The Dangers of Excess Frugality – Budgeting and Balanced Living

"Virtue, then, is a state of character concerned with choice, lying in a mean… Now it is a mean between two vices, that which depends on excess and that which depends on defect; and again it is a mean because the vices respectively fall short of or exceed what is right in both passions and actions, while virtue both finds and chooses that which is intermediate." Aristotle, Nicomachean Ethics.

A Zen Garden

The dangers of excess frugality – The slippery slope of budgeting

The first steps in budgeting are usually a real eye opener. For the first time income and expanse are laid bare before our eyes more often than not resulting in surprise and disbelief as to the proportion of expense relative to income, the volume of different expenses and usually the inadequacy of income.

A little later on the potential hits. As with any new endeavor a significant portion of the benefit can be taken advantage on early on. Potential savings and sources of money leaks are easily identified and several quick and significant measures can be taken to materially improve the family's financials.

Newly discovered personal finance enthusiasm usually leads, then, to further interest and reading which in turn leads to discovering the power of finance and compound interest. The affects of saving early are empowering and goals are set to allocate a more significant portion of the budget to saving.

Frugality often follows. Each expenditure is carefully weighted and considered against the future alternative benefit which, when compounded over time, amounts to hefty sums. Considerations such as "This $1,000 vacation has an alternative cost of $1,800 in 10 years using a 6% interest rate" are not uncommon.

Retirement planning takes up more and more of one's time as a result. Thoughts of early retirement are fascinating with seemingly small sacrifices made on the way. Slowly but surely present time is replaced with imagery of retiring at 40.

Without noticing money becomes the object rather than the means. "I only need so and so much more and I'm settled". The present soon is sacrificed for the future.

Sacrificing the present for the future

The real danger of the slippery slope presented is sacrificing the present for the future. The American public as a whole is in no real danger of this happening and the future has already been sacrificing several times over on the altar of consumption. Still, many personal finance enthusiasts quickly find themselves torn apart when it comes to spending money.

Frugality, in its moderate form, is probably a good trait. However, any excess (or deficiency), as Aristotle had so eloquently put, lead us away from virtue. Virtue or sense, in this case as well as others, lies in the middle.

Excess frugality will usually results in forgetting our original goals altogether, abandoning them to the accumulation of wealth with no real purpose. The inheritance will surely benefit the next generation but our lives are ours to live, not to pass on (again, reasonably).

The problem with sacrificing the presence for the future is the unavoidable frustration. Any extreme behavior takes its toll on the person as well on the surroundings. Being happy in such circumstances isn't easy.

I should note I obviously do not suggest sacrificing the future for the present. I am only recommending a more balanced approach.

How to achieve Balance?

Balance will be represented, in this case, by the ratio of saving to consumption. In economics permanent income suggests a person wishes to average out his or her income over one's lifetime in such a way as to not consume to much in the present or, on the other hand, consume too little (by saving too much – There is such a thing).

The rule of thumb suggests middle class households should consume 75% of their income. The rest will serve as either an emergency fund for non-expected expanses and big planned expanses (which can be expected as I've elaborated on in Budgeting for unexpected expenses) or as long term savings (equally weighted).

If you're consuming less than 60% of your income or over 85% than an evaluation of income vs. expense is in order. Some circumstantial aspects obviously exist as dual income families with no kids would present higher levels of savings while others may present less available funds for savings.

Still, the rule of thumb serves as an indicator that something may be off. In higher income levels the ratio of saving out of income is obviously higher while in lower income levels saving money is something one can only dream of.

To some the idea of spending when you can save may sound careless. I argue the good mental health and happiness include the satisfaction of everyday needs. Stoic willpower may enable one to retire early but what of the years past? Usually the best years in life.

The illusion of having compounding interest working for you

There's a reason why the 30's are considered the consumption era in one's life. Investing in education, raising a family, buying a house and other significant financial obligations put a damper on any attempt to really save for the long run.

True enough, saving throughout 20's and 30's will result in compounding interest working for us but who of us has managed to save significantly without sacrificing our present? Amassing a considerable amount of money requires many concessions, maybe too many.

The illusion of saving early is frustrating since saving at such an age is extremely difficult. For one's good mental health savings should be balanced with consumption. The 40's and 50's are considered periods of wealth accumulation and will serve the purpose of amassing wealth as well (considering you are not intent on retiring at 40 – another illusion of you ask me).

A more balanced life and balanced goals will help achieve inner peace and acceptance that money is truly a means and not an end. This takes work and time. I suppose on cannot escape the slippery slope I've presented but understanding the need for balance early on will save considerable frustration and contribute to early happiness.

Related posts:

• Personal Finance Management: Budget vs. Net Worth
• Shortcuts to Early Retirement – Absurd Frugal Thinking or Common Financial Sense?
• Making Investment Decisions Together Helps Avoid Common Investment Mistakes
• How I Saved $2,000 by Being Creative and What Else Did I Discover
• How Can they Possibly Afford That? Or Is Money in the Eye of the Beholder?
• Outsourcing Our Chores - Do We Overvalue Our Spare Time?

Personal Finance Management: Budget vs. Net Worth

While it may be recommended to manage both a budget and net-worth sometimes focus leads to better results.

I've been keeping a detailed budget for over two years now. My budget served me mostly in tracking my family's expenditures and investments rather than in setting goals but I tried to "course correct" whenever I noticed exaggerated expenditures in any area.

Another aspect of my financial management is tracking my net worth. A budget can be considered more of a profit and loss statement while net worth could be considered the balance sheet of household finances.

Still, since I took my recent job, I had very little time to invest in my budgeting efforts (and writing, unfortunately) and I had to focus my efforts on what I considered most valuable in terms of personal finance management.

My main consideration where the nature of my financial goals, the time and effort required and the marginal contribution I believed these tools had for me. The following discussion presents, in a concise manner the key considerations in net worth management and budget management.

Net worth management or budget management?

As any complex questions the answer is: it depends.

Personal finance management should complement one's lifestyle and financial goals. Considering my own led me to the conclusion net worth management is more suitable than budgeting (Still, had I the time I'd do both). Here are my considerations:

Personal finance management through budgeting is more of a short-term management focusing on specific goals, such as meeting one's financial abilities, paying off a credit card or short-term loan, regaining financial balance and generally meeting timely financial goals such as saving $1,000 a month, for example.

The key considerations for budget management are:

• Profit and loss management.
  
  
• Useful for achieving short term goals.
  
  
• Requires a significant time investment and management.
  
  
• Should be performed on a monthly basis, at the most.
  
  
• Budget management requires attentive analysis of the breakdown of expenses and creative thinking on how to lower them.
  
  
• Budget management keeps you focused on the savings side, leading to penny pinching and frugality which are good tools for savings as they have a cumulative impact.
  
  
• Budget management without goal setting is simply tracking expenses with no corrective action.

Personal finance management in terms of net worth is more long-term management focusing on major life goals such as retirement, children savings, portfolio management and others.

The key considerations for net worth management are:

• Balance sheet management – Capital as a function of assets and liabilities.
  
  
• Useful for achieving medium and long term goals.
  
  
• Requires little maintenance but significant time in portfolio management.
  
  
• Net worth requires tracking various balances of assets and liabilities on a timely basis - bank balance, deposits, investment portfolio, value of a house on one side and mortgage, loans and other liabilities on the other.
  
