, and sexually-oriented programming.

Summary: Good cash flow management is key to implementing any financial plan; commit to doing this well. No one likes self-discipline, but it is actually good for us. With proper management of your finances, you will become more confident and less stressed about your future. Remember, one bad financial decision can sometimes take years to undo. Be very careful with all decisions you make.                                                                                                                                                                      

The way to achieve good cash flow management is to:

  • Create a comprehensive financial plan from eFinplan.com.
  • Implement that plan using your team of trusted professional advisers.
  • Monitor your plan regularly to keep track of your progress towards achievement.

This is the final article of a 3-part series:

Part 1: Why You Should Have a Budget

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Budgeting Part 1

Cash flow management is especially important today as Americans are saving less and are further in debt than at any other time in our history. Let us explore why you should have a budget. The number of people that have and follow a budget is only about 33% of people today in the U.S.

Cash Flow Management Defined: Cash flow management is the management of income and expenses both current and forecast for the future. The old-fashioned name is budgeting, and if you spent more than you earned, it was called going broke. Now we call it negative cash flow.

You should have a budget if you…

  • Live paycheck-to-paycheck.
  • Borrow too much money, and have no disposable income after paying fixed expenses (like rent or mortgage) and buying food.
  • Are constantly stressed about money.
  • Are not making the necessary progress saving for retirement, college education and car replacements.
  • Have no money in savings for emergencies, and major car repairs are a crisis.
  • There is no money left over after paying bills.
  • You have no idea how much you can spend to eat out, for groceries, and on entertainment; you just spend what seems natural.
  • Answer Yes to more than one of the above!

Smart people manage their cash flow because they know they…

  • Have Limited Income: Virtually everyone has limited or fixed income. Without budgeting you are being controlled by your environment. If you have a plan, you are more in control of your money. Without a budget, you may not really know you are spending more money than you are earning.
  • Need Spending Limits: Knowing what your monthly expenses are projected to be and what they actually are will help you keep track of how much money you have left over for future goals and needs.
  • Have Unlimited Demands: There is an endless demand on your finances. Our commercial capitalistic society is constantly calling out for you to buy. If you have minor children, the demands are greatly increased by the things they want, the activities they are in, and the schools they attend.
  • Want Freedom, Not Bondage:  Budgeting seems to be restrictive to some people. The reality is that we have to make choices between what we want at the moment and our regular bills and goals for the future. However, there is freedom in knowing what your limits are. Many people find this liberating, because it creates opportunities to grow and mature.
  • Have Future Goals:  If you are sacrificing today, it helps to know what you are saving for in the future. By having an eFinPLAN financial plan, you will know what your goals are and for what you are saving.
  • Want to be More Aware of Where Money is Going:  If you do not have a budget, you may have no idea where your money is going. Knowing where you money is going will help you identify if you are spending too much money in specific areas.
  • Want Less Stress:  Spending without a plan and a budget increases your stress because you do not have a well thought out plan for paying your bills and you may spend more money for fun than you can afford. Planning and budgeting will give you the peace of mind that you are on the right track.

Summary: Only a small majority of people can live on no budget at all. A few people are able to control spending, and they spend very little each month. The majority of people need some kind of cash flow management system, or a budget to track their income and expenses. Knowing that you need and want a cash flow plan is the first step in the right direction toward designing a budget plan.

This is the 1st article of a 3-part series:

The Power of Negative Thinking

This article kind of flies in the face of the popular feel good ‘positive thinking’ philosophy, but before you jump to any conclusions, read on. Also, this has many ramifications to personal finances, which I will get to at the end of the article.

The Power of Positive Thinking made popular by Norman Vincent Peale in 1952, 60 years later has spread to many aspects of society, including teachings in business and religion, and adopted by many people in the ‘self-help’ movement of motivational books, tapes and CDs. You have probably heard statements like “your attitude determines your altitude.” This system of belief runs through much of our thinking and society, however, do we  take the time to dissect this, or do we just seem to accept it as truth? Coaches, teachers, preachers and counselors teach people all the time to think more positively, and that will lead to greater success, blessings and happiness- but will it, has it for you?

I hear people all of the time being labeled as negative or positive, especially in the business world. It is true, it doesn’t make healthy thinking and living to be like negative Eeyore from Winnie the Pooh, and only look at the negative possibilities – all the time. And we do limit ourselves from taking risks, trying new ideas, and living out religious faith- if we are consumed by negative thoughts, however positive thinking is being proven by research doesn’t lead to happiness and success either.

