The Secret Knowledge That Will Change Your Life Forever

I have unbelievable news! What if I told you that I know a proven way to build wealth, a way to get out of debt and stay out of debt forever?  Many people have paid fortunes to learn about this amazing plan. Like a magician who divulges his methods, I‘ll probably get in trouble with all the financial gurus out there if I share this incredible secret with you. But just for today, and only for the faithful readers of the moneytrip blog, I will share this fantastic secret of wealth and prosperity!

Are you ready for the secret knowledge that will change your life forever? Are you ready to set sail on a course for the debt-free life of wealth-building that you have always dreamed of? Okay, get ready and grab a pen because here it is –

Stop Borrowing Money

Yup. That’s it. 

See, this stuff is easier than it looks. 

There is no “forever” mortgage. There are no 100 year car payment options. The furniture store will not give you 3 generations to pay for that dresser, even if it is heirloom quality. All consumer debts have a finite period of repayment time built into their formula. If you stop borrowing money, you will eventually become debt free. How quickly depends on many factors, but you will get there. 

When my wife and I decided to become debt free, we were highly motivated. To me, slow progress can be painful progress. However, even slow progress is progress, and slow progress is better than no progress. If you just stop borrowing, stop swiping the Visa, stop “signing and driving” at the auto dealer, you will eventually owe no one. Imagine no payments. Imagine keeping what you earn. Wouldn’t that be something?

There is some debate about the best way to pay off debts. Some financial gurus advocate for a debt snowball approach, where you pay debts from largest to smallest. Some recommend instead paying debts from smallest to largest.  Some advise attacking debts by first going after the balances with the highest interest rates. Whatever. Just do it! My wife and I demolished our debts from smallest to largest, because this method allowed us to get some quick wins. It doesn’t really matter. All methods work – if you first stop borrowing. 

Once your debts are paid you will stop paying interest. This will save you money. Once you start saving and investing the money you were paying in payments and interest, that money will start growing. Rather than working for money, your money will be working for you. How cool would that be? 

Well, now you know the amazing secret, the proven path to a fabulous debt free life! 

(You’re welcome!) 

The reduction of debt correlates strongly with the creation of wealth, and it all begins when you stop borrowing. What you do with this powerful knowledge is up to you.

Investing to Retire – The Most Important Thing You're Not Doing?

It is often said that the largest purchase people can make in their lifetime is a house. I disagree. The largest purchase people can make is their retirement. In the Northeast where I live, the median home price as of March 2012 is $225,800, according to the National Association of Realtors. A properly funded retirement account for someone preparing to retire in 2012 could be many times that amount. If we thought of retirement as something we had to buy, like a car, house or vacation, perhaps it would be easier to understand that we need to save for it.

You can’t invest without saving, and we the people of the USA aren’t saving.  The financial services organization TIAA-CREF found that more than one in three Americans (39%) are not saving anything toward retirement.  Many who do save aren’t saving nearly enough. Forbes Magazine says that we are in a “retirement crisis,” and that age 65 has become a “fantasy” retirement date. According to US News, only 25 percent of us are saving more than 10 percent. As a culture, we all are living beyond our means. Without drastic changes, the idealized retirement picture of leisure, security and abundance will remain out of reach for not just a few, but for a majority of the population.

Why Aren’t We Saving? 

Trapped by debt and struggling with finances, many people simply think they can’t afford retirement savings.  Many who do save have too much debt and no emergency fund. They save a little, but then withdraw money to keep themselves afloat financially whenever problems arise.  Some start saving and investing, but the first time markets get volatile, they stop. (Volatile means that stock prices are fluctuating sharply, wildly and often.) Worse yet, they panic and withdraw the money they have invested, incurring penalties, selling at a loss, and missing the eventual market rebound.

If you think money is tight now, 
try not saving for retirement.

Some people think they can rely on Social Security to fund their retirement. I don’t. Social Security is NOT a retirement plan. It was invented to keep the elderly from starving and freezing, and that’s about all it will do. The average monthly benefit is $1,066. Can you survive on $12,792 a year? Many already do, and many more will need to learn how. According to the Social Security Administration, only about 75% of promised benefits will be payable as of 2037 (that’s just 25 years away), which brings that future number down to $9,594 a year in today’s dollars. Ouch.