  
• Net worth management is focused on the long term on or growth of capital through investments. Net worth management may ignore the short term and does not aid in managing a budget – Just the bottom line of money saved at each period.
  
  
• As with budget, net worth management without goal setting is simply tracking various balances.
  
  
• Net worth management can be performed on a quarterly basis. Shorter periods may lead to frustration as funds and investments take time to grow.

My conclusion

While many recommend financial management which looks at both the short term and long term I believe that one may distract you of the other. For me, time invested in budgeting meant less time to invest in portfolio management and analysis.

Managing net worth when trying to meet a budget and repay loans may very well end in frustration seeing net worth on the negative side of the balance sheet.

Related Posts:

• Making Investment Decisions Together Helps Avoid Common Investment Mistakes
• How I Saved $2,000 by Being Creative and What Else Did I Discover
• How Can they Possibly Afford That? Or Is Money in the Eye of the Beholder?
• Outsourcing Our Chores - Do We Overvalue Our Spare Time?
• On the Psychological Effects of Ownership and Overpricing
• Budgeting As a Family Activity

Image by: OneBlackBird

Shortcuts to Early Retirement – Absurd Frugal Thinking or Common Financial Sense?

Permanent income gone astray

The past week has been exceptionally long. I've managed to work 42.5 hours in just three days. Since I found this particular project very interesting it hardly felt like work was robbing me of my spare time. I often dislike working long hours as it simply seems like the days are glued together, endlessly working through the week.

Something else was different this time around as well. I've been accustomed to a global salary which remains the same no matter how many hours one invests. These are naturally higher salaries but they weaken the link between office hours and salary and often cause frustration, especially when your colleagues always seem to be relatively underworked and overpaid.

Getting paid for overtime is fantastic in that aspect. Even though I'm well into my 14th hour at the office on any given day my "reward" is directly linked to the time invested.

Since I spend considerable time pondering personal finance in general I started thinking about overtime from a financial-philosophical perspective. Thankfully, we've currently got our hands full of work. Each and everyone who wishes to get more done are quickly assigned another project and another. Many of those who wish for more spare time are often assigned more and more as well.

My financial-philosophical line of thinking quickly led me to a hopeful yet somewhat disturbing conclusion. Walk with me through this simple line of thought: Each extra hour of overtime I put in is quickly translated to a higher salary at the end of the month. Now, since we are currently able to save a portion of our income each month an additional hour of overtime would simply increase our savings by that amount directly.

Now comes the hopeful yet disturbing part. Since we all know the power of compounding interest each hour of overtime is quickly translated to 2.5-3 hours of early retirement 20 years from now! (compounded using a modest 4.5% return for 20 years). Assuming approximately 1,800 work hours a year, all I have to do to retry a year early is to work 2 more hours every day for 3 years.

The more I work today, the higher the compounding effect so I might as well go for 4 hours a day, right? That's where the disturbing part kicks in. Mortgaging the present for future's sake is a part of extreme financial frugal thinking.

The basic economic logic behind this line of thought is called permanent income and states an individual wishes to smooth income over the course of one's life. When earning more one will save more to compensate for a potential future in which less income would be available (such as retirement).

But there is more to this line of thought than permanent income. Philosophers often disprove arguments by giving absurd examples which the argument supports. This technique is called Reductio ad absurdum and it is very fun to use.

If we continue with this line of thinking than every vacation we postpone will compound and be worth so much more in the future (far future). Every expense we avoid can be saved and left to compound for eternity. There's more to life than compounding, isn't there?

We financial people tend to see everything in terms of present and future value, interest rates, returns and capital. It seems we forgot to enjoy life as it is. The assumption early retirement will bring us some great joy is dubious at best. If ever, many retirees I've talked to have distinctly pointed out they miss work and meaning. I do believe I will be able to find meaning in retirement as well but I think I'll avoid thinking about overtime as a shortcut for early retirement for now.

Related posts:

• Making Investment Decisions Together Helps Avoid Common Investment Mistakes
• How I Saved $2,000 by Being Creative and What Else Did I Discover
• How Can they Possibly Afford That? Or Is Money in the Eye of the Beholder?
• Outsourcing Our Chores - Do We Overvalue Our Spare Time?
• On the Psychological Effects of Ownership and Overpricing
• Budgeting As a Family Activity

Image by: anguskirk

How I Saved $2,000 by Being Creative and What Else Did I Discover

The before and after pictures of my latest experiment are attached but there was so much more to the process.

The straw that broke this camel's back was a cream "oven painted" M.D.F bed and dresser priced at a whopping $2,400. We've been looking for a new bedroom for quite some time now but haven't really been able to find anything that suited our taste and was reasonably priced.

We've been looking for a relatively specific design and color which apparently are quite hard to find. Upon returning, yet again, to a couple of pricy "designer" furniture stores we finally stumbled on something minimal and acceptable in our eyes. Naturally it was priced like it was the last bedroom on earth.

I usually don’t mind paying a bit extra for quality and design. I have shared my view of frugality (or the extreme version of it) here at TPF (The Personal Financier) more than once and am usually far from being frugal (for good and bad). However, this time I was really upset by the obvious lack of value for money. A good design merits higher prices but proportionality is also very important. $2,400 for an M.D.F bed and dresser was a tad too much.

After a very short negotiation the sales person was willing to lower the price by $300. Needless to say that wasn't enough. On the way back the muse hit me on the head with a hammer. We had some time off this past week. Why not put it to good use with some old fashioned manual labor? There's nothing really wrong with the bed we have. Why not try and suit it to our needs?

If you've been reading TPF for a while now you must have read my post on Doing It Yourself Doesn't Always Pay - A Short Lesson Learned Yet Again. Well, apparently I had forgotten the lesson yet again and had set out on a quest to paint our bed myself.

I boldly marched into a hardware store and spent $70 on paint and supplies. If this works, I thought to myself, I just saved close to $2,000.

And much to my surprise it actually worked. I couldn't believe my eyes; the bed we've been looking for has been under our nose this entire time. It's potential waiting to be revealed. All it took was one coat of primer, a 15 hour wait, two coats of paint and one night spent sleeping on the floor. An adventure if you will.

There's something deeper to this whole experience aside to saving money, which is always great. It appears I've missed manual labor (a bit). There's something about creating, transforming and building that is important to the human soul. Papers and computers don't simply fail to fill that gap.

It's really amazing how our consciousness if molded by what we do. Being able to perform a very simple thing like painting a bed really altered the way I look at things. Maybe I don't need a new dining table after all?

As for the argument on the cost of lost or spent time for this effort see my post on Outsourcing Our Chores - Do We Overvalue Our Spare Time? There's isn't really a price for every spare hour we have. Even if there is I still think $2,000 is a pretty good price for two days work.

How Can they Possibly Afford That? Or Is Money in the Eye of the Beholder?

Do we all see the same color of blue?


Each passing day bring with it small new understandings into human nature and even bigger new puzzles. Ever since I remember myself I’ve had the good fortune of ranking in the top 10th percentile. Whether in SAT’s or GMAT or in terms of household income I’ve always found we averaged somewhere on the border between the 9th and 10th percentiles.

Still, ever since I remember myself we never had a brand new car or never ate in fancy restaurants aside for birthdays. Even now, when I’m relatively well off after having bought an apartment and finished renovating it, I couldn’t manage a new car on our household paychecks alone (it’d take us about 3 years of savings to get to a new car right now).

