Take a Step Back From the Edge

What would you do if your transmission went out tomorrow?  If your identity were stolen and your credit frozen, would you be taking the bus to work?  If your uncle offered to sell you his mint condition Ford Mustang for only $5,000, would you be able to come up with the cash?

We’re apt to take many of the great things in our life for granted, up to and including out income.  In our culture, it’s acceptable and a common practice to live right the edge of our income, spending 90, 100, or even 110 percent of our annual income each year.

100_0297 - Copy (isujazzdog@gmail.com)

A Valuable Heritage

But for centuries (maybe longer), wise people have practiced the discipline of saving money for a rainy day.  Because we don’t know the future, it is necessary to save an emergency fund to have the options and choices we want.

In today’s article we’ll outline what the emergency fund is, why it’s important, and what it’s to be used for.  If you’ll make the decision to adopt this important discipline, you’ll reap the great rewards that wise men and women have been enjoying throughout history.

What’s It For?

The purpose of the emergency fund is to cover expenses that may come that you can’t predict.  Anything you can predict should be included in your monthly budget.  When I first began budgeting, I was tapping my emergency fund every other month, but as we get better at predicting what’s coming, there are fewer times when we need to use the emergency fund at all.  The goal is to have a full emergency fund that is never ever used, but just sits there “just in case!”

Can you estimate how much you spent on car repairs last year?  Take that estimate divided by 12 and this is how much you should allocate each month toward car repairs.  So maybe you’ll allocate $100 to car repairs in your February budget, even if you don’t take the car in.  But if your check engine light goes on in February, you have $200 sitting there, all ready to pay the bill.

If It Can Be Predicted, Figure It Out

Similarly, let’s say you know you want to upgrade your car by $4000, six months from now.  Just divide it out and you’ll find that you need to save $667 per month.  Again, it’s predictable so include it in your budget, not the emergency fund.

Overcome the Little Kid Inside

The tough part is saying no to all the things we’d like to do until the emergency fund is complete, totaling three to six months of your household expenses.  But it’s worth it to have the security; when you really need it and you have the money sitting there, it takes a lot of stress out of the equation.

Spend It All

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Good Advice

Here’s a statement you might not expect from a financial expert:   you should spend all your money!  In fact, you should spend the entire month’s income, even before the month begins.  You should spend it on purpose, by creating your cashflow plan before the first of the month.

Now, some of your money should be spent into your savings account.  Some should be spent paying down debts.  Some should be spent by investing into your retirement.  But it should all be spent.  Your income needs to exactly zero with all expenses, including savings and investments.  Why?  Because it isn’t until you lay out all income for January with all expenses in January that you  can make educated decisions about how much to allocate to the various competing uses your money can have.

You’re in Control

The beauty of using a cashflow planning tool like ThriveWealthy is that it puts you more in control of how your money is spent!  Since you are now making educated decisisons and prioritizing the things you value as most important, you are actually able to achieve more, and enjoy some of the better things in life.  Why not give this great free tool a try today?

ThriveWealthy Cashflow Software

Driving Blindfolded, Looking in the Rear-view Mirror, or Looking Ahead

What would you think of a person who drove his 2013 Corvette convertible around while wearing a blindfold.  How about someone who kept his eyes glued to the rearview mirror as he blazed down the highway?  Would you think that person is nuts?  Would you consider that person dangerous?  Would you be surprised if I told you this is exactly the way most people operate a major aspect of their life?

nice car!

The illustration above is the way many people operate their finances.  Ask 10 of your friends and neighbors if they keep a budget and you’re likely find few who do so.  Of those who keep a budget, many do not truly have a budget (forward looking) so much as they have a spending tracker (backward looking).  You would never drive a vehicle this way, so why would you operate your finances this way?

Not that fun?

Ok, few people are delighted to sit down with a spreadsheet and map out their spending for the month.  Even fewer people like to say no to themselves and restrict their spending on superfluous items.  But, if you will give advance cashflow planning (budgeting) a chance, I promise that the rewards will be worth the small investment of time, and you may just save yourself from careening off the road!

Having Financial Agility

When you’re sitting down with all the information in front of you, you’re more apt to see roadblocks and curves in the road ahead.  You can look at your home improvement fund or your vacation fund and get a gauge foe whether it’s on track for the upcoming expenses.  This lead time allows you to respond to financial challenges earlier: for example, skipping meals out for a few weeks early in the month so you can afford to buy new tires for your car when they’re needed later in the month.

