Managing your Money

Chapter 3 Reducing Expenses

Just the act of counting the ins and outs of your money will likely reign in some unecessary expenses. Because everything is accounted for, showing your partner all of your Starbucks receipts may not be something you want to do... So, consumption may very well decrease significantly. Or, it may show up as MVM. If MVM goes up sharply, something may be amiss and a family chat in order.

Credit Cards - You don't need them. Or at least, you don't need to keep a balance on them. Ever. Period. If your income is insufficient to let you live the lifestyle you wish, you need more income or a plainer lifestyle, or both. If you're a student, get loans or grants or mooch from your family before going to plastic.

Credit cards give you access to instant "money" which you will have to repay at over 10% interest rates starting next month. Unless you are buying your food on plastic, you can wait a month for your new doodad. If you are buying food on plastic, you need serious help. Over the long-run, paying in cash at all times will save you thousands of dollars.

Coupons - Coupons are your friends. Clip them, collect them and use them. If possible, never buy a food item without coupons if it's not already on sale. Supermarkets often sell items at below-cost prices to attract customers. Buy those. Leave the high-margin stuff alone. Go to a number of stores to maximise the use of your coupons and notice how different stores make money on different items. Buy only the goods that are truly cheap.

Sales, Special Offers and Freebies - Get all the free stuff you can. Never buy items unless they are on sale. There's always a sale for anything you want if you can wait a short time.

Buy Used - Some used goods can be really good. Baby clothes should all be bought used as they'll be useless in a few months anyway. Electronics get upgraded so quickly that only the richest can keep up. Buy used computers at reputable stores and keep them until they break. Then "upgrade" to the next model. Computers should not cost more than 150-200 US$/year.

Share - Carpool to work. Once you're done with your children's clothes, keep them and give them to a family member. Take any old children's clothes that are in good shape and still semi-fashionable that your relatives and friends have to offer. The same goes for strollers and baby seats.

Reuse and recycle - Old clothes can become rags. Milk containers can become cutting boards. Misprinted material can become fax paper.

Conserve - Energy prices are increasing. Walk more. Use your bicycle to cut fuel costs. Use a fan instead of the air conditioning. Put on sweaters instead of turning up the heating. Always turn off the lights when you leave a room. Get a library card instead of watching tv.

Re-gift - Got a gift you don't need? Give it to someone else instead of throwing it away.

E-mail - Use e-mail rather than the phone to keep in touch with relatives and friends... Especially overseas ones.

Cheap Fun - Try out cheaper entertainment. Instead of going out to a restaurant, why not a pic-nic? It'll be much cheaper and healthier. Only go to the movies on cheap night, at the cheap theatre. Try renting movies instead or use NetFlix' service to rent unlimited DVD's for a fixed monthly price. You may not even need to buy cable! Bicycle rides are cheaper than drives. Home parties are better than going to the bar with your friends.

Grow your food - Try growing whatever comestibles will grow in your environment. Having a spice garden can be a cheap, low-maintenance way to save on spices. Grow your fruits and vegetables.

Junk food - Junk food is almost always overpriced. Try to cut down. Make your own junk-food such as 'smores or cakes and cookies.

Chapter 4 The Revised Budget

Now that you've thought about how to cut your expenses, it's time to get to it! Some expenses of course are fixed and so cannot be easily cut. In the example below, rental fees are exhorbitant but reducing them would entail moving elsewhere... Not a realistic solution. So, what can be cut? Food, ET and the phone bill look like prime targets. Another important one to hit is MVM as it usually represents items which you can do without... after all, you don't remember buying them! Utilities and gasoline are already quite low, so don't need to be taken care of. Gradual cuts may be better than taking out 50% of one item in one fell stroke and suffering through the entire month, only to face the uncontrollable urge to splurge on that item next month. Perhaps cuts of 10% a month would be easier to bear.

Hey, not bad! You have shaved 50$ from your budget. That's a great start. Continue doing this every month until you feel you are living *too* cheaply and yearn for a better life. Then, loosen up a little... just a little! Just enough to feel the difference between extreme poverty and the point where you enjoy life again. So, enjoy life, but on the cheap side!

Chapter 5 Dealing with Debt

OK, so now you are living cheaper and as a result have some extra money left-over from your immediate survival-based monthly expenses. Time to slay the Debt Monster... or is it?

One important decision to make is where to allocate the extra 50$ you made. Will it go to pay down debt or will it go to savings?

Money has momentum. This is why the rich get richer and the poor get poorer. Money's momentum is exponential as a result of compounding interest.

If you have 100$ of savings at a 10% interest rate, it will not take 10 years to grow to 200$. It will take 7.2 years.

Likewise, if you have 100$ of debt at a 10% interest rate, you will owe 200$ in 7.2 years if you don't repay your debts. Only repaying the interest will keep you in poverty for ever.