I often find myself amazed at the number of SUV’s, 4x4’s, BMW’s, Mercedes, Porsche and what not driving casually around almost taunting me with their sparkling new look. A new car is not in my list of top 10 desires but serves as a good metaphor.

It doesn’t end with cars. All around people are living in new homes, wearing top brand clothing, dine in fancy restaurant, and take expensive vacations and many other luxuries I simply can’t afford.

I realized two things this passing week which I have yet to understand in a conscious matter up until now.


The perception of money (or lack of) varies greatly


As a kid I used to wonder if everybody sees the same color of blue I do. I still don’t have the answer of course but the principle remains unchanged through life. Perception varies from person to person.

The feeling of insufficiency I feel when I save $500 a month may be a completely other feeling in other people. I’ve known people who simply couldn’t handle a positive balance on their account and had to go buy something. For them words like emergency funds and long term savings are completely strange. Aside from what savings they have embedded in they pay they simple ignore the concept of saving all together. Everything will turn out for the best is their lead motto.

My wife and I have managed to save $7,500 in an emergency fund in the past year. With the upcoming Jewish holidays in October nearly all my colleagues at work have arranged vacations and will literally leave the office empty through October. I had deliberated in length whether to go on a three week vacation with my wife or not. Such a vacation would most certainly eat away our entire emergency fund.

I’ve discussed the matter with friends at work. Nearly all of them didn’t even think about leaving the money just hanging there. I’ve often mentioned my dislike for extreme frugality and I constantly wonder whether I’m missing out on life just because I love money so much.

There’s a deterministic factor at play here. My parents have never been frugal about anything and belong to the first type of people I’ve mentioned above which simply enjoy their money. I’ve developed a taste for growing positive balances in my different accounts and act accordingly.

I could have been driving a new car right now paying 20% more through monthly installments but the overall utility I’d gain would be negative. The pleasure I’d get from driving a new BMW would be dwarfed by the feeling I’d have repaying the loan. It’s just how I am.


There aren’t as many people living the good life as we are led to believe


Perception isn’t only heterogeneous. It’s also biased. There really aren’t as many people living the good life as we are led to believe by both our brain and advertisements.

Human nature, in what seems to be a remarkably ingenious ploy of nature, leads us to always aspire to more than we already have. Naturally we look up to things rather than down. We will always notice a new shiny object we don’t have. We will forever look up to a passing by Porsche until we own one.

The other side of it is never realizing what we already have. We accumulate and gain much but we never bother to look at the more shabby cars driving by admiring our own. Again determinism comes to play: It’s just the way we’re built.

Advertisers do their best to make us think we’re missing out on something and we’d better tag along. Everyday couples (especially young couple in their 20’s and 30’s) are portrayed in situations some of us can only dream of. How can they possible afford it, you ask? They can’t. It’s staged. They’re just selling one more can of cola.

The dilemma of whether to save or consume is genuine. Group pressure doesn’t make it any easier. Still, the rough times ahead make the decision a bit easier. I feel more a bit more secured and reassured knowing we’ve got three full months of unemployment budgeted for.

I’d like to dedicate this post to one of my favorite personal finance blogs and to a mentor I’ve one-sidedly adopted: The Digerati Life. I’ve learned much on proper writing from reading the practical, extensive and exhaustive posts of The Digerati Life. Not many people truly appreciate the professional effort required to produce such quality posts.

Related posts:

• Coming To Terms with Never Getting Rich – A Look at the Pre-Requirements


• Working Weekends - Free Professions Have Become an Ironic Oxymoron


• This Time of the Month


• Outsourcing Our Chores - Do We Overvalue Our Spare Time?

Image by: drumsnwhistles

Coming To Terms with Never Getting Rich – A Look at the Pre-Requirements

What If I just don’t have what it takes to get rich?

I simply don’t have it. It being the elusive trait self made rich people have. Whether it is simply daring, risk ignorance, animalistic instincts or just a plain good old entrepreneurial spirit I simply don’t have it and I’m starting to think I never will.

I’m not talking about simply being successful which it no small feat in itself. I’m talking about getting truly rich, several millions of dollars worth kind of rich. It seems like some people are just born with the right set of traits combined with a bit of luck and make it big.

It shouldn’t be that hard. Many rich people aren’t as smart as me and aren’t as talented. Why can’t I make a small fortune then? What is it that I lack?

I’ve given quite some thought to the matter and come up with several key traits and circumstances which one needs in order to get rich. I believe the following are essential to getting truly rich and they carry a price, as anything in life does.

#1 Hunger

Many self made rich people describe their childhood as less than ideal. Many tell stories of poverty and lack of means. Many rich people developed a sort of hunger that grew from a lack of means or a need to prove something. Paradoxically enough, the better the childhood you had, and the lack of “traumas” you had to face the less you have to prove as an adult and as a result chances are you are pretty comfortable in your upper/middle class social standing. I haven’t developed any real hunger for anything other than for money that will serve for a comfortable retirement at 40.
This hunger serves as a driver for going and getting. Without something to prove, why bother with all the hard work?

#2 Entrepreneurial Spirit

Some people are born entrepreneurs. We all know a friend of a friend who owns one coffee shop here, two apartments there and a small start-up company elsewhere. These people can’t really live any other sort of life without great frustration. Entrepreneurs usually keep on going forever, long after they’ve already ripped great financial success. It’s their nature.
Serial entrepreneurs are very common in the High-Tech industries, in real-estate and everywhere really. They always initiate, think of new ideas and somehow have a god given talent of starting anew.

#3 People skills

There’s no success without people. They buy, sell, manage, work and we’re totally dependent on them. Humans are social animals and without good people skills not much can be achieved. The current networking trend or plain old connections serve as success multipliers. Sometimes a good word or a friendly introduction can open doors to huge opportunities. In the end, it’s all about people.

#4 Risk “Ignorance”

For the lack of a better term risk ignorance is what I name the ability to take risks without being intimidated by them. It may even be more extreme. They may ignore risks at all. Thinking about risks limits our actions. Any rational person considers his actions before taking them usually weighing the risks and benefits.

If you’re like me you’re very risk averse and will probably never mortgage your house to finance any business endeavor, for example. Risk and return are tightly bound, as we know, and therefore chances of getting really rich are slim to none since a sacrifice is required.

#5 Luck

The other necessary side to risk ignorance is a healthy dose of good luck. Rich people stories are naturally success biased. We almost never hear of people trying and failing since it doesn’t sound as glorious.

We are fed success stories and naturally value our chances at success much higher than they really are. Risk, by definition carries a certain chance of success and a certain chance of failing. The stories that do get to us are of the people who already proved to be lucky in one or more business adventures.


It’s Better to Try and Fail Than to Have Never Tried At All ...

I hold quite a deterministic point of view. Philosophically wise it makes sense to me. Still, there is no better way to get to know oneself than actually trying. It doesn’t have to be a big bang try which will end up with heavy personal cost. Any small initiative might succeed (like this tiny little blog of mine which in my standards is doing quite well).

From my personal experience there are only a few experiences quite as empowering as making $100 dollars on your own, without the grace of an employer.

I’m coming to terms with never getting really rich. Becoming more successful is something I aspire to and work hard for but still, I almost know I’ll never be able to look at my balance and see a 7 figure, not to mention 8 figure number shining brightly back at me.


Related Posts:

• Outsourcing Our Chores - Do We Overvalue Our Spare Time?
  


