Frugal Intuition

Welcome to Frugal Intuition.  If you’re just now joining us, take a moment to go check out Part 1 , Part 2 , Part 3, Part 4 and Part 5 of the series.

Now, when last we left our friend Bob and Sue Spendthrift, they had finished totaling up their budget including all their monthly expenses, discretionary spending, credit cards, loan payments, and estimates for annual expenses.  They hadn’t factored in savings yet.  Their total for the month was $3029.  Their total monthly income combined was $3200.  Only $171 of wiggle room.  Or is there?  Let’s take a closer look at some of these expenses, in particular the discretionary section they filled out from their Part 1 homework.

• Gas for car ($200 for household)
• Groceries/household supplies ($500)
• Entertainment ($100)
• Dining out ($120)

Okay, well other than planning their errands more efficiently, the gas budget probably isn’t going to change much.  But let’s look at that dining out.  $120 for 2 people to eat out.  Bob and Sue always order tea or sodas with their meals and usually enjoy appetizers or desserts.  The smartest thing for them to do would be to cut back their dining out to once a month or not at all for a while.  So why don’t we change that budget to $30 a month for dining out–it’s a treat when they stick to their budget.  And while they’re out, they’re going to order water and save another few bucks.  So that frees up $90 a month to add to that $171.

Now what about that entertainment budget?  This is Bob and Sue’s movie habit.  Every weekend, they’re going to the night showing of some new release in the theaters.  And they buy popcorn and drinks.   One big change they can make is to start going to matinees.  There’s a $3 per ticket difference between matinees and night shows at their local theater.  So that’s easily $24 just making that change.  If they snack before going and just share a drink, they’ll also cut down on their food expenses.  That’s another $36 right there.  Even better, they can check out the selection on Netflix and watch stuff at home, cuddled up on the sofa with their own popcorn and drinks.  It’s way better for cuddling.  So maybe they take 2 weekends and do the movie thing at home.  That’s another $12 saved.  So we’ve just carved $72 out of the entertainment budget to add to our $261.  Now we’ve got $333.

Okay, what about that grocery budget?  $500 works out to $125 a week, which is a lot of money to spend on groceries for 2 people in a week.  The Spendthrifts need to do some analysis of their grocery buying habits.  I’m willing to bet a lot of name brand items wind up in their cart.  There’s also probably a lot of waste going on when they don’t eat things before they spoil or forget that they’re in the freezer or pantry.  Let’s be conservative here, and shave their weekly grocery budget to $100.  That’s $400 a month, which is more than adequate to cover groceries for 2 people.  Sue’s going to look into some thrifty recipes.  That’s another $100 we can add to our $333.   So just by making some discretionary adjustments, we’ve got $433 we can put either into savings or toward paying things off.

Let’s look back at those credit cards.   If you’ll remember, Bob and Sue had a total of $9,282 in credit card debt.

• Card 1: Balance $2,743 @ 21% APR, current minimum payment $109
• Card 2: Balance $566 @ 30% APR, current minimum payment $23
• Card 3: Balance $1,396 @ 28% APR, current minimum payment, $56
• Card 4: Balance $4,587 @ 25% APR, current minimum payment, $184

Let’s rearrange these based on balance.

• Card 2: Balance $566 @ 30% APR, current minimum payment $23
• Card 3: Balance $1,396 @ 28% APR, current minimum payment, $56
• Card 1: Balance $2,743 @ 21% APR, current minimum payment $109
• Card 4: Balance $4,587 @ 25% APR, current minimum payment, $184

Those are some really nasty interest rates.  The current minimum payments on these cards is $372.  That’s already included in our budget of $3092.  What we have to decide is how much of that $433 is going toward paying things off and how much of it is going to go into savings.  Now, it goes without saying that Bob and Sue have made a pact to cut up these cards and not add to their balances.  They’re turning over a new leaf in 2009, remember?  There’s a temptation, of course, to put all of that $433 toward the debt.  It’s a real strain and has been very much stressing the Spendthrifts out.  But if they do that and something happens, and they’re stuck without a contingency fund, then they’re right back to where they started.  So what about putting all of that $433 into savings?  That would add up pretty quickly each month.  Well, yes, but those interest rates…the minimum payments are going to take forever to pay off even the smallest card they have.  So my advice?  40/60.  Place 40% of the leftovers into savings (that’s $173.20–we’ll round to $175 for a nice even number) and put 60% toward the debt (that’s $258).  So Bob and Sue are going to add $258 to the $23 minimum payment on Card 2.  And at that rate, they should be able to pay that card off in 2-3 months.  Once it’s gone, they’re going to take that $23 minimum and the $258 of extra and add it to the $56 minimum payment on Card 3.  You can see the pattern here.  It’s going to be a snowball effect.  And with each month that passes, they keep putting that $175 into savings.