Many people might think they will just continue to work until they die. This is a bad plan. Research shows that nearly 60 percent of retirees will end up retiring sooner than they planned; and many of those will be involuntary due to health issues, downsizing, or other factors beyond their control.

What Should We Do?

Investing is simple. Anyone can do it and everyone should. Investing can get complicated, but it does not have to be. The basics really are, well, basic. 

There are only three factors that determine if you will enjoy a secure retirement: How much money you save, how long you save for, and what rate of return (percentage increase) you get on your savings. The hardest part is deciding to do it.

1) How Much You Save

The first step toward saving for retirement is to spend less than what you earn, and pay yourself first. As a nation, we aren’t doing that. The way to make this happen is to do a budget (read about that HERE) and put that retirement savings line item right at the top.  The minimum amount you should save is 10% of your gross income. If you can’t afford to do that right away, don’t give up! Start by saving what you can, and work up to 10% as you are able. 

2) How Long You Save

Is this couple on vacation, or is this where they live?
Only their bank account knows for sure.

You will want to save for as many years as possible, so let’s get going! The sooner you start, the sooner the interest, dividends and capital appreciation of your investment can go to work making money for you. The longer you wait, the more you will have to save to meet your goals. What if you are approaching retirement age and don’t have much time? Start saving anyway. It might be too late to save a million, but a little saved is better than nothing at all. 

3) Rate of Return

The only way to get a decent rate of return on retirement savings is to invest. If you simply leave your money in a savings account, CD, or under the mattress, you will end up losing purchasing power because these accounts do not keep pace with inflation. To build wealth you need to buy stocks, which should be purchased through mutual funds. (Mutual funds are a type of professionally managed collective investment that pools money from many investors to purchase many different stocks and bonds.) Mutual Funds are better than individual stocks because they reduce certain kinds of risk. I do not recommend buying individual stocks unless you can afford to lose every penny you spend, because you will be gambling.

If you have a 401k or 403b plan offered through your employer, terrific! You can use that to save and invest. The money will come right out of your paycheck and be invested into whichever mutual funds you choose. If you don’t have a retirement plan option at your place of employment, then you can just pick up the phone and call any investment management company and tell them you want to open an IRA (Individual Retirement Account). I personally like Vanguard for their low fees, broad offerings, and excellent customer service; so most of my money is there.

Not sure which mutual funds to choose inside your 401k, 403b or IRA? I know that this part can be intimidating. There are many options, and each option has a different focus and goal. Just take a deep breath. You can do this! For starters, there are helpful online calculators that you can use. Chances are the administrator of your account will offer one. The best are set up like questionnaires, where you answer the questions, and then the program suggests a particular asset allocation that is appropriate for you based on your age, goals and risk tolerance. (Asset allocation is an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio.)

What I Know

Federal law requires that all articles on the
topic of retirement planning be accompanied
 by a sailboat picture. True story!

Those of you who have been reading my blog understand that I only teach what I know. I have been investing in mutual funds through my 401k and IRA for about 13 years. To achieve a fully funded retirement account on a modest income, investing in good growth stock mutual funds is essential. One could easily argue that the last 13 years have been the most volatile in generations and the worst investment period since the great depression. The dot-com and housing bubbles both burst during this time, each causing two significant recessions. Some investors have named it the “Lost Decade.” Even though the market has been a panic inducing mess for over a decade, I have averaged a 10% rate of return. Assuming a continued average 10% rate of return, I’ll be financially independent (a millionaire, if you prefer) before age 60 with a continued investment of just under $500 a month. What if my calculations and assumptions are off by half? I’ll still have more than half a million by age 60. It sure beats the $9,594 a year that Social Security has waiting for me.

The key to making this work is consistency and diversification. I continue to contribute to my retirement funds no matter what the market is doing. This is called dollar-cost-averaging. When the stock market is down, I keep buying, because that means that everything is on sale.  For diversification, I invest in different asset classes that I selected using the online calculators provided by my fund managers and a small amount of additional research. I don’t worry that I’ve done everything perfectly, because the important thing is just to get in the game. You can always fine tune the details as time goes on and your investments grow.

I share my situation not to boast, but to inspire. I believe that if I can successfully save and invest for retirement while supporting a family on a modest salary, then nearly anyone can. I’ll never understand why more people don’t make the effort. Please, don’t end up trying to survive on the pittance that Social Security will dole out because you didn’t save and invest during your working years. I wish something better for you. 