• Extreme Risk Aversion Paradoxically Leads to Another Huge Risk
  

Image by: noahwesley

This Time of the Month

Our net-worth hopefully takes a small spike up at each month start

The start of each month holds both a sort of thrill and desperation. We manage each month trying to meet our goals, pay our debts and grow our net-worth as much as we can.

My budget excel chart eagerly waits its monthly update, its graphs shimmering with anticipation. I take great joy in our budgeting process. I can’t say if it is as a result of my constant dealing with budgets, finance and money or just an obsessive compulsive behavior. A bit of both I reckon.

The passage of time receives yet another meaning, waiting for wealth to accumulate, slower than the growth of trees. I don’t really believe true wealth can accumulate in one lifetime of solid salaries. It’s just too slow and the numbers are too small.

Still, comfortable living and early retirements are not just fantasies for the majority of hard working people. It is a pity many of our better years are spent in our workplace but there is challenge and growth to be had at work as well.

The secret is obviously to avoid constantly checking our balances and portfolios. A watched pot never boils and a watched portfolio never “compounds”. Short term thinking and planning have always plagued man kind but during the past couple of decades have worsened due to us getting used to instant gratifications.

The months do go by pretty fast eventually, the budget history grows bigger and more detailed and our net worth grows, however slowly. I sometimes have a difficult time reminding myself money is a means to an end and not an end in itself as we’re always taught the power of compounding works only in long periods of saving.

We do have a life to live and it is important to remember. I’m very far from frugal and I believe money should serve us. I do have goals and I try to meet them, sometimes avoiding or postponing what I don’t necessarily need at any given moment.

Hopefully the start of this month finds you all well. Please feel free to share.

Image by: hounddiggity

Outsourcing Our Chores - Do We Overvalue Our Spare Time?

Outsourcing chores to free up more spare time is a good idea but more often than not laziness is the real reason while the spare time just generates more expenses

I just finished cleaning my house. I try my best to thoroughly clean it at least once a week. There’s something about starting the weekend with a fresh, clean home which I greatly enjoy.
Having started working over 50 hours a week, as of late, I find the weekend to be the only time left for tending my personal affairs. Sometimes I wonder whether I should be “spending” the time cleaning by myself.

Many of my friends pay for housekeeping services which mostly include cleaning and maintenance. Cleaning takes, on average, 3-4 hours for a small apartment (like ours) and it’s needed 3-4 times a week. A quick multiplication amounts to paying hired help for 9-16 hours each month.

Outsourcing Chores is an Industry

It doesn’t end there though. Apparently many of the people I know value their spare time so much they’ve found paying for other such services worthwhile. Chores take up a significant amount of our spare time and it’s truly a delight handing them away.

• Eating out - Many of us have already outsourced food, at least a couple of lunches every week. Buying groceries and cooking takes some time and it much easier eating out. The time saved adds-up quickly, think of the time saved on grocery shopping, cooking, cleaning the dishes, packing a lunch and getting up 10 minutes earlier every morning…
  
  
• Laundry – A relatively new initiative, at least in our neighborhood. Pack up your dirty clothes and send them away. They return fresh, scented and folded. Again, the time saved is very significant.
  
  
• Ironing – A whole other successful initiative is outsourcing ironing. This back-aching and frustrating endeavor which I never get done right. For a decent amount of money you can have your shirts and pants ironed to perfection and delivered to you as well.
  
  
• Shopping for groceries online – I’ve recently wrote a post on the many merits of shopping for groceries online. We obviously pay for them extra.

The Subjective Math

Still, my wife and I are set in our old ways and refuse to “outsource” our chores. We both try our best to limit eating out to twice a week at most (including lunches and dinners). We do our own laundry and ironing. We’ve tried shopping online but the produce wasn’t satisfactory and we clean our apartment on our own.

I can attribute our behavior to the education we got at home according to which no one should clean our mess. There’s something intimate, in my opinion, in chores but that’s not the reason we’re haven’t outsourced them. I believe many of us overvalue our spare time.

Many of us do a simple math trick. We calculate how much our working hours are worth and boldly make the claim our spare time is too precious to waste on chores. A very wrong conclusion, naturally, as the alternative “cost” to the time we spend on our chores is not work or income but spare time and leisure.

Valuating spare time is subjective and difficult but I do have the feeling we often overvalue it. As I’ve already mentioned I’ve recently started working for a different, private corporation. I’ve went from 40 hours a week (which was quite dull but enabled me to invest more time writing here, at The Personal Financier) to 50-60 hours work weeks. The difference is astounding as my spare time dramatically reduced.

Naturally, a scarce resource is worth more and I’ve considered the thought of outsourcing my chores to create more spare time. I must say I’m pretty convinced chores are a good use of my time, as paradoxically as it may sound.

Working 12 hours a day leaves me at least 3-4 hours to myself (Riding my scooter from work to my home takes about 10 minutes – Consider this as a great alternative to create more spare time).

It’s more than enough to get two posts done a week, spend time with my family, catch up on news, exercise and read. The chores themselves take up 3-6 hours every weekend which I usually try to get over with when the weekend starts.

The financial comparison is pretty much straightforward and tilts the balance in the direction of performing our chores ourselves. The monthly expense required to outsource all our chores (a couple) is surely greater than $500, an under estimation I believe (without the cost of eating out).

• Ironing – $2 per business shirt and $3.5 per pants – At least $60-$80 a month and frees up 10 hours a month.
  
  
• Laundry – $0.75 per pound – At least $100-$150 a month and frees up 15 hours a month.
  
  
• Cleaning - $20 an hour – At least $300-$350 a month and frees up 15 hours a month.
  
  
• Eating out – A whole different game – anywhere from $500-$1,000 a month and frees up 25 hours a month.

The average cost of each spare hour is approximately $20 an hour.


End up shopping in your spare time?

There is another element to the comparison which is I believe is rarely considered. What do people do with so much spare time? My answer (and that of the western civilization as a whole): Shopping! Spare time? Let’s go to the mall, go to the movies, drive somewhere or just sit and watch TV. We need new ______ (choose: furniture, clothes, gadgets, games, etc… ). Spare time incurs more costs.

We’re not only paying to get more spare time but we spend more during our spare time. I truly believe our spare time is overvalued.

I also believe very few people really plan out their spare time rather than wasting it away idling somewhere. The main motivator behind outsourcing chores is probably laziness. It is important to note that I believe having a big family, with two kids and more, changes the basic premises. The time required to properly tend to several children is obviously much greater and changes considerations.

Still, I would carefully consider and balance everything before I go outsourcing my chores.

Related Posts:

• How Shopping for Groceries Online can save you Money As well As Time


• Saving Money and Time (while Reducing Pollution): Americans in Big Cities Discover Scooters


• Save Time and Money with These Tips for Organizing Your Personal and Financial Records


• 10 Tips on How to Make the Most of Time Spent In Traffic – How to Make More Time Post #4

Images by: Jana Christy

More than a Third of British Citizens are Only 11 Days Away from Financial Ruin: On The Importance of Good Financial Planning

How long could you last on $1,100?

A recent survey by the Yorkshire Building Society reported by the Daily Mail indicates 36% of British citizens could survive financially for only 11 days should a personal crisis occur such as losing a job or getting too ill to work.

Researchers examined income and expenditure patterns among British citizens and come to alarming conclusions. The survey indicates 36% of British citizens have less than 500 Pounds in savings to use as an emergency (Approx $1,100).