Maybe negative thinking has been given a bad wrap though.  Wandering through the library a few months back, I came upon an interesting book, The Antidote: Happiness for People Who Can’t Stand Positive Thinking, by Oliver Burkeman. Reading this book has given me some new perspectives.  It makes a convincing argument that devotion to the positive thinking cult as a path to happiness has failed; the following are some excerpts from an interview of Burkeman:

“I think the premise from which I start is this idea that we have become fixated on the idea that relentless positivity and optimism is exactly the same thing as happiness; that the only way to achieve anything worthy of the name of happiness is to try to make all our thoughts and feelings as positive as possible, to set incredibly ambitious goals, to visualize success, which you get in a million different self-help books.

Whereas, actually, there’s a lot of research now to suggest that many of these techniques are counterproductive, that saying positive affirmations to yourself in the mirror can make you feel worse and that visualizing the future can make you less likely to achieve it. And so, what I wanted to do in this book was to explore what I ended up calling the negative path to happiness, which involves instead turning toward uncertainty and insecurity, even pessimism, to try to find a different way that might be more durable and successful.”

I think that what is counterproductive about all these efforts that involve struggling very, very hard to achieve a specific emotional state is that by doing that, you often achieve the opposite.”

Embracing fears and failures, moving through insecurities, though actually leads people beyond themselves and to a state better than happiness. Happiness is fleeting; it will not come through retirement, after enduring miserable years at a job you hate. Thinking accurately, truthfully, honestly and sincerely with yourself can help us on our paths, to more clearer thinking about what gives us something better than happiness, I will call flourishing.

How does this apply to financial planning? Big picture: financial planning is outcome based. It often looks forward to retirement and the rewards and happiness it promises. On one end, some people avoid planning, because if they saw the actual numbers and really became aware of reality of not being able to retire comfortably, they fear how this will make them feel. They may have to embrace what that means now. It may mean change, or looking at life totally different. It doesn’t surprise me anymore, when people I sit down to counsel in their 50′s and 60′s who have no idea of their expenses and income. Often they are shocked to see how much negative cash flow they have each month. Embracing the reality now, instead of avoidance or positive thinking (a lot of people falsely believe inheritance will save them), can actually lead people to more a more flourishing life, now and later.  If they have to adjust lifestyles down, living simpler and search out life that provides fulfillment, whatever their age or financial status, they will be overall happier as they flourish in a new more realistic path, that is aligned with their gifts, talents and beliefs.

On the other end, those that have a solid retirement plan, and are enduring a job they hate now, positively thinking a lifestyle of leisure is going to lead to a more happy existence would be well advised to think this through. Have you ever taken some time to really imagine what daily life would be like in retirement? Really go there, and imagine the routine, thoughts and feelings. I used to ride the bus with dozens of corporate workers in a state of mild depression. I see them today at local coffee shops, and they seem lost, sometimes they are angry grouches focused on cable TV news.  I enjoy being around those in retirement that found meaning and value outside themselves, and contributed time, talent and money to things and people that will improve the world around. This starts before retirement. It makes better life now and later, whether you can retire in your 60′s or must keep working to save into your 70′s.

Applying this in a practical way to our personal finances is important too. If we have fear about our real budget, the return on the rate of return we are getting, the concern about a planner’s advice, or underperforming investments- it makes great sense to call it all into question. Dig deep to learn more, ask a lot of questions, assume a negative posture, and don’t stop until you get good answers. Sometimes you have to press through fears of insecurity looking stupid asking bad questions, or looking at our bad decisions, or finding a new advisor who we were afraid to confront, but glad we did.

In conclusion, I think there is value in a ‘both-and’ approach to this. We don’t have to entirely choose one or the other: I think it is possible to smartly combine or switch between both negative and positive thinking, on our paths to a more flourishing in life.

Hedonic Adaptation

Hedonism isn’t a word we use very often. If loosely defined it means happiness achieved through feeling pleasure. Many psychologists say that one of the greatest barriers to happiness is ‘hedonic adaptation.’ When you are getting ready to buy something, you anticipate the pleasure it will bring. However, after you own it for a short while, it gets relegated to the back ground of our consciousness. We get used to having it, and it doesn’t provide as much joy.