If you want to get serious about retirement savings but aren’t sure where to begin, e-mail me at my-moneytrip@cox.net and I’ll help you get the ball rolling.

As always, thanks for reading.

The information contained in these columns is for entertainment and educational purposes only. 

While the advice given is accurate and authoritative, you also should consult your own personal 

advisors regarding the particular details of your unique situation.

The Gratitude Attitude

People who know me well know that I love cars, and I always have. I once had a really sweet car. It was a silver convertible – quick, smooth and sporty, and heads turned as it zipped by. Neighborhood kids would give me the “thumbs up” sign and shout, “Nice car, mister!” as I drove by. My wife and I would plan entire weekends around where we would ride. Boy, I sure was proud of that car. That was many years ago.

I still have that car, but it is getting old. It has dulled headlights, rust bubbles, scratches and dents. On rainy days, the drive belts squeal loudly in protest until the engine warms up.  It is not as quick or smooth, and heads are not turning so much anymore. It needs some work. But I still love it. 

I love it because buying it made a dream come true. I love it because after many years it is part of the family. But the main reason I love it is because I have replaced pride with gratitude. 

Not Good Enough?

There was a time years ago when I would have believed that this car was no longer good enough for me. I would have been preoccupied with replacing it.  How can I show the world how successful I am in an 11-year-old car? I need to impress! I need to look like I’m winning! That is an expensive way to think. I no longer think that way and I am better off for it.

Ready for the road trip – a decade ago.

I choose to love my old car in part because doing so saves me a fortune. If I replaced my old convertible with a shiny new one, it would cost me about $35,000 plus $2,450 in sales tax, plus around $2,000 in annual excise taxes. My car insurance would go up, too. Yikes! Choosing to be grateful for the car I have means I save at least $40,000. The money I’m not spending on a new car can be saved and invested. My old car might not impress anyone; but it’s mine, it’s paid for, and it’s good enough. It will remain good enough until the day it is no longer safe to drive, because I have learned that an attitude of gratitude builds wealth.

Are you with me so far? I hope so, because we can apply this philosophy of gratitude to the rest of life. Consider all the things that you might think you need to replace or improve: your car, home, clothes, furniture, appliances, electronics, and on and on. How many of these things might actually be good enough?  If you can change the way you perceive your possessions from “not good enough” to “good enough and I’m grateful for it,” you will almost certainly find greater peace in your life, and you will probably save a fortune.  You have the power to make this decision!

Write a New Story

I believe that the Western world is very bad at gratitude. It seems like almost everybody wants more than they’ve got. We see the commercials for luxury cars, watch the nouveau-riche Mc-Mansion tours on MTV Cribs, buy our lottery tickets, and think, “If only!”  

In our collective culture, there is so much anxiety born of the idea that what we have, where we live, what we drive, and by extension who we are is not good enough.  We live in one of the most affluent, most coddled societies in the history of the world, and yet many of us are a stressed-out mess, and deeply in debt, because we lack gratitude and perspective. 

Have you been telling yourself that you don’t have enough or that what you have is not good enough?  If so, question your assumptions and write a new story. Cultivate gratitude, and you might discover that what you already have is exactly what you need. You'll be richer for it.

Budgeting 101

Some of my readers have requested a basic budgeting lesson. I am pleased to have this blog become an interactive forum driven by reader response, so here it is:

Budgeting is important. Basic budgeting concepts are easy. Budgeting well is a little bit harder. Here is how I do it, along with some tips to help you get started.

Part 1 – The Basics

To start, it helps if you have some idea what you are working with. A little research is required. Gather your pay stubs. Think about all your sources of income: salary, tips, investment income, alimony and child support, rental income, public assistance – everything counts. Gather up your utility bills and recurring expenses. If you have not done so yet, begin writing down everything you buy. (You can come back later and read about this topic HERE.) You need to know where you have been spending your money to make a budget that reflects your reality.

You can calculate your budget using just a note pad, but I recommend graduating to a simple spreadsheet file such as can be made in Excel. Doing this electronically will be so much easier. You can tweak the categories and numbers to your heart’s content, and the spreadsheet will do all the math for you. There are many commercially available budgeting programs, but I recommend a real K.I.S.S. (keep it simple stupid) system that I have created. E-mail me at my-moneytrip@cox.net and I will send you the file for free. 