The current economic climate apparently leaves people with little choice regarding their financial conduct. More and more people are living on a “financial tightrope” as the Daily Mail puts it due to rising commodity levels and inflation and the growing impact of the current economic slowdown or recession.

The typical person, according to the survey, has 52 days before running out of financial resources. The average monthly expenditure of the average British citizen amounts to 1,445 pounds which are approx. $3,300.

Source: The Daily Mail

Many of the people surveyed indicated they will sell their home should a crisis occur. Relying on selling your home as a last resort is a very poor option as we’ve witnessed only recently. In a crisis real-estate prices tend to respond rather quickly plummeting down due to lack of demand.

In another recent survey by the ASEC Americans reported they saving habits and progress. According to the survey more than two-thirds (71%) report that they "have sufficient emergency savings to pay for unexpected expenses like car repairs or a doctor visit."


Good financial planning is about smoothing both consumption and living standards over one’s life

Solid financial planning aims to smooth consumption over a life time. As crisis come out of nowhere, annoyingly unannounced, good financial planning should utilize precautions to smooth out such a crisis as losing one’s job or becoming too ill to work. There are several tools which help smooth out such a crisis:

#1 Budget for the unexpected

Unexpected expenditures are a fact of life. Budgeting for these unforeseen expenditures each month is a great way of tackling them. Set aside 2%-3% of your entire budget for unexpected expenditures (aside from savings). This method has two distinct advantages: You won’t be surprised and hard pressed when you suddenly need a new car battery and more importantly should frequency and volume be surprisingly low you’ll be able to save that amount, increasing your emergency fund (step 2).The temptation to consume these funds is great. However, keep in mind that on average these expenses will occur eventually.

#2 Set up an Emergency Fund

Much has been said and written on emergency funds and their importance should be clear by now. It’s a method of expecting the unexpected and a very important pre-emptive measure towards more pressing times. Should nothing surprising happen you’ll have a healthy saving generating solid interest.

I believe an emergency fund should last for at least a couple of months of debt and mortgage payments as well as solid living. Everyone knows that decisions made under a lot of stress are usually bad decisions (I already addressed the faulty logic of selling your home as a last resort).Great articles on emergency funds can be found at The Digerati Life, The Simple Dollar and Get Rich Slowly.

#3 Get Insurance

Accidents, disability, mortality and longevity (surprising but true) all significantly or totally hinder our ability to maintain the level of comfort we have been used to. These events are unexpected in nature but have a certain probability of occurrence. Accidents and disability significantly change our lives, mortality is self-explaining and longevity has the risk of turning us into a liability on our children’s lives.

There is no real way to budget for these occurrences. What do we have left in our arsenal of pre-emptive measures? Insurance.

Insurance is basically transferring our specific risks to the community for a premium. For a certain premium which is carefully calculated according to the risk of a certain occurrence we can assure ourselves and our families a steady and good life even should the unfortunate happen. Disability Insurance, life insurance and retirement planning are all integral parts of planning for unexpected expenses in the “life” level.

All of the precautions and preemptive measures mentioned naturally cost money. That is what good financial planning is all about. Save when you’re able to finance possible hardships. Too many people live on a much higher level than they can actually afford. With an upcoming economic slowdown in Great Britain as well many people will unfortunately learn this lesson the hard way.

I believe its much easier compromising for 15% of your monthly income (that’s how much you need to put aside totally) than to face financial ruin.

Related Posts:

• Budgeting for Unexpected Expenses


• The Problem of Accounting and Budgeting For Cash Expenses


• How to Save Money by Analyzing Your Budget: 4 Basic Tools


• How to Make Saving More Rewarding and Tangible: 5 Practical Tips


• How to Save by Making Credit Card Payments More Real and Tangible: 5 Practical Tips

Images by: Phil Moore

How Shopping for Groceries Online can save you Money As well As Time

The advantages of shopping for groceries online significantly outweigh the disadvantages – 9 distinct money and time saving consideration

I personally dislike shopping for groceries. I usually have much better uses for my time than combing the length and breadth of a supermarket and standing in endless lines. I think every spare moment in my home is precious and shouldn’t be spent standing in line waiting for someone to decide whether she really wants that candy bar or why she was charged an additional 5c for something that used to cost a bit less.

Unfortunately shopping for groceries is a basic and essential need and activity which can’t be overlooked or neglected.

Although I truly try to avoid grocery shopping I do enjoy fresh fruit and vegetables, meats and cheese. I’ve been aware of the option of shopping for groceries online for some time now but I’ve also been worried about the quality of the products I’ll receive without choosing them myself. Obviously since I’m already shopping for those groceries there’s no point in paying higher prices online for boxed and stored goods and I buy those as well.

Recently I’ve been more and more interested in online grocery shopping as I’ve had enough of these endless journeys. I’ve decided on trying an online order a couple of times with high hopes of ridding myself of this annoyance without having to settle for stale and day old products.

Delivery days for my area are scheduled for Thursday, Friday and Monday and I’m very eager to give it a try. In the mean time, much like I always do, I sat down and tried to look at this experience from an economic and financial viewpoint. Online grocery prices are considered to be relatively higher and can amount to 15%-20% more than shopping at the supermarket itself. I came up with interesting results which just might justify paying higher prices for online grocery shopping.

The following are the main points I’ve given thought to regarding online grocery shopping. I’d love to hear more from your experiences with shopping online for groceries:

#1 See the total price of your shopping cart at any given moment

I think the number one advantage of shopping online is the ability to view the total cost of our purchase at any given moment. Think about how many times the total amount surprised you. “I just bought eggs, milk and a couple of more things… How did I get to $100!?” Sounds familiar?
With a total amount available at any given time you can really examine what you’re about to buy and maybe decide on settling for a cheaper brand this time.

#2 Really stick to your shopping list

Another distinct advantage is the ability to really stick to your original shopping list. You avoid the instant craving and sudden impulse and just pick what’s on your list.
In future purchases you’ve got your list all ready and you only need to make minor adjustments. What are the chances you’ll deviate from it and spend wildly on an attractive bottle of wine that just smiled to you from one of the isles?

#3 Check if you actually ran out of something

How many times have you asked yourself “did we run out of this and that?” and couldn’t remember. All you have to do is get up and take a peek at your refrigerator or pantry and find out. Avoiding unnecessary shopping might save significant amounts of money in the long term.

#4 Dramatically lower your exposure to supermarket marketing tricks

Much has been written on the cheap yet effective tricks supermarkets employ on us susceptive shoppers. I’ve written a post on cheap marketing tricks supermarkets employ and how to avoid overspending by being aware myself.

When you’re shopping from home you’re in a controlled environment unsusceptible to those tricks. I believe that save money. If those tricks hadn’t worked on us supermarkets wouldn’t employ them.


#5 Compare prices easily

No longer having to duck all the way down to the bottom shelf you can easily compare prices for similar products and save a bundle on good cheaper products.
In each session you can choose another niche to dig in to and buy cheaper products of the same quality thus lowering you grocery expenses on fixed basis.

#6 Add or remove items quickly and without hassle

Looking at the bottom line you suddenly decide to get rid of a certain product. Maybe you forgot something and you’re already in line. It’s very easy to add and more importantly remove products from your shopping cart when shopping on line.

#7 Get shopping done very quickly

By the third or fourth time I guess everyone has their own list of groceries to buy on a weekly basis. Log in, load the list, make minor adjustments and get exactly what you need. I’m guessing 30 minutes ought to be enough for the complete process.