Taking Control

Rather than creating unpleasant restrictions, a budget like that recommended in our ThriveFit page actually makes your life easier and more hassle-free.  While your friends are busy worrying and hand-wringing about how they’ll pay for the medical bill they didn’t plan for, you’ll be peacefully executing your spending plan for the month.  Although planning ahead doesn’t create more money for you from thin air, when you get your spending under your control, it often feels like you’ve gotten a raise.  Anyway, what do you have to lose?  If you hate the feeling of being in control and looking in front of you instead of behind, you can always go back to the chaos method….  😉

Get Your Money’s Worth

Thinking of making a big purchase soon?  How can you get the best deal and have a great time, simultaneously?  Today we’ll explore a few best practices for buying big ticket items like a car or a new appliance, to ensure that your dollars work as hard for you as you worked to earn them!  🙂

Honda Magna

Use Your Own Money

The first step to any big purchase is saving up the money!  Obvious as this sounds, it is a rather uncommon practice today.  Many retailers make big money selling financing, and therefore market it heavily.  They don’t usually have a tough sell either, since by nature we tend to want the nice things now, and patience isn’t usually too fun!  But if you will slow down and consider it, I think you’ll realize that by nature debt reduces your options and inhibits your freedom.  There’s a reason that it feels so good to pay cash for things, and this is what wise and wealthy people do.  In fact, it’s habits like these that typically made the wealthy wealthy in the first place!  For more on that, check out “The Millionaire Next Door,” a great, fact-based book that will likely surprise you in more ways than one!

Narrow the Field

Once you’ve saved the money, your next step will be to determine what models and features are available to you in that price range.  If you’re looking at a car, for example, you can use resources like Craigslist and kbb.com to identify particular year/model/mileage combinations that are in the right range.

Taste and Sample!

Now comes the fun part—go looking!  Seek out at least three stores or individuals offering the model or models that you’re looking at.  Try out the features, and hone down your short list of models to the one you like best.  As you begin to settle on the particular item that’s best for you, take note of any optional features or upgrades.  In many cases, buying a higher-end model with extra features can offer more long-term value, but this is very dependent on what you’re buying.  (A quick aside, I’ve become convinced over the years that spending a little extra on leather seats for a vehicle is money very well spent!  Particularly if you have kids…  🙂

Fit and Price

After looking at the model you like at a few places, you’ll start to have a feel for what a good deal is.  Resist the urge to get in a hurry and instead remain calm as you seek for the ideal fit.  Once you’ve found a good price on your item, let the owner or salesman know that you’re thinking this item is a good fit.  I used to think that feigning disinterest in an item was a good way to get the seller to come down on price, but have learned from experience that this doesn’t work.  Instead, make the sales process into two steps.  First, decide if the item meets your needs/desires.  Once you’re convinced it does, let the seller know, but then go right into the price negotiation.  So, you might say something like, “This electric stove seems to be just what we’re looking for.  The price, however, does seem a little high.  How flexible are you on that figure?”  This is a useful tactic because it lets the seller know that there’s only one thing stopping you from buying the item:  price.

Have Fun and Be Creative

Now for the next fun part—price ping pong!  Let the seller make an offer, then counter with a lower one, have a good time (without insulting anyone).  Somewhere along the line, you’ll want to pull out your envelope of cash and start rifling through it.  I don’t care who you are—a stack of hundreds makes your eyes get bigger and your heart beat faster, and you can use this method to stir the seller into accepting a lower price.  If you’re starting to get close, a fun way to end the negotiation goes something like this:  “I’ll tell you what, I’ve got $4,700 right here.  Say the word and it’s yours.”

Sometimes, your man won’t be willing to come down as far as you’d like.  Don’t fall in love with a particular item and keep your walking away power—there are plenty other deals out there for you.  Or, if the price is still a bit higher that you’d like, but the particular item seems worth the extra, it’s ok to pay a little more than absolute bottom dollar.  Just have fun, keep your head, and enjoy the process!

Controlling the Little Kid Inside

Any time you turn on the TV, open a magazine, or walk down the street, you’ll find a plethora of advertisements for incredible products that you can’t live without.  While many of these products may well be amazing, if you lose control of yourself and let the little kid inside take over, you can end up with a home filled with some cool stuff and retirement and savings accounts filled only with IOUs.  Perhaps worse than that, you’ll find that your resources were unintentionally spent on things you value little, and those priorities that you want to value highly go wanting.  Today we’ll dive into the topic of prudent spending and offer a few suggestions on how to enjoy some of the nicer things in life now, while preserving your future and tempering buying with wisdom.

