You and Money

Buying gifts and giving them feels good. Its great to see the look in a friend or family member’s eyes when they open something they really like. But if that look is going to give you indigestion when the credit card bill comes, you spent too much. The financial aspect of gift giving is rarely discussed but as important as getting the perfect gift (which we will discuss in an upcoming post).

OK, so your girlfriend saw a piece of jewelry she absolutely loves and her birthday is coming. What do you do? Before you plop down your credit card in the heat of the moment and buy it for her, its good to think about three things:

How Much Can You Afford for Buying Gifts?

Money for buying gifts really should be in your budget, especially if you are someone who tends to be a gift giver. It would be something you put money aside for so you have it when you need it. This is especially true for the end-of-the-year holidays when most of us buy lots of gifts at one time. However, its a good idea to also put money aside for times when you might buy more expensive gifts like birthdays, anniversaries, and engagement rings. A good time for a guy to start saving for an engagement ring is as soon as he meets a girl he may want to spend the rest of his life with. The time to buy the engagement ring is when he has save enough to cover the cost of it.

If a gift is not (yet) in your budget, take a few minutes to determine how much disposable income you have. Disposable income is money that is not earmarked for necessary things like rent/mortgage, bills, insurance, food and so on. It’s the money you’d have left at the end of the month if your bought nothing extra. It could also be money you have saved, but not for something else.

How Much Does the Gift Cost?

This is always a consideration. Can you get it for a better price somewhere else? Is it the best quality for the money. I don’t mean you can never buy a gift on the spur of the moment, but be mindful of your disposable income. The cost of a gift is not just the price. It’s the price in relation to the want or need and the quality. Weigh how much something is really wanted and how much and how long it will provide joy relative to the cost and your ability to pay for it. This may sound heartless, but also evaluate how much it will be appreciated by the person receiving it. All other things being equal, why spend the money on someone who takes it for granted?

How Are You Going to Pay for It?

Sure. Pay for it by credit card if you can easily pay it off in total when the card comes. Points or cash back are good. However, if you choose to pay by credit card and can NOT pay it off in total, you are paying a LOT extra for the convenience. If you do use the card and can’t pay it right off, be sure you are prepared to pay the huge interest. Do it only if you know that you can pay it off within 3 months. If not, don’t get the gift.

Someone who wants you in debt isn’t your friend (or love). Anyone who likes or loves you based on what you give them isn’t worth your affection. Buying friends or lovers wont make you feel good about yourself, especially if you are still paying off a gift after the person is no longer in your life. Find something less expensive, but thoughtful instead.

Wouldn’t it be great if all you had to do to take care of money would be to sit on it? Unfortunately its not quite (but really almost) that easy. Taking care of money has basically four steps. If you think about them whenever you do any thing that involves money, it will be easier to take care of it.  Obviously, this is just an overview and hundreds of books have been written on each of these steps, but knowing this part is a good place to start.

Step 1: Start Taking Care of Money by Planning

Money, in and of itself, has little value. Its just metal or paper. You cant eat it, drive it or wear it. Its value lies in what it can get for us.  What would you rather have than the money? Money means different things to different people and what matters to you may be completely different than what matters to me.

First identify what money can buy that matters most to you. Is it the ability to buy things, freedom from the fear of going without, security?  How much money do you need to have what it is you want?  What are the big things you want to save for or pay off: student loans- yours or your children’s, vacations, retirement, children, a home, a particular car? How much do you need to put aside for a rainy day (like if you get ill for a while, or lose your job, or decide to move to another state)?

LifeSkill Secrets reminds you that you can’t get there from here if you don’t know where there is and you don’t know where here is. So, how much do you need to save, or how much more do you need to make to save what you want to?

Step 2: Making It

You can’t take care of money it you don’t have it. We recently posted about budgeting: knowing how much you spend and how much you make. But if your income doesn’t cover your expenses there are only two things to do: Reduce expenses or increase income.

The best time to increase income is when you are young. You have more energy and (believe it or not) fewer calls on your income, so this is the best time to save. You might be able to reduce expenses by living with friends or at home. Most parents can get behind the idea of saving to pay off student loans or saving for a down payment on a future home. Just be sure you aren’t going out with friends 5 nights a week and blowing the savings in Margaritaville. In my generation it was easier to live independently right out of college than it is now, so explore your options. Better to live at home working 2 or 3 jobs at 22 or 26 than at 32 or 36, right?