Also into savings, they’re putting the monthly amounts for their annual expenses.  Remember those?

• Car insurance ($1200 every six months, approximately $200 a month) [there is a significant savings to paying all at once instead of monthly]
• Car tag ($600 for both vehicles)
• Car maintenance (oil changes, tire rotations, etc.) (approx. $400 a year)
• Christmas and other gifts throughout the year (approx. $600)

It’s important not to forget to save for them so that they don’t pop up and derail the budget.

And perhaps the most important thing to remember when writing a budget–nothing is set in stone.  You have to create something you can live with .  Budgets are always adjustable.  But be realistic about what your needs are vs. your wants.

Okay, sorry for the delay in posting.  I’ve been tied up with stuff for the last few days. If you’re just now joining us, take a moment to go check out Part 1 , Part 2 , Part 3, and Part 4 of the series.

Here’s the part where I write out a sample budget for Bob and Sue Spendthrift

Here’s our sample list of necessary expenditures per month:

• mortgage ($700)
• electric/water ($100)
• student loan ($118)
• car note ($281)
• phone/internet ($160)
• satellite ($45)

That’s a total of $1404 a month in recurring expenses.  Of course with the utilities, that’s an average of what things cost, so that value could go up or down, depending on time of the year. Now we begin adding in the things that don’t have a bill that comes in the mail.  Remember, we’re using our Part 1 homework to figure out how much we spent on this in the last month (again, these are sample figures)

• Gas for car ($200 for household)
• Groceries/household supplies ($500)
• Entertainment ($100)
• Dining out ($120)

That’s another $920 per month.
And then, of course the not monthly, but must be remembered expenses:

• Car insurance ($1200 every six months, approximately $200 a month) [there is a significant savings to paying all at once instead of monthly]
• Car tag ($600 for both vehicles)
• Car maintenance (oil changes, tire rotations, etc.) (approx. $400 a year)
• Christmas and other gifts throughout the year (approx. $600)

That’s another $4000 in annual expenses.  Which works out to about $333 a month, but remember that a lot of these don’t have monthly payment options, so you have to save for them.

And now for the credit cards.  Let’s say our fictional couple have 4 credit cards.  Two for Bob and two for Sue.  (I estimated the minimum payments required at 4% of the existing balance–some cards presently require less than that at closer to 2%)

• Card 1: Balance $2,743 @ 21% APR, current minimum payment $109
• Card 2: Balance $566 @ 30% APR, current minimum payment $23
• Card 3: Balance $1,396 @ 28% APR, current minimum payment, $56
• Card 4: Balance $4,587 @ 25% APR, current minimum payment, $184

The Spendthrifts have a whopping $ 9,282 in unsecured debt.  We’re not even thinking about the $83k left to pay on their house or the $ 15,732 they still owe on Sue’s car.  These cards currently require $372 in minimum payments, but with those huge interest rates, they’re not going to get them paid off any time soon.

So where does this leave the Spendthrifts?  Looking at monthly totals alone, not counting saving for a contingency fund, they have a total of $3029 a month.

The bad news?  Bob and Sue only make $3200 a month, combined.  That means that with their current lifestyle, they only have $171 a month left to cover unexpected expenses, savings, and paying off their debts.

What are Bob and Sue to do?  Well, you’ll have to tune back in to find out. 

Sorry I missed posting yesterday.  I was away at a staff retreat for work.

If you’re just tuning in, please check out Part 1 and Part 2 of my Write A Better Budget series.

So we’ve talked about the absolute necessitites.  For the most part you don’t have too much control over these.  Well, you can work to reduce your energy and water consumption to lower utility bills, and/or move to a lower rent place, but for the purposes of our discussion here, let’s leave those alone.

I’m betting that in your absolute necessty list, you forgot to write down things like groceries/household and gas.  This is where your Part 1 homework is going to come in handy.  You’ve spent a month charting all your expenses.  Add up both of those categories to see how much you spend monthly on groceries and on gas.  These are both unavoidable expenditures.  You have to eat and you have to get to work.  Have you added those into your absolutely necessary column and deducted it from your monthly income?  Okay good.