I Need a New One!

One of the starkest examples I’m aware of that illustrates this danger dramatically is the following story.  A man owns an older car that he had purchased years ago and maintained well.  One day, as he’s tuning through presets on his car’s radio, one of the buttons pops off.  “Well, I can get by with only four presets,” he thinks.  No big deal. A few days later, while setting his coffee cup in its usual place, he hears a loud “Crunch!” as the well-worn plastic cup holder finally gives way.  A week after that, he notices that his brakes start squeaking, and then grinding.

“That’s it, he exclaims, “I’m getting a new car!”  And off he goes to trade his $2,000 car in for a $15,000 brand new one, for which he’ll take out a loan.  Normally our man would know better than to do such a thing, since he’d read the TotalThriver post on the value of saving for large purchases.  But, he let that information drift far from his mind in this moment of weakness since, even though he didn’t have the money saved up yet, he HAD to do this because it was an “emergency.”

Upselling Yourself

Before we’re too hard on our reckless friend, we should recognize how easy it is to let yourself begin down this road, and then justify a higher and higher purchase price, ignoring the fact that you don’t have the money for any of this.  Our man did have a real problem.  His car radio, cup holder, and brakes all needed to be repaired.  Let’s even imagine that in this case, the total repair bill would have been high enough that putting such a large sum into an old car wouldn’t have been wise.  In this case, what our friend should have done was sold the car as-is.  Perhaps it would only bring $1500 because of the defects that he left unrepaired.  But here’s where our man went awry:  He thought to himself, (as we have all done one time or another), “well, since I’m getting another car anyway, I might as well get a nicer one while I’m at it…”  Though this isn’t necessarily a terrible sentiment, problems come when things go too far out of proportion.

A more prudent decision for our friend to would have been to spend $800 or so from his savings account to put with the $1500 that he received from the sale of the old car in order to purchase a $2300 vehicle.  Notice that this is an upgrade from the car he had before, and should definitely include functioning cup holders, a radio, and brakes.  Though a $2300 car isn’t as fun to drive as a $15,000 one, our man would have solved his problem while staying out of debt, thereby preserving his options.  By avoiding entering into a loan agreement, he will have more of his income available to replenish his emergency fund, and then begin his car savings fund.

I’ll Bet You Like Options

This brings us to the more pleasant side of the coin—enjoying the good things in life in a prudent way.  According to the revised plan outlined above, our friend is on the path toward a better car, without the risk and bondage of the debt that came with the “new car today option.” As he saves the money month by month, he can evaluate how important a premium car is to him.  He lives, as most of us do, with some limit on his available cash.  Because we have these limits, we must decide which things are most important to us, and conversely, which areas we will tolerate a lower-quality product.  What we often don’t realize is that when we sign up for a $15,000 loan on a new car, we’ve just locked ourselves into a high-quality vehicle and low-quality everything else—potentially even very important things like a future home, retirement savings, kids college, and many other aspects of our lifestyle.

The point is that by having the cash saved up, you have multiple options.  You can think about what areas you desire a quality product, and what areas you’ll tolerate something lesser.  Perhaps you want a really nice car and don’t care about eating at restaurants or buying expensive gifts for others.  Or perhaps you don’t mind driving an old car but you’ve got to have a new iPad and an unlimited data package.  For you ThirveFit members, perhaps your priority is high-quality weight equipment, supplements, and nutritional products, and you’ll put up with a five-year-old computer and TV without complaint.  Whatever your combination is, the important thing is that you find out who you are—what’s important to you—and then make sure to limit your big purchases in lower-priority areas.  Though this sounds obvious when put this way, it is so easy to find ourselves “ponying-up” for a great ______, (car, tv, washing machine, computer) when we can’t really afford it, and then later regretting having so much money tied up in that item.  The point isn’t that you can’t have nice things; it’s that we all must be vigilant to resist the “kid in the candy store” mentality ruling our every purchase.  We are wise to remember that money saved on a purchase today is money we’ll have available for those things we truly value.*

*Incidentally, this could be another purchase, or something even more valuable like giving to others or supporting spreading the Gospel.  But we’ll save that topic for another day!  🙂

What’s Important to You?

What would you think if I told you that you have two sets of priorities?  Or that you have two sets of values?  Perhaps you will deny it—“of course not!  I know what’s important to me, and my values are clearly sorted in my mind.”  Maybe so, if you’re like many people, your bank statement will demonstrate quite a disparity between the list of priorities in your head and the true priorities according to which you spend your money.