Step 3: Saving It

Note that saving money comes BEFORE spending it. That is a basic rule for the care of money. You can’t save what you don’t have, and just as work will fill the time allotted for it, you will spend the money you have available. Figure out how much money you want to save and save it first. Its best if it goes right into a savings plan and/or savings account (depending on what you are saving for, how soon you need it and interest rates) before you even get your paycheck. It takes more discipline to do it once its in your hand, but you can do it if you know what you are saving for and it’s important TO YOU.

Step 4: Spending It

Care of money relies on some basic guidelines to spending money.  Keep in mind that money you spend is not money you can use for anything else, so if you fritter your money away on things that only have a C or D value to you (fancy coffee, doughnuts, drinks), you won’t have it to save or spend on the things that really matter to you.

Ask yourself these four questions before you purchase anything:

Do I really need this?

A lot of what we buy is bought on whim. When I want things on Amazon, I put them in my cart and think about them while I ask the other questions. At this moment I think I have 10 pages of Save for Later items, most of which I will never purchase. I may have thought I really needed them at the time, but on careful consideration realized I’d rather have the money for something else more than those items.

Do I already have this?

When I was a fashion designer I learned an important lesson from my mentor: “If you like it the first time you see it, you will probably like it every time after that”. She told me this in response to my shock that so many of the fabrics that I sampled in New York looked similar to each other. The point is, if you like a royal blue shirt with a certain pocket, you will like it the next time you see it.

If you follow these two LifeSkill Secrets principles, it will be easy to check to be sure you don’t already have it:

• keep all things of a kind together
• a place for everything and everything in its place

Be sure to check what you have and “shop” your closets before you go shopping or purchase more. I actually once bought two of the exact same blouse (not at the same time or in the same store) and didn’t even realize it til like a month later.

Where am I going to put it?

I go to art fairs a lot and love to buy beautiful artwork, but the reality is, my house has little usable wall space. If you don’t really have a place to put it, don’t buy it. Have an answer for yourself before you purchase. This leads into the next question.

What will I give up for it?

Any time you purchase anything, you are giving up something else. That new pair of shoes could be the cute dress you saw last week that you really liked. Or giving up on those special coffees could mean you buy your Mom a nice gift for her birthday.  Keep in mind that every purchase has 2 prices- the actual cost of the item, and what you can’t get if you buy it.

What will I give up for it is also an organizing question so your stuff doesn’t consume you.  If you have a place for it, do you have the space for it? This is especially true of clothes. My son, for example, practically collects graphic tees. Periodically he has to give some up to bring in more or there just wouldn’t be room in the closet. Its best if you eliminate the old when you put away the new, then cleaning out is not such a chore.

If you take care of money, how and where you spend it and save it, it will take care of you. Like most things, it takes some planning and will seem a bit awkward at first, but will soon become second nature.

Budget. It’s a word that has the same glamour as cleaning the toilet. But the truth is, having a personal budget is just as important. Knowing what you have, and what you need to do to get what you want, is incredibly liberating. Last time I suggested tracking your expenses and income so you know where you are. Here are the steps to refine the information to build a structure for moving forward.

4. Figure out how you can spend less

Even if your income covers all your expenses, the next exercise is important. If your income does not cover all your expenses, this part is critical.

The point is not to overwhelm or distress you. It is to put you in control of your money, so lets see how this personal budget thing can do that.
Seriously look at the list of all the things you spent money on during your tracking period. Now get real with yourself and determine which of those things really were necessary and which were not. Did you really have to have a specialty coffee 5 times a week, eat out for 12 meals, buy 4 new tops (3 of which you may never wear again)? The trick here is not to cut away to a point you cant stand to live, but to a point you can maintain.

So you know how much you made and how much you spent over a period of time. Great start.

Using the same form, create a yearly estimated budget in the EXPENSES EST page. Include all the things you spent money on in your tracking period as well as things you didn’t spend money on but that you know you will need to in the future, such as car maintenance, insurance, tuition, loan repayments, and so on. If you have big bills that come at certain times, put them in the month you pay them. I enter them in brackets [] until I actually pay them so I know they are coming. For example, I know that homeowner insurance is a bill that comes once a year in June. My real estate taxes are paid in March and August.