We arrive at these numbers using the "72 Rule", which is simply to divide 72 by the percentage of interest you have to see how many years it will take to double your capital. So, debt at 12% will double in only 6 years. Credit card companies get rich by having you pay only the minimum on your card. A future chapter will deal exclusively with credit cards but let us just say that the minimum payments are designed to keep you indebted (and thus paying) forever.

So, money that has to go to repay debt is money that is not working towards making you richer. To decide whether to repay debt or invest, consider the rates on both propositions.

If you can invest your money safely (ie: NOT stocks, options, commodities, baseball cards or other 'risky' investments) at a higher interest rate than your debts, you might consider investing the money and using the spread between the money you make and the money you lose to pay your debts. (This is the idea behind margin, which we will get to in time.)

For example, if you can make 5% interest on 100$ using a safe investment which you understand but your 100$ debt rises at a rate of 12%, you are better paying your debts before worrying about investing. You will "save" 7$/year by paying your debts rather than investing.

If, as in the 1980's, you had interest on a 100$ 5 year CD at 12%, investing in that safe vehicule might have been better than paying down the 100$ debt owed to your mom and dad at 5%. In this case, your spread would be 7$/year. In this case, that's REAL money in your pocket which you can then put down on debt or again on investment.

In today's low rate, high stock PE's and potentially inflationary environment, finding a safe investment that will return more than the interest rates of your debt will be challenging to say the least. It may then be far better to simply pay down your debt and make sure that it doesn't come back anytime soon.

How do you pay down debt? - Firstly, you need to itemize your debt. Make a list of all of your debt and the rates on each type of debt. This should include credit cards, mortgages, student loans, money owed to your parents, car loans etc.

To put this into perspective, 700$ of total debt will generate 68$ of extra debt per year. Nearly a 10% average rate!

Not all debt is equal - Some of the debt in this example has little momentum and some has tremendous momentum! When you decide where to put your 50$, pay off the minimums on everything to keep up your credit score. After paying the minimums, put EVERYTHING on the highest rate debt, the DIC card at 28% in this case. Deal with it item by item, as you slowly get out of the debt pit.

Don't add to your debt! - Just as important as getting rid of the highest rate debt first, so is not adding more fuel to the fire at your feet. Stop using your cards! If you can't pay for it in cash, you cannot afford it (today). Wait until it's on sale or until you accumulate enough cash to pay for it, or better, both! Basically, if you have a mountain of debt, you got here by living above your means and as long as you continue to do so, the mountain of debt will not shrink and disapear. You will be a slave to your debt forever.

Again, kill the debt one bit at a time and don't let it grow back. Burn your cards if you have to.

Chapter 6 Dealing with Credit Cards

How many credit cards do you have? If you answered more than "one", then think, why is that? If it's because one card is for airline points, fine. Otherwise, wouldn't it simplify your life to cut down on the plastic?

You may also note that different cards have different rates... consolidating debt is an effective way to reduce it. Bring all the debt you can onto the low-rate card. Destroy the debt on the high-rate cards ASAP.

Lower your current rate by calling the credit card company and simply asking them for a lower rate. If you make your minimum payments on time, you may well have success.

For some, it may be possible to transfer your credit card debt into a second mortgage at better rates than the cards. (Providing that you own your house.)

Stop using the cards! Use a budget to live according to your means.

Chapter 7 Savings vs Investing and the Nature of Money

OK, now thanks to your budget reductions, you've eliminated your debt, or at least brought it down to levels where you can envision saving some money! Congratulations!

Savings are basically moneys put aside so that it can be used to buy something later. Investing, however is buying an asset in the hopes of making some money from it. These are two very different concepts! It's important to realise the difference. Savings are moneys not spent. Investing is spending.

That being said, your house is not a source of savings! Nor are your stocks, nor your bonds, nor your baseball cards.

Savings are money. Ok, so what's money?

According to the U.S. Constitution, money shall only be silver and gold. So there you have it: Money is silver and gold. Nothing else.

Acutally, paper money was also gold until the gold window was closed in 1971. Before that point, one U.S. Dollar represented a fixed amount of gold which had to be physically held in the U.S. Reserves. The famous Fort Knox. So, paper money was, in effect, gold.

After the window closed, money became a fiat currency. Ie: not gold or silver.

So, what's the difference? - While paper money was still gold, the government couldn't print it at will. They needed to first acquire gold before printing money. This is the process that gave paper money meaning. Now that the gold standard is removed, money "floats". Governments can print as much money as they want but because money is weighed against other currencies, if one government prints too much money and floods the market with its dollars, the value of that currency will drop. This in turn will raise prices. Inflation.

So, what does that mean? - Basically, it means that paper-money savings are not risk-free. The nominal value of your bank accounts may go up, but you may lose buying power over time. As an example, if you make 1$ from the interest on 100$ in your bank (yay!) but inflation goes up by 2% you did not gain any new purchasing power from the nominal 1$ gain in your account. You have in fact, LOST money.

Return to chapters 1 and 2
Needs and Wants - The Basic Budget

Personal Finance Solutions

---