Your Treasure and Your Heart

Jesus taught this principle quite clearly in Matthew 6:21 when he said, “where your treasure is, there your heart will be also.”  For example, if I look at my bank statements and notice that I spend 5% of my household income on golf in an average month, this demonstrates that golf is important to me. Conversely, if I say, “international missions are very important to me,” yet none of my money is given to support international missions, I’ve demonstrated that my imagined priorities are quite different than my actual priorities.  Your treasure will go to that which your heart values.

An Eye-Opening Experience

Now, if you’re anything like me, the first time you sit down to look at where your treasure went, you will be very disappointed with yourself.  I remember the day, years ago, when I sat down to start getting my finances in order.  I first developed an imaginary budget, allocating something like 2% of my salary to entertainment.  This made my budget work out very well, apportioning a solid sum of money towards saving and paying off debt, which I thought were high priorities to me (my imagined priorities).  Then, I looked at the previous month’s bank statement.  To my chagrin, I found that my actions demonstrated a high priority of enjoying activities with friends and buying drinks at the bar.  Instead of working toward a place of financial strength, I placed high value on having fun with money now.

If you find yourself in a place like I did—with “real” priorities rather far from the ideal you imagine, take heart, for change is quite within your reach.  Start by creating your budget for next month, using your bank statement as a template.  Then, adjust down slightly the categories that you think are too high (entertainment, in my case) and increase other more desirable categories by the same amount.  The trick is to not go “scorched earth” in your first month.  If you try to reduce entertainment from 5% of your budget to 1% on the first try, you’ll be tempted to “forget the whole thing” a few weeks from now.  Instead, focus on incremental progress, one month at a time.

Some Practical Steps

Herein lies the beauty of a zero-based budget.  Before the month begins, spend all the income you expect to receive on all the categories of expenses that you will have.  Allocate every dollar to the appropriate category, then get several blank envelopes.  Write the category name on each envelope, and withdraw the appropriate amount from the bank after each paycheck is deposited.  Now, if you will restrain yourself to only spend from your envelopes, you have no choice but to follow your budgetted plan. 

Staying Flexible

When something unexpected comes, as it always seems to, you may have to go back to your budget mid-month and reallocate.  This is perfectly acceptable, so long as you reduce one category by the amount that’s needed in another category.  Just make sure to do this with all your numbers in front of you, so as not to start the month with 2% allocated to clothing and find at the end of the month that you gradually ratcheted up to 7% by not paying attention.

All in all, this practice of advance cashflow planning is a great tool for spending your money on things that are truly important.  The sense of accomplishment and satisfaction that comes with switching expenses which bring you little value for those that you truly care about is magnificent, and will serve you well on your path toward the thriving life.

Wandering into Trouble

I’ve enjoyed many hiking and camping trips since I was a young child.  Walking through the forest, listening to the sounds of wildlife and seeing the sun gleaming through the trees, I’ve had a chance to appreciate the beauty and creativity of our Father’s world.  Occasionally, my hikes have become extended for a bit longer than I was planning on, due to an underestimation of how long a climb might take or a casual disregard for things like maps and compasses…. 

Oblivious to the Peril

The funny thing about getting lost is that you don’t realize you’re about to get yourself in trouble until you suddenly realize that you are in trouble!  On a certain camping trip with a buddy of mine in Arizona, we hiked out into the desert loaded with many gallons of water.  We found a good site, set our provisions down, and trotted off in search of a good “sitting log” to place beside the firepit.  We found a good one a short while later, and began carrying it back to our campsite.  At first, we thought it was pretty funny that our campsite was taking so long to get to.  “Strange how it only took us 10 minutes to find this log, but we’re taking 20 minutes to carry it back,”  we laughed.  Slowly we realized that we were actually lost, and we’d been walking for so long because we didn’t know where we’d left our jackets and water!

A few hours later, tired and thirsty, we found our campsite as the sun finally set.  This set us up for a cold night (the coldest night of my life, in fact), since we’d wasted our afternoon and now had only a half-built shelter.  But we were thankful at least for the jackets and water that we had nearly lost.

This story is an example of how we can be walking along unaware, and suddenly find ourselves in an overwhelming situation.  We were too confident that we wouldn’t get lost, and by the time we recognized our precarious position, it was too late.

Common Financial Dangers

In a similar way, we can tend to be very blasé with debt in America today.  We look around at our friends and neighbors, and many of them have student loans.  Everyone’s got a mortgage, and some debt on their cars.  And of course we’ve all got to have our credit cards!  But even though we all know that people get trapped and pulled under by debt, we mistakenly think that this can never happen to us.