It is important to do your budget before the new month begins. You should be doing your April budget at the end of March, your May budget at the end of April, your June budget at the end of May, and so on.

The file is set up this way:

A) At the top, list all your income for the month. If exact numbers are not available, make your best educated guess based on your earnings history. Total up this amount. This is how much money you have to spend for the month. If any changes happen during the month, such as a cash gift, unexpected bonus, or a drop in income due to a missed shift or delayed payment, you must update your monthly income totals as the changes occur.

B) Next, list all the expenses you will incur over the course of the month. I suggest starting with the big expenses that seldom change and must be paid, such as income taxes and social security withholding, medical insurance, life insurance, retirement savings, emergency fund savings, mortgage or rent payments. For me, this category also includes charitable giving.

C) Next, list your recurring and variable expenses, such as utilities, cell phone bills, car payments and life insurance. Include in this section savings for larger recurring expenses, such as that big annual car insurance bill, car repairs (unless you drive cars that don’t break down), home improvements and repairs, and also gifts. (Christmas will come this year; try not to act surprised.)

D) Next, list the day-to-day expenses of living; such as groceries, dining out and take-out food, clothes and clothing care, beauty supplies, salon visits, gym memberships, dues and fees, minor car maintenance, housewares and minor home maintenance, gifts, entertainment, and any hobby-related expenses.

E) Finally, add up all the expenses and subtract them from your income. Your goal is for the total of income minus expenses to be zero. If the total is more than zero (a positive number), then you still have money to spend. Congratulations! You can beef up your savings, give more away, and otherwise enjoy the fruits of your labor. If the total is less than zero (a negative number), then you have busted the budget. You need to go back and tweak all the numbers to get the total to equal zero, or you will overspend and incur debt. This is when playing good defense comes in handy (You can come back later and read about this topic HERE),  since creatively lowering your expenses will help you get to zero.

Part 2 – The Challenges

You will almost certainly fail! How’s that for motivation? Kidding aside, budgeting is a process. This can be hard at first! Budgets are based on assumptions, and sometimes those assumptions are wrong. Surprises will come and mistakes will be made. There have been times when just a few hours after I completed the monthly budget, I learned about some huge expense that totally disrupted everything.  A good budget allows for those surprises with an emergency savings category and a recurring expense category. Recognize at the start that It might take a while to get this just right and you will reduce your frustrations. 

The numbers won’t work. If you can’t get to zero, and you have gone over-budget, then you need to increase income or reduce expenses. Many expenses can be reduced with minimal effort. We tell ourselves it’s not possible, but of course it usually is. It’s just not always convenient or enjoyable. If your very life depended on it, would you be able to find an extra $100 a month in your budget? I’m guessing yes. So just for a while, pretend it does, and find some ways to reduce expenses so you can get this darn thing to work.

Some quick, down and dirty money saving ideas:

• Cancel cable. (You’ll live.)
• Quit smoking. (You’ll live longer.) My cousin recently quit and is on track to save $3,600 this year. That will bring her some breathing room – in more ways than one.
• If you have not been to your gym in 12 weeks, cancel the membership.
• Eat out less often, or not at all.
• Make your own coffee and save at least $60 a month.
• Discover your library and you will find free movies and discount passes to area attractions. And they still have books, too.
• Shop for things you need at consignment shops or on Craig’s List. Only underwear and toothbrushes must be bought brand new.
• Call your insurance agent and politely say, “It’s time to lower my premiums.” 
• Drive less.
• Cars are the number one budget busters for many of us. If yours is dragging you down, trade to a less expensive car.
• Wash it, fix it, do it yourself.

Pay yourself first. If you have never done this before, it’s time. This is not a new idea, but it remains the cornerstone of any financial plan. You simply must set aside something for the future. I recommend that your budget begins right at the top with 10% set aside for retirement savings. If this seems impossibly, start at a lower percentage, but not too low – it’s OK to let it hurt a little bit. Increase the amount whenever you are able. As you get better at budgeting, you will find money. 

Another way to find retirement savings money is to save your raises. If you received no raise this year, you would find a way to survive, right? So pretend there was no raise and beef up that percentage. If you are saving at 5%, and you get a 3% raise, save that raise so your savings rate becomes 7%.  Remember, I practice what I preach. I saved my raises for many years, and over time my retirement account contribution grew to 24% of my income. This was made possible by a constant re-examination of and reduction of expenses. Thanks to budgeting, my expenses went down as my income went up, and I saved the difference.