Psychologists say this same principle applies to almost everything, from buying electronics to marriage. They also say, that when we think about losing things, due to unfortunate circumstances, we feel the pleasure again. This negative thinking reverses the adaptation’s effect, and shifts it back to where we experience pleasure once again.

I can think of several applications this has to peace of mind.

  • Fasting from things that bring pleasure, or meditating doing nothing can have the effect of our appreciating them more, and giving us time to think about important things and priorities
  • Hesitating: Knowing that an item I want to buy will soon after ownership deliver less pleasure than I imagined it would, may cause me to hesitate before purchasing.
  • Appreciation: When I’m thankful for the things I have, it is okay to think that I could loose them: the opposite of positive thinking can lead to more happiness.
  • Giving: When I let go of money and possessions, for the moment I experience pleasure and pain together: I’m re-living the feelings I had when I originally acquired it, but now know that it will be gone forever. I can imagine the happiness it may bring others. Giving is the antidote for greed and materialism,
  • Relationships:  Friendships and marriages in particular require ongoing investment, since our tendency is to relegate them to the background, yet we want more from them as we get older. Doing all of these things are good for my relationship with my wife: focus on her needs not mine (fasting)- hesitate and think of her first, appreciating her, giving things and myself to her.

Conclusion: To be a good manager of one’s personal finances, it is important to understand the thinking involved when one makes purchases of wants and not essential needs. Marketers of products know what motivates buying decisions. It may be wise to evaluate our emotions when we are getting ready to buy a new car, piece of technology, house, piece of sporting equipment and really anything outside of basic food, shelter and clothing.

Should I Buy an Ereader? And The Benefits of Waiting

I love to read, so a few weeks ago I had a burning desire to purchase an Ereader. I had a lot of reasons for purchasing one, and came up with a great list of my rationale:

  1. Ease of getting a book and reading it without the delay of going to the bookstore or library
  2. Ability to look up words in the dictionary with a simple touch, or references on the web
  3. Inventory quotes that I can later use for blogs articles I am working on, and for a book someday
  4. Portability, since I could have all the books I am currently reading, which is about 4 right now, and easily take them anywhere
  5. Read about book recommendations, and then quickly add them to my wish list on the device
  6. Less distractions, since when I am reading on the laptop, I get distracting checking email, Facebook, and Twitter

These reasons gave me excellent justification for the purchase. I had a few hundred extra dollars from a writing project, and a little gift money. Since I provide financial counsel to hundreds of people, I have to follow my advice to think long and hard about it.

I thought about it a lot, and compared products. I felt it was okay to purchase, with my initial allowance of $150. However that quickly expanded when I saw all of the products being offered. I could easily buy just a good Ereader, like the new Kindle Paperlight. All Kindle Ereader dedicated products have all the great tools for reading, weeks of battery life, and the great Amazon library and services. Then I started to wonder about the Kindle Fire products. They allow you to do much more (in color) in terms of Internet and email- since they are really mini tablet computers. These can be purchased from $150 – $200, I could stretch the budget a little.

If I was going to buy a mini-tablet, this expanded my choice of products. The Kindle Fire’s were somewhat limited in their application to computing, so I was looked at the ones from Samsung, and Google. Google Nexus 7 was newer than the Samsung 7 inch min-tablet, has a faster operating system and ran the latest Android Jellybean system. The 8 GB was $199, and 16 GB was $249. More memory was important, since the Nexus doesn’t have expansion slots (unlike Samsung’s). Now my budget stretched to $249, about $100 more than I started with.

However I felt compelled to wait, and not purchase. During this pause some interesting things happened. The Apple iPad Mini was introduced. iPads are amazing machines, however their price starts at $329 and goes all the way to $659 depending upon memory, WI-FI, and Cellular capability. Then there was talk that the other manufactures were lowering prices, expanding base memory, and offering new devices. More reasons to wait and think about it some more.

During the wait, I was given a few books to read. One was a free from a publisher, to review a theological tome on possessions. None of these were in digital format. A had a few books I wanted to read digitally, I was able to download them from my local library and read on my laptop. I downloaded the Kindle app and it works great. I also downloaded the newsreader pulse.me and customized it for the periodicals I wanted to scan.

My burning desire to purchase an Ereader diminished. Although I would still like to have one, I am enjoying reading the various formats of books, magazines and newspapers, and the money is still in savings. I can still do everything I need to do for personal computing, entertainment, blogging and writing- quite nicely.