#8 Choose the delivery time

Buy from work and have everything arrive 10 minutes after you get home, or maybe late at night if you’re insomniac. I believe this might also limit you a bit as you have to wait for the delivery sometimes but wouldn’t you have spent that time in the supermarket in the first place?

#9 Save on gas

With gas prices so high each 15 trip to the store is a waste of money. Shopping online helps us save on gas and car related expenses easily.

I’ll report back with my couple of first experiences and tell you how it’s been. I’m most worried about product quality and packaging. I do believe 15% higher prices just might be economically and financially sound as the advantages seem to outweigh the disadvantages significantly.

Related Posts:

• 10 Tips on How to Avoid Overspending In Supermarkets
• The Problem of Accounting and Budgeting For Cash Expenses

Images by: desiitaly, miss_jen

Budgeting As a Family Activity

Encouraging your family to take part in the budgeting process is crucial to its success

After a very short while budgeting actually becomes fun. You simply can’t wait to add up the numbers and see how you’re meeting your goal, how much money have you been able to save and how much debt you’ve been able to repay.

After another short period of time you begin visualizing you’re budget at every spending crossroad. You become dedicated and determined on meeting your goals at the price of postponing satisfactions and avoiding certain luxuries.

When the month ends you eagerly sum up expenses only to find your efforts have been foiled by seemingly uncooperative family members. “Don’t they know how hard I’ve been working to better our finances?” you ask yourself. Well, the most simple answer here, and the one I’ve obviously been aiming at, is no.

When we really take interest in something suddenly is seems the whole world revolves around that same thing. It’s a natural phenomenon as we now divert our attention to that specific issue. We, ourselves, are often surprised by the wealth of information and occurrences we hadn’t noticed before. Still, try to remember how it was before you read your first personal finance article. You were probably oblivious to this entire world. So will your family member be should you not include them in the process taking place.

Since our families play an integral part in our “family budget” the process of setting goals and budgeting must take place at a family level. Cooperation and mutual understanding are required for this process and way of life to succeed.

What are the necessary elements of any successful family process?

No change and no process can succeed in any organizational unit without the people that make up that unit. The same goes for families. Families are social structures made up of people.

Change in a family requires the same elements as any organizational unit to succeed. I believe the following draw a good outline of the required elements and atmosphere:

1. Cooperation – Without cooperation even the most gifted manager can’t succeed. We are always co-dependent on other people and on their cooperation.

2. Mutual Understanding – There’d be no cooperation with our mutual understanding. Each person has to understand the process and its general goals in order to identify with it and take part in it wholeheartedly.

3. Thoughtfulness – Especially true in families, thoughtfulness is most important and required for success. We must try our best to understand the need of the other members of the family without casting aside what might seem trivial to us. Lack of thoughtfulness will eventually cause the other members of the family to abandon the process and disregard it.

4. Compromise – An integral part of any process between more than one people is compromise. Conflicting needs and wishes need to be settled by mutual compromises. Compromise is a direct result of the points discussed above.

5. Positive Feedback – Often overlooked positive feedback is the one mean in which we acknowledge the other family members’ efforts and cooperation. Positive feedback is probably the best mean of education and reaffirmation and is so important I can’t stress it enough.

How to construct a family budget and goal setting process?

Having in mind the aforementioned elements we now incorporate them into a process of setting goals and creating a family budget. The process itself should include the following steps:

1. Laying the ground and creating the framework – The first step should include constructing a general budget outline and general ideas and goals. These will serve as a framework for the first family gathering in which the process will be initiated.

2. Discussing the process and the general mission – Acknowledging the importance of our family members, the second phase should include a detailed discussion of the process and a general, clear mission statement.

Explaining the process and its goals will create the required atmosphere for change. There’s always a place for allowing each family member to make suggestions and remark on what’s happening. Being heard is very important to us all. A process we can influence is usually process we’d like to be a part of more.

3. Discussing specific numbers and constraints – After the ground has been set it’s time to dive into the details. This will probably be one of the more difficult stages where each family member will try to protect their own as they might believe they are being criticized and scrutinized.

It is very important to keep an open and relaxed atmosphere and try to keep judgmental arguments to a minimum. It is also important to stress and point out our own little cost drivers and luxuries.

Another important part of this stage is to agree money has a limit. This is a powerful constraint that cannot be argued with. Use this as an anchor for the rest of the discussion.

Each expenditure will have to be analyzed in order to agree on a conclusion and a path towards goals.

4. Setting specific goals for the entire household and each family member – After agreeing on select expenditure and future plans and wishes goals need to be set.

Again, it is very important each family member has at least a couple of personal goals in order to become an integral part of the process.

Goals should be measureable and obtainable even if a bit ambitious.

5. Creating timely family meetings to review budget and goals – Timely reviews, such as monthly meeting to analyze the past month’s budget and performance have a key role in the entire process.

They serve both as course correction and as a constant reminder we’re not there yet. Positive feedback is encouraged throughout these meetings. These are also a place to constantly review the budget and maybe shift focus should sufficient progress has been made in a certain expenditure item.

6. Celebrating success and milestones – Often overlooked, celebrating milestones is encouraged in project management literature and in life as a whole. The process itself is never ending and it is very important to celebrate success in order to instill a sense of capability and reward.

I believe that every member of the household needs to be aware, in some level, of the financial planning of the family and contribute to achieving the family’s goals.

Image by: Chris Gin

Americans Report Their Savings Habits and Progress

A recent research by the ASEC sheds light on some very important statistics regarding Americans’ saving habits and progress

Americans have long been accused as saving too little while consuming too much. A recent survey by the ASEC has some intriguing results. Can you find yourself in the numbers?

I’ve extracted what seemed to me as the most interesting statistics from the report and I’ve divided them into groups. There’s a lot to learn from the following numbers. The most powerful conclusion I draw from this particular survey is the strong need for mass personal finance education the lack of which is responsible for what seems to be an innate inability to save.
Spreading the message of personal finance, budgeting and planning is essential to making real progress in American saving habits (naturally higher interest rates might help as well).

Saving Habits

• Half of all U.S. households report adequate savings progress.

• Nearly three-quarters of Americans (73%) report that they "spend less than their income and save the difference."

• Little more than half of them (53% of all respondents) say they save at least 5% of their income, and only 28% say that they save at least 10% of their income.

• More than two-thirds (71%) report that they "have sufficient emergency savings to pay for unexpected expenses like car repairs or a doctor visit."

A little reminder here, experts usually recommend saving at least 10% of your income on a regular basis. As far as the data goes it seems a quarter of all Americans have difficult time saving at all.

A more intriguing fact is that of half of the Americans who report adequate savings only 28% save at least 10% of their income. This conflict in data stresses the lack of personal finance education and a lack of understanding when it comes to the importance of saving.

Retirement Saving

• Only 57% of those not retired say they are saving enough for a retirement with a "desirable standard of living".

• An important reason for inadequate retirement savings is the failure or inability to "save for retirement at work through a 401(k) or other contributory plan," which only 55% of the non retired report having.

The crux lies in saving for retirement. Sadly, only 60% of Americans save enough for retirement to meet their desirable living standard. I don’t believe it’s a problem with the subjective definition of “desirable”. I truly believe people weren’t properly educated to plan for retirement.