Part 3 – The Benefits

Feel richer. Budgeting done well will make you feel richer. I have found that careful budgeting reduces expenses, giving you a “virtual raise.” 

Smoother cash flow, more savings. One of the benefits of a budget is that it allows for an ongoing fine-tuning of your spending. A budget allows you to see exactly where the money is going, so you no longer have to wonder where it went.  If you are consistent in your efforts, you will get better at planning. As months go by, there will be fewer surprises, fewer mistakes, smoother cash flow, and more savings.

A budget allows you to see the RELATIONSHIPS between your categories of spending. Categorizing your spending and putting real numbers to each category allows you to analyze effectively.  You might see at a glance that if you had no car payment, all the numbers would fall nicely into place.  You might notice that you go over budget on food $100 every month, and perhaps begin to question the wisdom of that $170 cable bill. You might realize that it has been years since you shopped for a cheaper insurance plan. You might discover that your charitable contributions are less than your cell phone bill. You could realize that your spending at the coffee shop is greater than your retirement savings. Seeing the relationships between different categories of spending allows you to consider if that spending is in alignment with your goals and values. 

You will stay out of debt. If you budget well, stop overspending your income, and save for recurring expenses and emergencies, then you will no longer need to rely on credit cards to make up your monthly shortfalls.  This is important because debt is EXPENSIVE. Trying to do a budget and grow wealth while carrying debt is like driving with the emergency brake on.

Part 4 – Tips & Inspiration

Stay realistic. The primary goal of budgeting is to develop control and awareness. As the months go by you can work towards any secondary goals, such as reducing spending, increasing savings, or just making ends meet.  It might take a while to make the adjustments needed to get things right where you’d like them to be. Be patient with yourself, and give yourself a “pat on the back” for even making the effort. 

Use cash. When you shop, use cash, not credit cards. You will be much more aware of your spending, and probably spend less. (You can come back later and read about this topic HERE.)

Overcome the fear. This is important. This is worth it. Tend this garden, and it will yield a harvest. (You can come back later and read about this topic HERE.)

For richer or poorer. If you are married, then this is a process that must be done together. I believe that married couples should pool all resources. There should be no “yours” and “mine,” only “ours.”  This trip is taken on a tandem bicycle, with two riders, pedaling in the same direction. You must work together and agree on your goals and expenses. (Much more on this topic in a future post)

Look forward to the cool stuff. View this process as an adventure! A big reason why I budget is to get my money to do all the important stuff it needs to do so I can use any “extra” money to do some guilt-free cool stuff. Once the important stuff in your budget is covered (you responsible adult you!) then you can move on to the fun.  As you get better at budgeting, analyzing, and controlling your expenses, you likely will find that you have the money to enjoy more of life's pleasures.

Offense and Defense – What's Your Game Plan?

When it comes to money, there are two categories into which everything can be divided: offense and defense. Offense is what you EARN. Defense is what you KEEP. Personally, by necessity, my forte has always been defense. I’m getting better at offense. My goal, posted here for all the world to see, is to become excellent at both.

Offense – Someone who is good (strong) at playing offense will earn a high income relative to their needs. Someone who is bad (weak) at playing offense will earn a low income relative to their needs. Simple as that.

Defense – Someone who is good (strong) at playing defense will spend less than their income, which means that there is income that can be saved.  Someone who is bad (weak) at playing defense will outspend their income, whatever it may be, leaving little or nothing for saving. While it is not difficult to overspend a low income, there are plenty of people who will overspend their income no matter how high it goes.

Many people are good at offense. Many people are good at defense. Much less common is the individual who is good at both, as this person will almost certainly end up wealthy. Someone who is good at neither may end up as broke as a $3 watch. Either way, the percentage of your income that you keep is more important than how much you earn. For this reason, I propose that defense is more important than offense.

OK, huddle up!

Strong Offense + Strong Defense 

(Make a lot + keep a lot, relative to income) = Winning with money!

Weak Offense + Strong Defense 

(Make a little + keep a lot, relative to income) = Winning with money!

Strong Offense + Weak Defense 

(Make a lot + keep just a little or none) = This game is too close to call.

Weak Offense + Weak Defense 

(Make a little + keep just a little or none) =  A losing season. Time to fire the coach.