Waiting taught me a few things. One it is good just to wait and to refrain from purchasing things. It felt good to be in control. I used the devices I already have, and now I don’t have another one to maintain, or battery to charge. Having a Cell phone and laptop,and internet TV, I can do everything I need to do. I would like to have a smart-phone PDA, and either a tablet or mini-tablet, and in a couple of years I will need a new laptop. However with all the new things Microsoft is trying to do with Windows 8 to blur the lines and capability with smart phone’s app driven world, and touch screen capability- I think the wait will be good. With my next technology purchases, I am considering going all Apple, for the simplicity, ease of use, and less technological messes that Windows based systems seem to always have. The benefits of waiting mean I will get better technology in the future since they are constantly improving, or buy a good device used, while protecting my savings in the meantime.

If you are considering a purchase do your research, and take your time to wait. In the end you will probably decide better what you really want, while protecting your savings in case some emergency pops up.

Financial Thanksgiving

With Thanksgiving only one week away, I thought it would be good to have a financial Thanksgiving post;

The attitude of being thankful is one of the foundational feelings we can have for helping us do well financially. When we are thankful for the things we have, we are content and are not in the “I’ll just be happy if I have…” mindset. Contentment and satisfaction are internal feelings; they can’t be obtained from external sources usually.

When I want something that is beyond my basic needs, I am telling myself that I will be more happy and satisfied when I have obtained it. We all know that after we have purchased something we desperately wanted, in a short while we will want something else again. It seems as if the cycle never ends. Emotions really come into play in this game, much more than logic (except of course when I want new tools :) ). Marketing firms know just how to craft ads to make us feel incomplete, and to suggest filling that gap with their products. We are emotional beings, and our emotions can often fool us.

If I had been a more thankful person, I would have avoided purchasing many things I have over the years, and I would have borrowed a whole lot less money. In the end I would have had more money in savings and investments, and I probably would have given more money away too- bringing more joy to others and myself. When I own fewer things, I love having more time on hand, since everything comes with a maintenance schedule. Thanksgiving might be the best American holiday, for it is a great reminder for us to be thankful for all the things we have. Being thankful and content with what we have makes us happier people, something we all want. It is really sad that the day after Thanksgiving is the largest shopping day of the year. In addition, it can be one of the worst times to buy things, since I reported earlier that prices go up on many items during the Holidays.

The most quoted Bible verse of all times is probably the 23rd Psalm, since it is read at almost all funerals, it starts out: “The Lord is my shepherd: I shall not want” (NKJV) and “The Lord is my shepherd, I lack nothing” (NIV). Most versions have worded it similarly to these two– Christianity and other religions talk about contentment, but when we don’t feel contented we often live a financial lifestyle we can’t afford, or are too materialistic. It has been said that materialism is to buy things we don’t need, with money we don don’t have to impress people we don’t like.

Recently my pastor in his monthly congregational email had a few interesting research factoids about the connection of thankfulness to happiness: One of the exercises that psychologists gave to people was a gratitude journal; taking time every day to write in a gratitude journal things for which they were thankful. What psychologists found was that if people took time to conscientiously count their blessings every day, life satisfaction markedly increased in just six weeks.

Martin Seligman, the Father of Positive Psychology, has tested similar practices at the University of Pennsylvania and in huge experiments that he’s conducted over the Internet. Seligman believes that the single most effective way to turbo-charge our joy is to make what he calls a “gratitude visit.” This means writing out a testimonial thanking a teacher, or a pastor, or a grandparent, or anyone to whom you owe a debt of gratitude. Then visit that person and read your letter of appreciation to him or her. Seligman said that the remarkable thing was that people were measurably happier a month after they paid a gratitude visit to the person to whom a debt of gratitude was owed. Saying thanks produces ongoing joy.

Seligman also recommends what he calls “three blessings,” taking time each day to write down three things that went well that day (in other words, counting your blessings), taking time to journal what’s going well and intentionally savoring good moments by journaling them. Why not consider creating a gratitude journal, paying a gratitude visit, or savoring good things in your life by journaling them?

It seems that thanksgiving is not only good for our finances, but our general overall well being. Happy Thanksgiving to you!

Please comment below, I would love to hear your comments, from any perspective that you have.

Are the Educated Smarter With Finances & Debt?