Now what’s left?   Your credit card bills and discretionary purchases.  Now in an ideal world, you would pay off your credit card balance monthly and never carry what’s called a revolving balance (that is, you balance fluctuates from month to month, based on interest rates, purchases, and payments).  The credit card companies would never get a dime off you in interest.  But as the credit card companies are sitting like fat kitties who got the canary, lots of people don’t do this.  You’re going to get to that point.  For now, we’re talking about budgeting.  You have a limited amount of income and a big chunk of it is designated to stuff you can’t avoid.  How much do you have to put toward debt?

I want you to take all your credit card bills and lay them out in order of interest rate–highest to lowest.  If you’ve got some balances that are substantially bigger than others, then it may be more beneficial to lay them out in order of lowest to highest balance.   With luck you can afford to pay minimums on all of them and put some extra toward that card with the lowest balance.  Once you get that one paid off and closed, you’re going to take the amount you were paying per month toward that card on the card with the next highest balance and so on in a snowball effect.  If you don’t have enough to cover all the minimums, check out this post about being your own credit counselor . (FYI, if you do go the route of credit counseling, be sure to pick one that is accredited by the National Federation of Credit Counselors–NFCC.org ).  Anyway, figure out what your total of minimum payments are and how much you are able to devote to payment above and beyond that.  That’s your budget for credit card payments.  This does, of course, assume that you cease to use those credit cards.

Tune in tomorrow for the other things you should remember to budget for.

For those of you just tuning in to this portion of our program, please review Part 1 of our series on writing a better budget.  It’s all about doing your homework and analyzing your current spending patterns.  You have to know where you’re spending to figure out where you have to spend and where you can cut back.

Have you done your homework?  Good.  Now I want you to sit down with that month’s worth of bills, your ledger detailing where you spent every penny, a calculator, and a good notepad and pen.

Now I want you to take those bills and make two piles.  The first pile is absolutely necessary things.  This includes things like mortgage/rent (if you’re a renter, you probably don’t have a bill, but write out your monthly rent on a slip of paper and add it to the pile), utilities, car insurance (this may or may not be a monthly bill–if it’s quarterly or every six months, don’t forget to add it), health insurance (if it isn’t already deducted from your paycheck), and monthly statements for any other loans such as auto loans or student loans.  What’s left should be credit card bills and any other form of unsecured debt (that is debt that isn’t tied to an asset like your car–which if absolutely necessary they could repossess or you could sell to help satisfy the debt).  Now add up your monthly expenses in the absolutely necessary pile (for utilities, it might be beneficial to have several months’ worth of bills to add and average to determine an appropriate value).  Whatever your total is in this column, this is how much you have to spend, minimum.  Now take your monthly income and deduct that pile one total.  The remainder is what’s going to have to be split between your remaining debts, savings, and discretionary purchases (that is, stuff you choose to spend money on, not stuff you have to have).

Tomorrow I’m going to talk about how you’re going to decide how much goes where.  Please stay tuned.

Sorry I didn’t get around to posting yesterday.  I was taking a much needed day off from–well, everything.  I posted my resolutions in various places where they were relevant.  It’s a popular thing to do–make resolutions…even though most of us don’t keep them.  I don’t want you to make resolutions this year.  Why?  Well, resolutions are these grand things that are often difficult to measure and attain.  I’m more interested in seeing you set goals.  What’s the difference?  Well, a goal is something that is specific and measurable.  A goal is something you can build a plan around, and I’m really big on plans.  If 2008 was a Year of Debt for you, then go ahead and mentally think of 2009 as the Year of Change.  Because getting out of debt calls for changing behaviors and changing attitudes.

One of the number one reasons that most of America is in debt is that we have this massive sense of entitlement.  We’re brainwashed by advertising and peer pressure and keeping up with the Joneses (who the heck are the Joneses anyway?) that we all have a God-given right to the American dream and everything that goes along with it–whether we can afford it or not.  Instead of focusing on the things that we have to be grateful for, we focus on what we lack, what we want.  And sooner or later, we give in to those wants (notice I said wants, not needs) and go into debt to get them.  This is not the way to live, people.

So here we are at the beginning of a brand new year.  Think of this as your clean slate.  Whatever crappy money habits you’ve had in the past, this is the year you are going to change them.  This is the time to think about what your financial goals are for 2009.  Here are mine:

• Pay off the last of DH’s stupid debt. One card left.
• Continue to put away $25 per paycheck into savings, plus 10% of any bonuses or windfalls.
• Revise and stick to a new budget.
• On a weekly basis, use my money management program to track expenses (this helps with that whole budget thing).  Quicken and Microsoft Money are good, but of course they cost money.  On a freeware side, I like AceMoney Lite .  It’s just a basic, straightforward accounting program that allows you to enter stuff just like you do in your check ledger (you’re keeping one of those, right?), as well as categorizing expenses to track where your money is going.
• Put $5 a check away toward the 2009 Christmas budget.