As shown above, strong defense is the “X” factor in winning. If you have a low or modest income, but live beneath your means, you will have money with which to build wealth. Small amounts of money invested over a working lifetime can lead to a fortune at retirement. If you have a high income, and live beneath your means, all the better. Either way, you win when you spend less than you earn and invest the difference. 

As with any game plan, both a strong offense and a strong defense are best. I recommend that you get to work on the defense right away, since that is most important, and it is something you can have an immediate impact on. This means spending less and saving more. Improving your offensive game is a bit more work. To do this, you must make a plan to earn more. Easier said than done I know, but for most of us far from impossible.

One of my goals with this blog is to help you hone both your offensive and defensive game. I will do both with stories still to come. Meanwhile, some homework: brainstorm your own personal ways of getting better at money offense and defense. How will you start to earn more or reduce your expenses – right now, today? It would be cool if you’d share your ideas with the readers here at the Money Trip blog. Or, you may email me privately at my-moneytrip@cox.net. Good luck!

How a 10¢ Envelope Saved Us $300 a Month

For years, my wife and I have been diligent about tracking our spending and keeping a monthly budget. We had our notebooks in which to track all purchases, and I had my spreadsheets where I would predict spending each month. At month’s end, we would compare the plan to the actual spending to see how we did. We did this for four or five years; but most months, we were off, sometimes by quite a bit. This was discouraging, because being so diligent should pay off with consistent wins. Many months we were off by at least a few hundred dollars. When this happened, we either had to save less than planned or dip into our emergency fund to make up the difference.

Last June we really blew the budget, and it was not because the car broke down or some other big, unexpected expense popped up. The trouble was the grocery bill. We had budgeted $550 for food, which should be plenty for a family of four, especially when two of the four are very young. My wife and I both cook, and we know how to shop the sales and plan meals accordingly. We eat leftovers, and we know about 18 different ways to turn the leftovers from roasted chicken dinner into something else. 

At the end of the month when I tabulated our purchases to compare the spending plan to what we actually spent, I discovered that we had gone over budget – by more than $300. My jaw hit the floor! How did this happen? As my wife and I looked back over the month, we just could not figure out how we had spent so much. We were not eating porterhouse steaks and fresh-caught salmon fillet every night. We did not host a big dinner party or a huge BBQ. The only answer that made sense was that we had simply become super-sloppy in our spending. We must have bought too many convenience foods, too many top-shelf items, we did not shop the sales, and we must have been tossing our leftovers down the disposal. Whatever the cause, we knew that this budget busting boo-boo could not happen again. 

Spend less when you shop –

pay with cash.

The simple solution was a 10¢ envelope.

At the start of the new month, July, I took $500 out of our checking account and put it in an envelope. I handed that envelope to my wife – who does most of the food shopping – and said, “Good luck, baby!”  That $500 was our food budget for the month, and no matter what, we were not going to spend a dollar more. Period!  We prepared for a month of rice & beans as we joked about the ramen noodle dinners, dumpster diving and fasting that was sure to come. 

This envelope plan might seem slightly unusual, but up until about 40 years ago, this is the way that everyone did it. There was no other way. Our great-grandparents did not have Discover cards. They had cash, and when it was gone, it was gone.

Would you care to guess how much we spent on food in July?  Just under $500. Success!

We shopped the sales. We planned the meals. We ate the leftovers. The crazy thing is that we ate as well as ever! There was absolutely no sense of deprivation or loss.  There was, however, a tremendous sense of victory! Hurray for us! We were finally getting real control of our spending.

What we experienced in July was a universal truth: There is just something about using cash – cold, hard cash – that changes the way we shop and spend.  Peeling off dollar bills feels different than swiping a little plastic card. Somehow, it hurts more. As the month goes on, you see your food envelope getting thinner and lighter, and you instinctively begin getting conservative because you don’t want to run out of dough.  

This little budgeting trick – the power of cash – has not been lost on the merchants where we all shop. Merchants KNOW that shoppers who use plastic to pay spend 10-20% MORE than shoppers who only use cash. That is why the merchant is willing to pay a 2-3% FEE on every transaction processed by a bank or credit card company. That is why stores try so hard to get you to sign up for their own brand of credit card every freaking time you try to cash out. Merchants pay the bank fees and push their own store cards because YOU WILL SPEND MORE if they accept plastic as payment.