A new study shows that prior to the current economic crisis, it was the highly educated people that were more inclined to have unmanageable levels of debt. The percentage of Americans with more than 40% of their income going to debt payments increased from under 15% in 1991 to 27% in 2008.

You would think college-educated people would be less likely than those without a college degree to make this mistake, but the study showed more of them exceeded 40 percent. The study provided some clue as to why this happened–optimism. College educated people with large amounts of debt were more optimistic about future economic conditions. Did they think they were immune to economic problems because they had advanced degrees, so they had less fear when they borrowed? That is the conclusion Sherman Hanna, co-author of the research and professor of consumer sciences at The Ohio State University, reached.

It wasn’t that those with advanced degrees didn’t understand debt as well as those with less education, but perhaps they thought economic conditions would always get better for them.

What caused the economic crisis? There is no one group to blame, but you could probably categorize them two ways: institutions and people. Institutions are guilty, especially those in the sub-prime industry (including the lenders), mortgage security issuers (investment bankers), and rating agencies. Some people place blame on the government’s excessive borrowing, and for not watching the institutions closely enough. At the end of chain are the consumers. We were borrowing too much and not saving enough. Can we blame one group of people more than the others? Some have opined that it was the lower-income and less-educated people that borrowed for mortgages too much.

However, the study found that the debt crisis wasn’t caused by homeowners who took out mortgages, since 35% of renters had heavy debt compared to the debt that 21% of the homeowners had in 2007. They concluded that we can’t blame the uneducated, the homeowners, or the educated.

The study appeared in Consumer Interests Annual and the International Journal of Consumer Studies.

How can I use the information, I ask myself. It provides more information when recession conversations come up. More personally, it forces me to examine my own thoughts about my financial plan. What do you think–comment below, or tweet or Facebook others if you found this interesting.

Kids Saving More Money

Do you think your children are learning from their parent’s financial woes and are practicing better personal finances, such as saving more money? The Wall Street Journal yesterday reported in “Watching Parents Fail Sparks New Rebellion: Saving Money.”

I think this could indeed be true, I know we have been transparent with our kids about things we have learned, sometimes the hard way, and their attitudes about finances are very spot on. It seems as though for prior generations finances were sometime more secretive. Today in light of parents perhaps not saving enough or budgeting like they should have, the recession has exacerbated family finances, and kids have witnessed first hand their difficulty, and they don’t want to go through the same thing.

I know when we lead the Dave Ramsey Financial Peace University class it seems there are almost two groups of people: those in their 20′s who want to get it right for a lifetime, and those who are older who have gone through difficulty and have regrets. There are about 20% who actually are doing okay, but just want to do better too.

Have you noticed teenagers and young adults trying to take control of their finances more these days?

Financial Diligence Is Required More Now Than Ever

Various news sources last week reported that inflation-adjusted median incomes haven’t increased since 1995. The recession is partly to blame, since many higher paying white-collar jobs are gone. Over the past 20 years many factories have moved overseas, so higher paying blue-collar jobs are rare.

As if those challenges aren’t enough, those with modest incomes have a tougher uphill battle than ever before. Gasoline has doubled in price since 2009. Grocery costs have gone up, and package sizes have come down. Many people living on the margin are driving older cars, needing more repairs.

Health insurance costs climb at rates faster than inflation, and with higher deductibles common with many plans, consumers have to pay more out of pocket. Many people don’t have health insurance even though Obamacare was passed (but it will not be fully implemented until 2014), and still business owners haven’t really figured out how to pay for benefits for low income and uninsured workers. So many modest and low income people continue go without regular health care, so they must pay everything out of pocket.

I know many people that are going back to college to get degrees in nursing or computers in order to find better jobs. Yet college costs have increased way beyond normal inflation, and many people graduate with burdensome loans. When financially strapped with debt, many exhaust their savings and are forced to use credit cards and check-cashing stores. Those with modest incomes and the poor are further hit with high interest rates, making it all the more difficult.

Is Obama or Romney coming to the rescue? Well I have been listening closely to both presidential candidates, and I hear they are concerned about all these challenges, yet I haven’t heard either articulate about their actual plans; their rhetoric remains abstract.

With all of these challenges, Financial Diligence is required more now than ever. Politicians and government in the end might help some, but it will take quite a long time. To make changes to present circumstances, it is up to me and you.