5. Identify what you need to save to accomplish goals

Here’s a fun part. Use columns X-Z for things you want to save for, like vacations, Christmas gifts, weddings, etc., as well as regular savings. Put the amount in the month it occurs or in December if you want to save all year for it. Notice that line 17 will take the yearly amount and divide it by 12. If you only have 4 months between now and a big payment, multiply the monthly payment by 3. (if you are good in Excel, go into the formula field next f_x at the top and change the 12 to the number of months you have to save for it: =W15/12 to say =W15/7)

Box AA17 on the Excel sheet will give you the total you need to make in a month. Probably more than you thought, right? Does your income cover this?

6.  Identify if you need to make more money

If your income does not cover the expenses, take a critical eye again at your expenses. Are there some things you could give up at least temporarily? Alter your budget as you find things to trim.

Once spending is cut as much as possible, the other way for income to cover expenses is to make more money. Many generations have worked more than one job at a time, and many have worked three. If you want to be in control of your life, you need to be in control of your money. One advantage to working a lot is that you have less time to spend money. If you really realize that certain things might mean working another job, you may be more willing to reconsider how important they really are to your life and happiness.

Also consider out-of-the-box solutions. If you live at home with your parents, with roommates, or are able to work in a disadvantaged area for a couple of years can you knock off a good portion of your student loans or save for the house you want? The reality is that most big wishes require some form of sacrifice, and that includes having financial control. Evaluate whether the big wish is yours or just one you inherited. Do you really want a big wedding more than the down payment on a home? Is a four year college the best solution for you or would you be better at a community college and transferring for the last 2 years to a state university?

The important word in your personal budget is PERSONAL. It should work for you and help you accomplish those things in life that matter to YOU.

OK, so seriously. Why Budget? One constant theme in LifeSkill Secrets is that you cant get where you want to go if you don’t know where you are now.  Building a budget starts with knowing where you are right now with money. Money is not the enemy. Its just a means to get you what you want from life, so its good to know your starting point. This budget overview will help you understand how knowing where you are with money and where you want to be will help you achieve your dreams.

Money In and Money Out

Basically there is money in (income) and money out (spending). You cant spend more than you have (in spite of what credit cards may lead you to believe).
The steps to your budget overview are:

1. Track and understand all money you have coming in (income)
2. Track and understand all money you have going out (spending)
3. In case of doubt, overestimate spending and underestimate income
4. Figure out how you can spend less
5. Identify what you need to save to accomplish goals
6. Identify if you need to make more money

1. Start by Knowing What Your Income Is

This is easiest if you have a regular job and make a salary, or even if you are paid hourly and usually work the same number of hours each week. It gets harder if your income varies. In any case, determine monthly income. If it varies, look at your deposits or pay stubs for the last month (or start now and pay attention and keep records for the next few months) and write down what you make after taxes. If your income varies a lot from month to month, try to determine what is the least it might be, the most it might be, and, if possible, any monthly variations. For example, is summer usually less income than the rest of the year? If so, by how much?

2. Know What You are Spending

At the same time, start keeping a record of all your expenses. Yes, I know. Its a pain, but you can’t start to know how much you need to make if you dont know what your basic expenses are. Start with the ‘have to pay’ things. For many, this is utilities like gas, electric, cell phone, rent or mortgage, insurance, cable and/or internet and so on. Click this link for an excel worksheet to get you started tracking expenses and income. (If you are concerned about viruses, scan it here at virustotal.com. This is a good resource to bookmark anyway to use any time you download something. Scan the file -up to 128MB – before you open it. I scanned this and it was free when I uploaded it, but you just never know.)

3. Basic Rule of Budgeting: Overestimate Outflow and Underestimate Income

Since the idea is to have enough to get to cover the expenses, always follow this rule so you dont come up short. IF your electric bill can be as high as $200 in the summer, plan on that. If your income can be less due to seasonal fluctuations, assume it will be the lowest amount.

Its also a good practice to determine when you have to pay which bills. I personally pay bills on the 1st and the 15th of each month. Its on my calendar. Anything that is due on the 6th to the 14th gets paid on the 1st and any bills due on the 20th to the 5th get paid on the 15th. I keep a notebook that has a page for each month showing the 1st at the top of the page and lists those that I pay on the fist, and halfway down has the 15th and the bills I pay then. That way I dont get caught if I dont get a bill or an email reminder, and I always have funds for automatic withdrawals. If I know I always pay the water bill on the 6th of the month, its listed on the first.By doing this regularly I know how much I need and when.

Next post I will explain what you do with all the information you are collecting.