Cash is King, in more ways than one. If you want to spend less of it, skip the plastic and go old school. If you want to give yourself a “virtual raise” by cutting your spending, the “cash envelope” is the easiest way to do it. It really works! Merchants know it. Banks know it. Great-grandma knew it. Now you know it, too.

Fear of Planning

Please note: This post was previously titled The "B" Word.  I had intended to title it Fear of Planning but talked myself out of it. Regretting the decision, I have restored my original name choice.

Budget. The dreaded “B” word. I’ve often wondered why this word conjures so much fear and resistance. Budgeting is planning, and I have never understood the reluctance to plan. What is there to lose? There are plenty of people who would rather step on a rusty nail than create and follow a budget.  Whatever the reason for the fear, budgeting is just too important and too fundamental to healthy finances to go undone. Failing to plan is planning to fail.

It seems to me there are five reasons people don’t budget:

• Fear of Poverty: Some are afraid that they will discover that there is just not enough money to meet all their needs and wants. (If that’s the case, you probably already know it – and don’t need a budget to tell you.) But if this is your situation, a budget can help you to be certain your essential needs are met. If the money you budget for food is only spent to buy food, then you probably won’t run out.

• Fear of Loss: Some are afraid that they will see the “financial truth” and be forced to conclude that a lifestyle change is in order. If you have no money saved and can’t pay your bills, it might be time to sell the Harley, move to a cheaper home, eat out less often, or stop shopping just for fun.

• Fear of Maturity: Some folks are apathetic, prone to procrastination, or just lazy. (What? Who? Me?) Others are “free spirits” who figure the “universe will provide” for them and everything will magically work out. These individuals are unable to overcome their reluctance to look life square in the eyes and make the tough decisions that adults need to make. Unfortunately for this group, lack of discipline today almost always leads to a lack of options tomorrow.

This man is exhibiting
classic "Fear of Budgeting"
symptoms.

• Extreme Wealth: Some are just so rich they could never spend it all. You are excused from the budgeting lesson if this describes your situation, but you might want to stick around just in case. Big time sports heroes, movie stars and rock stars file for bankruptcy nearly every day, in spite of their million dollar paychecks. Do you think M.C. Hammer had a budget? Think he knew where every dollar was going? Definitely not, but what he did have was a great big golden shovel with which to dig himself into a giant hole. It does not matter if you earn $30,000 a year or $30,000 a week, you still need a plan.

• Ignorance: Some were just never taught, never learned, and never possessed the basic life skills needed to sort it out for themselves. We could cure this problem by teaching basic personal finance skills in junior high, and advanced skills in high school. (The cynic in me believes that one of the reasons we don’t teach this is because the ignorance is so easily exploitable for large profits. More on that in a future post.)

If you recognize yourself in any of the above examples, be assured I’m not trying to beat you up or tear you down. I’ve experienced several of these fears myself at one time or another. That said, this is a process that requires some honesty and self-reflection. You need to identify what is holding you back so you can move past it.

I believe that most people who avoid budgeting do so because, above all, they fear that some kind of SACRIFICE or PAIN will come. In my experience, there are no real sacrifices or pain that come along with budgeting - only decisions. After looking at my budget, I may CHOOSE to give something up, but when doing that I am usually trading it for something else. Often, I am trading little wants for big wants. A loss here is a gain over there. For example, what if you eat out much less, but doing so allows you to rent a beach house for your summer vacation? What have you lost besides maybe a few pounds? Not much. What have you gained? A week by the shore your family might never forget. Good trade.

A budget is just a spending plan, which means that you tell your money where to go instead of wondering where it went. That’s not so scary, right? 

If you do not believe that a budget is something you need to do, try these little tests. First, next time you receive your credit card statements, see if you have been charged interest. If you have, that means you are spending more than you earn, and using the credit card to finance the shortfall. If this is you, then you definitely need to start budgeting in earnest. Overspending your income is not sustainable. Second, check your savings account balances. Are they growing? If not, then you need to budget so that they can.

Remember that your budget is your budget - ultimately, you are in charge. Do what you want with your money, but do it knowingly, with thoughtful awareness, eyes wide open, lights on!

I believe that eliminating debt and building wealth are the personal responsibilities of every adult, and it is impossible to get serious about either without a spending plan. Do yourself a favor and jump this hurdle. Overcome the reluctance and fear! You have nothing to lose, and much to gain. I believe you will discover, as I have, that it is worth the effort.