See?  All of these are very measurable goals.

What are your financial goals for 2009?  If budgeting is on your horizon, check back here.  I’m going to continue my Build a Better Budget series next week.

Well, I’m back from my trip.  I had intended to continue posting on inexpensive Christmas ideas, but that’s not really what’s on my mind tonight.  I’m thinking of debt–as I am usually thinking of debt and all its costs.  You see, you lose so much more than money and interest with debt, particularly in a marriage or relationship in which one party is responsible for the accrual of debt and one has to pay the price.  And pay.  And pay.  The debtor makes promises to change his/her behavior.  And maybe they do for a while.  It becomes easy to slip into trust again because it is natural to want to trust the ones we love.  But that same atmosphere of trust makes it easy to be blind.  Over the years, this has happened a number of times to me.  I love my husband and I want to trust him.  And not only is it an issue of trust, it’s a matter of really, truly not being able to understand the mindset that leads to that kind of debt.  Student debt, mortgages, car loans–these I understand.  Not the rest.  And that’s where debt can become every bit as corrosive and dangerous and hurtful as other addictions like alcoholism or drug use.

Even if the offending party does make the necessary changes–does, truly and honestly stop that behavior, it’s so so hard to deal with.  You may reach a point where trust is built again–only to have it shatter each month when the bills arrive and they aren’t shrinking at a reasonable rate.  I know it makes me want to vomit each time one of the “stupid debt” bills comes in the mail.  Bills with interest rates up to 30%.  Where so little of the payment you can afford actually goes toward paying down the principle. For someone like me, who finds the whole situation so abhorrant, my heart breaks again every month.  It’s exhausting.

To those of you in my shoes, I want you to know, you’re not alone.  There are always others out there in your shoes.  If you need someone to talk to about the strain, you talk to a friend, a pastor.  You can email me.  Support is always there if you need it.

To those of you in the debtor’s shoes, I just want you to think about what effect your behavior has on your loved ones.  And think about what it may cost you other than enormous amounts of interest.  It just might cost you your relationship.

A lot of people will tell you about how to write a budget all in one big long post.  I’m going to break it down because writing a budget–a realistic, good budget, takes some homework and effort.  If you’re one of those people who doesn’t write any of your purchases down, you’re really probably going to struggle with this.  But I promise you, the effort is going to pay off in lots of ways when you’re finished.

Your homework:

For the next 30 days (yep, that’s what I said, a full month–they say you need to repeat something for 3 weeks before it starts to become a habit), I want you to do these things:

1. Keep a small notebook with you at all times.  Any time you spend anything, be it cash, credit, debit, or check, I want you to write it down.  Write down how much you spent, on what, and make a notation of how you paid for it (cash, credit, etc.).
2. Keep all your receipts, no matter how small.  Have an envelope in your purse or wherever is convenient for you.   When you get a receipt for something, stuff it in therefor the 30 days.
3. Keep all your bills.  A lot of people habitually pay a bill, then toss the statement.  This is a bad habit.  We want to break that.  So save all of your bills for those 30 days.

At the end of the 30 days, I want you to come back here, and I’m going to tell you what to do with all this paperwork.  We’re going to analyze your spending habits and talk about where you can make some adjustments.

I guarantee you, you’re going to be surprised where a lot of your money goes. Writing everything down is one of the things that separate savers from spenders.  Savers are much more aware of where ever penny they spend goes.  The goal of this exercise is to turn you from a spender into a saver!

I know, I know, Halloween is barely past, why am I already talking about Christmas?  Sue me.  My neighbors put up their Christmas lights yesterday, so despite my questioning of their relative sanity, I’ve had Christmas on my mind.  I think I saw Christmas themed displays in stores before Halloween was past.  Retailers are already gearing up for the holiday rush, bombarding you with messages from all sides that you must buy buy buy.  When Accuradio launched their Holiday channels last month, I turned it on for about 10 minutes and practically broke out into cold sweats. See, holidays always stress me out.  I come from and married into a family that goes overboard at Christmas.

I have a number of objections to this. 