Lack of contributory plans is an outrage. There are examples of other countries where a mandatory contributory plan was installed with minimal contributions. While these are not enough to properly retire they are a good start while always introducing retirement planning to the other 50% of the population.

Planning

• Only 62% of Americans have a "savings plan with specific goals".

• Only 49% have a "spending plan that allows you to save enough money to achieve the goals of your saving plan".

• Only 42% "save automatically through regular preauthorized transfers from checking to saving or investments".

• Only 41% "save a portion of tax refunds, gifts, bonuses, or other financial windfalls."

Needless to say having a sound plan with specific goals is the first step in saving. You need to have clear and specific goals that will motivate you to save and help you postpone instant gratifications with a clear view of what you’re aiming for in the future.

Windfalls such as tax refunds or bonuses are excellent saving surplus that will get you ever closer to the goals you’ve set. It’s a pity 59% of Americans quickly consume these funds.

Debt

• Only 21% say their consumer debt is “growing” or “remains at the same level.”

• More than three-quarters with mortgage loans (76%) say they "will pay off all mortgage debt before retirement."

"Hard data about savings behavior suggest that responses to several questions were buoyed by the personal optimism of respondents," said Stephen Brobeck, Consumer Federation of America Executive Director.

We need to be very careful in estimating our current financial situation and future financial prospects. Personal optimism and success oriented planning certainly have their place in life but we must make sure we’re not clueless once our plans don’t go as planned.

Income Differences and Saving Habits

The survey verifies what we all assume intuitively. High income households:

1) Save more
2) Are more aware of the importance of saving
3) Have adequately funded emergency funds
4) Have adequately funded retirement savings

The survey defined high income households as households with incomes of at least $75,000. Obviously these households can afford bigger savings but this is not the entire story. I believe the following statistics are no less important:

• 85% of the high-income group, but only 36% of the low-income group, report having a savings plan.

• 72% of the high-income group, but only 29% of the low-income group, report having a spending plan.

• Furthermore, members of the high-income group are much more likely than those in the low-income group to: know their net worth (72% vs. 38%), save automatically through checking transfers (54% vs. 28%), and save financial windfalls (55% vs. 30%).

It’s all about awareness and good financial education. Low income households are less exposed to good financial advice and the basic of financial planning. Knowing how to plan, budget and manage is crucial for financial success.

Hopefully this blog and many others of its kind will raise public awareness to the importance of personal finance and active management and control of our lives.

For the complete report

Related Posts:

• Budgeting for Unexpected Expenses
• The Problem of Accounting and Budgeting For Cash Expenses
• How to Save Money by Analyzing Your Budget: 4 Basic Tools
• How to Make Saving More Rewarding and Tangible: 5 Practical Tips
• How to Save by Making Credit Card Payments More Real and Tangible: 5 Practical Tips

Image by: s2photo

Budgeting for Unexpected Expenses

Unexpected expenses are just an expense with uncertainty attached

Unexpected expenses can really hinder your saving or debt repayment efforts. You have your budget carefully planned and meticulously detailed and thought out. Then, out of the blue, pops an annoying significant and unexpected expense and re-shuffles everything.

I’ll be arguing further along this post that all unexpected expenses are really expected costs with an attached element of uncertainty. This is a powerful claim which I believe to be true. Hopefully by the end of this post you will agree.

Not all unexpected expenses were created equal. I like to think of a hierarchy of unexpected expenses and in the following I will present my hierarchy of costs and how I budget and plan for these.

#1 “Is it Christmas already?” – Seasonal recurring expenses

When it comes to the first type of unexpected expenses, such as holiday presents for example, the case is clear. These are obviously expected costs which were not planned for. This usually happens in budgets that are planned as averages while ignoring seasonality, or peaks and lows in certain months.

Holidays are a good example since they usually happen, and even more surprisingly, they arrive at the same time every year. Humor aside, an occurrence with a probability of 100% cannot be titled “unexpected”.

Adjusting you budget to seasonal variability is a good idea which will help avoid sudden expenses which should have been planned for. Among seasonal expenses are:

• Holidays


• Annual or semiannual subscriptions of all sorts (magazines, health clubs etc.)


• Taxes, tolls and fees


• Insurance


• Travel and vacations


• Tuition


• Etc.

All of these should by no means surprise you as they are bound to happen and are easily incorporated in an annual adjusted budget. Average is a good tool but it should be used appropriately.

#2 “The neighbor’s son is getting married”, “The car’s broken again” or “The walls are leaking” – Surprises

Moving on we find some of the most annoying expenses of them all: a car malfunction, plumbing problems, dental care and more. These expenses will occur, the question is how often will these occur and how much will they cost?

Referring back to probability these expenses will occur at a certain probability, smaller than 100%. The probability of these unexpected expenses differs from person to person or family to family. Research shows the average annual spending on this sort of expenses is approximately $2,000 per family.Source: Mymoneyblog.com

There’s no sure way of estimating these costs. Only you know your own personal circumstances and your family. However, there are a couple of pre-emptive steps to take in order to expect the unexpected:

1. Budget for the unexpected – Since we foresee these expenses will eventually occur at a certain frequency and volume we can and should budget for them on a timely basis (I do it on monthly basis).This method has two distinct advantages: You won’t be surprised and hard pressed when you suddenly need a new car battery and more importantly should frequency and volume be surprisingly low you’ll be able to save that amount, increasing your emergency fund (step 2).

The temptation to consume these funds is great. However, keep in mind that on average these expenses will occur eventually.

2. Emergency Fund – There have been a lot of words written on emergency funds and their importance should be clear by now. It’s a method of expecting the unexpected and a very important pre-emptive measure towards more pressing times. Should nothing surprising happen you’ll have a healthy saving generating solid interest.Two great articles on emergency funds can be found at The Digerati Life and The Simple Dollar.

#3 “Can’t we postpone the birth for a couple of months?” – Life events

Life events tend to surprise us with their financial impact. Whether it is buying a house or having a baby we are often caught unaware and unprepared to handle the financial aspects of these life events.

The events themselves are usually planned and thought out but their meaning and significance hasn’t been all that clear while making the initial decisions.

Home buyers are always surprised by the deal costs. New parents are often awed when facing the harsh reality of how costly another family member is (wait till you have to get him or her through college and maybe help out with an apartment). This post by Moolanomy demonstrates this point beautifully (10 ways new parents overspend on their newborns).

These unexpected expenses are usually a result of relative ignorance and lack of proper research. There is a wealth of information available on line for all of us to research and use for our financial and life planning.

Taking the time to properly plan an annual and multi-year budget is crucial. This multi-year budget should take into account our life plans and events and should be used as an integral tool in our decisions making.

#4 Accidents, disability, mortality or longevity

The broadest and maybe most important type of unexpected expenses are the ones that impact our ability to generate income and support the ones depending on us.

Accidents, disability, mortality and longevity (surprising but true) all significantly or totally lower our ability to maintain the level of comfort we have been used to. These events are unexpected in nature but have a certain probability of occurrence. Accidents and disability significantly change our lives, mortality is self-explaining and longevity has the risk of turning us into a liability on our children’s lives.

There is no real way to budget for these occurrences. What do we have left in our arsenal of pre-emptive measures? Insurance.

Insurance is basically transferring our specific risks to the community for a premium. For a certain premium which is carefully calculated according to the risk of a certain occurrence we can assure ourselves and our families a steady and good life even should the unfortunate happen.
Disability Insurance, life insurance and retirement planning are all integral parts of planning for unexpected expenses in the “life” level.