The “F” Word

I feel bad for the word frugal. It is so misunderstood. I mean, frugal is such a classy dame, but everyone thinks she’s cheap. Frugal is wine and cheese in a picnic blanket, but everyone thinks she is mac & cheese in a plastic microwave dish. I’m here to defend her reputation.

Frugal does not mean cheap. Frugal is about intention. Frugal means using every part of what you have so nothing is wasted. Kind of like using all your vacation time before it expires or drinking your whole beer before it gets warm. There’s noting cheap about that. Frugal is savoring.

Consider for a moment what happens during a power blackout. It changes everything. In a blackout there is no electric light, no TV, no DVD’s, no Facebook, no video games, no time-consuming diversions.

What is there instead? Candlelight. Conversations and board games. Chatting by flashlight with seldom seen neighbors. Hide and seek and ghost stories for the kids. Going to bed early like folks did before electricity doubled the length of our days.  Once we remove all the extraneous modern distractions, we have simplified life. What we are left with is MORE of what really matters, and less of what really doesn’t. 

Much as a blackout redirects our attention to what is essential and fundamental, so too does choosing a frugal lifestyle. Instead of focusing on what you don’t have, you focus on what you do have.  Sure, you might choose to give up some things, but you are left with what is most valuable and essential. Eventually, if you persevere, you won’t miss the rest. When you savor the essentials of life, when you sit and breathe and count your blessings, you are living intentionally, and this is a big part of being frugal.  

Sure, there might be less food at the buffet, but everything there is healthier and tastes better. Frugal is better living by subtraction, and on that path lies abundance and peace.

You gotta write it all down!

Many of the money books I read when I started to get wise instructed me to write down every purchase that I made. That’s right, everything. Just get a little notebook, and jot down every single purchase. And while I did just about everything those books told me to do, I just could not bring myself to do this essential step.

You can’t tell your money where to go until you know where it went. And a few years ago, I realized that I had gotten lazy and really didn’t know where much of the money was going. 

My darling wife and I had been married for seven years or so. We were DINKS – dual income no children – and our careers had matured, so money was flowing. We were saving 15-20% into our 401K’s, we owned our home, we had two new cars and travelled often. We were living pretty well and saving without really trying. So what’s the problem? Life was good, but the lifestyle was creeping.

I forget exactly what the trigger was, but something I read once again mentioned the step of writing it all down, and I finally figured, “What the heck. We’ve tried everything else. Let’s just do it and see what happens. If we hate it, we can stop. Nothing ventured, nothing gained, right?” My wife, bless her ever-supportive heart, agreed to play along. 

I bought two notebooks, one for each of us, and my first entry into my notebook was:

2 Notebooks – $2.24

A pretty exciting start, you’ll agree.

Then for the next 30 days, we each recorded every single purchase we made. At the end of the month, we totaled  up all our purchases, organized loosely by category, to see where it all went. If you do this exercise, you WILL learn something about yourself, I promise. 

What did we learn?  

The first insight was that we each bought something nearly every single day. There was hardly a day that passed when each of us did not whip out the cash or the Visa to buy something. That, I did not expect.

The second surprise was that we has spent just about $300 on wine. Yup, $300 on fermented grapes. Not all at once, but over course of the month we had managed to justify the purchase of about 12 really good bottles of wine. 

This was a “light bulb” moment, folks. Spending $300 on wine might not be a big deal if you are George Clooney, an Un-Real Housewife of Who-Knows-Where or a master sommelier; but we are not those things, so spending $300 was stupid. Preposterous, really. And ultimately not in alignment with our values or life goals. Wine was becoming a bit of a hobby of mine. Time to find a cheaper hobby.

My wife and I decided that $30 a month really ought to be enough money for wine. When we made our budget, that’s what we allocated. Suddenly, the $7 bottle of Shiraz was looking pretty good. And the other $270? Well, it wasn’t too hard to find a better use for that.

I encourage anyone who has never done this to give it a try for at least three months. You will learn a lot about yourself and your spending habits, and like us, you might be able to find some money in your budget that you’d rather send somewhere else. Best of all, after three months of tracking expenses in this way, you should have the information you need to start creating a solid spending plan that reflects the reality of your life, a plan that you can live with.