First, we have a large number of people on both sides of our family and frankly, I just can’t think of gifts to give to all of them.  I hate giving un-thoughtful gifts.  I used to be one of those people who did all my planning and Christmas shopping throughout the year, so that by the time Thanksgiving rolled around, I was already finished.  This is a good plan if you can stick to it, and it’s much easier on the budget to spread such purchases out over the year.  But for some reason, I’ve just not been any good at carrying this out during my adult life.

Next, there’s the annual fight over the Christmas budget with my husband.  He’s got this enormous, generous heart and loves finding great gifts for people.  However, our bank accounts never match the totals of what he wants to spend on people (which is part of where some of his stupid debt came from).  So every year we go rounds about how much we’re going to spend total, make the list of who we’re giving gifts to, and what an appropriate present is.  I am a big fan of hand made and home baked (= thoughtful, cheap, appreciated).  He’s more of a flashy, electronics gizmo kind of guy.  He’s gotten better over the years, but this year, as I face the writing of the Christmas budget with absolutely zero thoughts on what to get anybody (I mean, seriously, the only thing I can think of is that my mother in law needs a new can opener), I have decided that I have had enough.  Shipping costs have gone through the roof, whether you’re ordering gifts or mailing them to family who don’t live nearby.  The cost of everything has gone through the roof. Frankly, we don’t have the money to spend a lot on anybody, even immediate family this Christmas.

Now I want to ask you something.  Can you remember everything you got for Christmas last year?  

If you’re like most people, unless you got something absolutely outstanding or that you use all the time, you probably don’t.  You probably don’t have room for any more generic stuff in your house.  You’ve got closets full of gifts that you haven’t regifted or been able to “legally” get rid of yet because the requisite few years haven’t passed since it was given to you and that person might stop by sometime.  You probably got things you didn’t want or need and you’ve been guilted into keeping them, allowing them to clutter up your space and your life.

You are not alone.

This is SO SO common.  We are so driven by the commercialization of the holiday that we buy each other stuff we don’t need or want with money we don’t have.

I say, stop the insanity!

My husband and I are calling up the entire family this weekend and proposing that we do a gift drawing.  Everybody’s name goes on a slip of paper in a hat and everybody draws one name.  That’s the only person they’ll get a gift for this year.  This holiday is going to be about family and food.  Instead of stressing out about what to buy for whom, we’re going to focus those energies on making something fantastic for the holiday dinner.  I’m thinking truffles for us.  And I always make homemade sourdough bread.  It is so much more important to focus on being together as a family than on the stuff.

Over the next few weeks between now and Christmas, I am going to be doing a series of posts on ways to reduce your holiday expenditures, including Christmas crafts, recipes, homemade gift ideas and more.  So be sure to check back for updates!

To say that I am teed off right now does not begin to cover it.  We got our car insurance renewal notice today.  There was a jump of more than $800 a year.  So I called the company up to find out what in God’s name was going on.  They had run my driving record and found 2 speeding tickets, one from this past summer, one from the year before.  And they were appending $400+ for each 6 month period to our premium for the next 35 months.

OMG.  That means that in addition to the cost of the tickets themselves (about $300), we’re getting socked with $2500 over the next three years.  All because of my tiny bladder (because, yeah, the only reason I was speeding is because I desperately had to pee–did the cops care? No.).  They did update our level of education achieved, which saved us about $200 a year (so take home message here–always call to check and see if they have other discounts available), but faced with an $800 increase, that’s just a drop in the bucket.   I am beyond horrified.  If I’d stopped on the side of the road and peed and gotten arrested for indecent exposure, it would have been cheaper and wouldn’t have affected our insurance.

Note to readers:  Have you ever heard that if you write your check to pay your ticket for some small, odd amount over the value of the ticket, that it will get stuck in their accounts because it won’t balance and hence won’t make it on your record?  Yeah, that doesn’t work.  Not anymore now that everything’s moving to computerized.

So the next time you’re late somewhere or need to pee or whatever and you’re thinking it’ll just be a $100-$200 ticket, remember that that isn’t the only price you’ll be paying.  Even if we manage to find cheaper insurance elsewhere, those two tickets are still going to be an issue, so we’re screwed either way.  That’s $800 that should have gone toward paying off our other debts, but no.  It has to get funneled to obscenely priced insurance.  (I won’t get started on how insurance is such a racket but you can’t really live without it because as soon as you’re not covered something catastrophic is going to happen.)

So yeah, when you think of speeding–just…don’t do it.   Because you’ll pay and pay and pay…