Hopefully I was successful in my mission of explaining my view of unexpected costs. I’d be very happy to read your point of view and thoughts on the matter.

Image by: Pulpolux

The Problem of Accounting and Budgeting For Cash Expenses

Where did all that cash go ?

I’ve recently written two posts on payment methods or credit cards vs. cash. I argued that while cash payments help us avoid overspending credit card payments provide us with valuable and timely information for budget planning and review (Credit Cards or Cash: A Costly Tradeoff).

I also provided my tips and insights on how we can make credit card payments more tangible and real to help save us money (How to Save by Making Credit Card Payments More Real and Tangible: 5 Practical Tips).

There is, however, one remaining question which I’ve yet to find a successful solution to. How do we account, and budget in turn, for routine cash expenses?

We can’t avoid paying cash as part of our daily routines. The problem arises at the end of the month when I take a look at all my cash withdrawals and start scratching my head trying to remember where I spent all that money. These cash withdrawals, when summed up on a monthly basis can really amount to significant sums of money.

Aside from having spent those sums of money in the first place there’s the problem of accounting and budgeting for it. How will I be able to answer these questions?
1. How do I figure out my budget busters?
2. How much did I actually spend on eating out this month?
3. How will I know what my actual budget looks like?

The deviation in your budget’s numbers depends greatly on the percent of cash expenses out of your total expenses each month. The bigger the percent of cash spending the less the budget represents what is actually going on.

Our options for accounting and budgeting for cash expenses

What are our options and what are the possible solutions? I’ve narrowed the list down to the following:

#1 Lower your cash expenses

Naturally, the first solution would be to lower cash expenses and pay more with credit cards. A word of caution – paying with credit cards requires a much higher sense of awareness to spending and the realization credit cards are money as well (as I’ve discussed in detail here).

#2 Limit cash expenses to routine, specific expenses

Since cash payments are unavoidable narrowing and focusing them might work better. Most of my cash expenses pay for eating out and usually to buy small trinkets. This way, at the end of the month, I usually take all my cash expenses and assign them to “eating out” budget.

The extra cash spending makes eating out a bit bigger then in reality and helps me pressure myself into saving more on this particular budget item.

#3 Treat cash like it’s another expense

I’ve read about this method somewhere. The author recommended adding another budget item called, very conveniently, “cash expenses”.

There is a basic logic to this method. Adding cash expenses as a budget item makes into an expense which should be minimized. Since assigning cash expenses is often done in accurately we might as well plan and budget for it as just another expense.

#4 Keep tabs – My least favorite

I don’t know how but some people are able to keep tabs on cash expenses. If you’re able to do that, either with a pen and paper or an electronic wallet, you’ve got it made. Forget about credit cards and use cash only. You’ll both save and be able to track your expenses. I think it’s impossible to get it right, though.

Image by: marirs

Credit Cards or Cash: A Costly Tradeoff

Where do you stand in the tradeoff between cash and credit cards?

There’s an ongoing debate on the preferred and recommended method of payment for routine, everyday expenses and purchases. Is paying cash better, and more financially sound, than paying with credit cards? Maybe it should be the other way around with credit cards being a more convenient method of payment?

The trade off between cash and credit cards – It doesn’t end with convenience

Many people recommend handling a monthly expense budget on a cash-basis. This recommendation is sound as it essentially contains two important principles:

1. Increasing the tangibility of money – Cash spending is the most tangible form of spending. When we pay cash we see the money literally leaving our wallet and hand and watch it slowly moving away from us and into the seller’s register making harder to spend.

2. Following budget constraints – Cash just runs out. Credit doesn’t. When the cash we allowed for this month is over it’s over (forcing us to carefully reconsider expenses).

However, the problem arises when we try to account and budget for these expenses. Keeping track of the cash that leaves our wallet is hard and requires constant bookkeeping (either by hand or by an electronic wallet of some sort).

Unless we know exactly what we paid cash for we would have a very hard time keeping a monthly budget of our expenses and of their dispersion and behavior (more information on why we need to do that is detailed in this post “How to better analyze your budget”). This information is crucial to correct financial planning.

If we choose to pay with credit cards monthly statements will provide us with every detail we need to know about our purchases and expenses in a specific month. However, we would have an easier time both spending money and exceeding the budget we set ourselves.

Which means of payment is better: Cash or credit card?

I believe the answer, as many others, is not a definitive one. It depends greatly on the sort of person you are. The more disciplined you are the more I’d recommend using credit cards more often in order to have the best data available for budgetary planning and review.

Unfortunately, the less disciplined have a hard time here as well. Obviously using cash as the preferred payment method is recommended. Unfortunately, it carries a price. The data about expenses and purchases would most likely be unavailable as discipline is also required to keep manual track on all that cash.

I personally prefer credit cards as they are more convenient and provide us with the data we need. I believe that with small behavioral adjustments we can actually create a sort of tangibility to credit card payments as well. More on increasing the tangibility of credit card payments later this week.

Image by: Joe Shlabotnik

How to Break the Vicious Circle of Negative Cash Flow and Growing Debt

Understanding the vicious circle is the first step out of it

Chronic overdraft and debt is a widely spread illness. Chances are many of the household who suffer from it are caught in a vicious circle of negative cash flow and debt. Even more likely is the fact that they are unaware of their situation and of the behavioral pattern responsible for it.

The vicious circle

A vicious circle is comprised of an interlinked series of events or behaviors which constantly reinforce themselves through feedback towards greater instability. In household finances the classic vicious circle would like this:

The total negative cash flow of the household keeps getting bigger and bigger. The end is obviously and painfully clear.

Getting caught in such a vicious circle is terribly easy. Express loans, credit and other magical solutions are handy and available to everyone. These magical solutions obviously carry some of the highest interest rates known to man (other than loan sharks I guess) which bury us further in the circle. Financial awareness and education is unfortunately a lot less available and so many people find themselves stuck in such circles.

Getting out of a vicious circle is the tricky part. It will require painful concessions and, without a doubt, a sudden drop in your standards of living.

How to break the vicious circle and stop negative cash flow and growing debt

The strategy required to break a vicious circle should be clear. Attack one, or more preferably all, of its links. In the case of household debt and negative cash flow action should be taken on the following:

#1 Know where you stand - Awarness and acceptance

Find out how sizeable is your debt and how serious your negative cash flow is. By budgeting and concentrating all your financial data together with some hard work and the help of endless helpful posts from personal finance blogs around you will be able to draw these numbers. Getting professional financial assistance is always recommended but will cost additional money (I believe it’s worth it if it’s good counseling).

#2 Consolidate your debt - Immediate Action

Getting caught in a vicious circle usually means having multiple loans and credit lines. Consolidating your debt and setting a fixed monthly payment with a known period is very important to planning your way out of debt. Your monthly payment should be within your new budget (Step 2,3 have a lot in common).

#3 Adjust your standard of living to your income (don’t forget to include your debt payments) - Balance

The most important and maybe hardest step of all is to create a new, balanced, budget which will ensure you live what you earn. This is difficult in a world where consumption is the new god but you will also discover, as many of us have, that there is a lot more to life then consuming.

This post is about the bigger picture.More detailed guides, advice and how-to’s are available here, at The Personal Financier, and also at leading personal finance blogs which can be found in my blogroll and links section.

I especially recommend this guide by Trent Hamm from The Simple Dollar titled “31 days to fix your finances”.