Financial Diligence

  • Making personal finances a priority
  • Committing time to do banking and budgeting
  • Investing time and money to take a class, e.g., Dave Ramsey’s Financial Peace University
  • Being smart and wise with decisions
  • Planning shopping trips and putting limits on grocery buying, eating out and entertainment expenses
  • Not borrowing for consumer goods
  • Saving for emergencies
  • Getting cost savings books from the library and implementing homemaking cost reduction measures
  • Obtaining advice from a financial coach about all areas, and especially before all major expenses
  • Being a great employee–learning extra skills or going back to school, and asking for more work when you have down time
  • Lastly, praying for wisdom to make good non-emotional decisions, and asking for all kinds of heaven-sent help for such things as financial miracles, raises, jobs, and good health for you as well as for your possessions that might break down and require budget-breaking expenses

Conclusion: The challenges are greater now than ever, yet it is not hopeless; it just requires greater concentrated Financial Diligence. You are smart, intelligent, and gifted; you can do it! You will repay debt, make more money, accumulate savings, and have more for good and fun things in the future. Don’t be discouraged–I have seen it happen to people over the past few years as they endure and improve through difficulty.

Credit or Gift Card Positives, Negatives and Innovation

The banking industry has never been known as innovators or centers of creativity, that’s why an article in the Wall Street Journal caught my attention today: Ice-Cream Bank’s Rocky Road. I’ll get to the article in a moment, but my gripe with credit cards and gift cards is that although they provide a definite convenience, their negatives outweigh their positives for many Americans.

Credit cards, and debit cards are definitely handy. No one wants to carry thousands of dollars around when making large purchases and they are necessary for making flight, hotel and car rental arrangements. They also provide reward points that can be used for gifts, cash, and travel; maybe a few percentages of the purchase.

Then there are the negatives: retailers are charged 1.5% – 3% on purchases, inflating the cost of goods we buy automatically. The credit card industry makes a lot of money on these fees. They also like it when people don’t pay-off their balance each month, because they charge up to 30% interest on unpaid balances. The credit card issuers are really nice when they offer you a card, tempting you with points, no interest for the first year, and maybe waive the annual fee. However if you run into hard times, and miss a payment, many of them increase your interest rate to their highest rate nearly 30%, making it even harder to get caught up.

Research shows that people that use plastic to buy goods instead of cash psychologically feel less pain, and spend more per purchase.

In summary, you use credit cards out of convenience, the retailers charge more for the goods to cover the cost, you spend more money, may end up paying high interest rates, and in return you get convenience and points. Now some people have awesome discipline and don’t spend more, and really profit from the points. I wouldn’t recommend this to most people, but if you are really disciplined, the points can cover your vacation costs every year, potentially saving a few thousand dollars from your budget.

Gift cards on the other hand, are a nice way to buy gifts for people. Some people buy them at grocery stores, and get reduced cost of gasoline; Kroger and Giant Eagle are common grocery and gas bundlers in our area and some people do this when making large purchases at other retailers. The negative side of gift cards is they can sometimes get lost in the mail, forgotten or lost once we receive them, or lose value if not used within a specific time.

Now back to the story about an Ice-Cream Bank. Seems there’s this boutique ice-cream parlor in Pittsburg that pays 5.5% interest per month on their cards. The interest can be redeemed for items they sell such as ice-cream and coffee. The banking regulators are in turmoil trying to shut down this parlor offering bank like products, but so far they haven’t figured out how to shut down the niche the proprietor found in banking and securities regulations.

I like innovation, and admire Ethan Clay’s (the owner), creativity and courage to come out with an interesting idea to attract and reward customers. This got me thinking, why doesn’t the credit card, banking and major retailers come up with ideas to not just add convenience and points, but to encourage saving money on purchases, maybe provide a discount on purchases if you use their card? Wouldn’t it be cool if a credit card company rewarded people who finally paid off their balance, by depositing money into a special savings account (redeemable only the future) for each month that the balance is reduced? Maybe even increase that amount for every month that this is maintained, and then repaid. They probably cook up ideas like this all the time, but they are not approved when they get to the executive team, for fear of losing revenue, since they make more money on interest and fees. But like Ethan Clay’s small Whale Bone Cafe, small companies can try new ideas. Maybe a smaller credit card issuer will read this story in today’s Wall Street Journal and provide a card that has positive innovations to help people more.

 

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