Confident of our ability to keep our debt in control, we walk right along the edge of a financial cliff.  We buy a nice big house, great new cars, and a brand new living room set—all on payments.  At the end of the month, we’ve got $25 leftover after all the credit payments are made, and we think, “All right! Everything’s going great!”  But then comes something unexpected, and all of a sudden we’re $175 under instead.  No big deal, we think, “I’ll just pay the minimum credit card payment this month, then get everything cleaned up next month.”  But again, something unexpected comes, and now the balance we carried last month is compounding on us.  On and on it goes, and the debt pulls us down deeper and deeper.

Recognize the Trap

This story has sadly happened to too many people who are able to escape only through a long and painful bankruptcy.  If you’re fighting this now, know this:  many have overcome this situation through wise money management, hard work, and tenacity.  If you’re still dabbling with debt and don’t think this could ever happen to you, think again.  Banks are not evil, but they are concerned with making money, not ensuring that you keep your head above water.  Knowing what you can afford and what you cannot is your responsibility, and you owe it to your family and to God to manage the money He’s given you wisely.

The most reliable way to make sure that you can afford something is to simply buy only with cash (or debit cards/checks).  The one exception might be a mortgage on a 15-year fixed rate with the monthly payment of 25% of your take-home pay, which can be a reasonable debt, provided that you have a substantial down payment.  And some financial experts would contend that there are a few other “reasonably safe” debts as well, but use these very carefully.  It is much easier to lose your way than you think.  Decide instead to take control of your financial life by eliminating debt and paying with cash.  The confidence and freedom that come with becoming debt-free will serve you well on your path to a thriving life.

Planning for Unusual Expenses

Last week, we discussed the importance of including unusual but predictable expenses in your budget.  Items on this list include things like car repairs, home improvements, large gifts, or vacations.  By allocating a fixed amount each month, these big expenses don’t have to catch us off guard.  For example, my wife and I set aside $60 each month for car repairs, which has been plenty for the minor repairs and maintenance that our vehicles have required.

This brings up a small wrinkle in your budget, though, since you’ve allocated money to be spent on a certain day, but since you likely won’t have a $60 car repair this month, your account will be out of balance if you don’t correct for this.

Thankfully, this feature is built right into the ThriveWealthy advance cashflow planning program.  If you’ve not downloaded a copy yet, be sure to head over to the ThriveWealthy page and download the latest version.  Start budgeting next month’s income in the colored boxes, along with the dates your paychecks come.

Once you’ve entered your income and expenses in the appropriate categories, notice the orange box in the upper left part of the screen.  This section is called, “pending expenses” in the example tab, and is used to balance your budget with your current bank balance.  This section is also where you’ll keep track of your car repair fund, and any other “funds” for big items that you’re saving for.

Keeping with our example of $60 per month for car repairs, let’s say that we’ve reached the 15th of the month, which is the date we entered the car repair fund to be spent.  But, since we’ve not needed any repairs or maintenance this month, that $60 is still sitting in our account.  To ensure that the budget matches the actual bank balance (ascertained by logging into your bank’s website), we need to enter the $60 as a pending expense.  Next to the value of $60 that we enter in the orange box, we need to title the expense as, “car repair fund.”  The spreadsheet will automatically adjust the budgeted balance, and the “difference” value in cell C25 should drop to 0.

Next month, we’ll have the same thing happen, and assuming no car repairs are needed by the 15th of that month, we’ll follow the same procedure.  On the 15th, we’ll replace the $60 value in the orange box with a value of $120, and so on and so on, month after month.  Anytime money is spent at the auto repair shop, simply reduce the pending amount by the total amount spent.  So, if on the 18th of that second month, you spent $20 on wiper blades, simply reduce the pending amount from $120 to $100.

Following this plan will bring you such a sense of peace–bring ahead of these unusual expenses instead of getting knocked down by them.  Please enter any questions or clarifications you have in the comments section, and as always, remember that we’re here to help you thrive!

Overcoming the Unexpected

Most of us have been through the following story at some point in our lives: We resolve to “do better” with our money. That credit card company has taken advantage of us for the last time! We’re angry that we let ourselves get into such a vulnerable position and we’re angry that the credit card company hit us while we were down.

So, we get out the yellow pad or the computer spreadsheet and we get to work on a budget. We allocate our money carefully, taking our best estimate at what we’ll spend in the following month on groceries, gas, and utilities. Everything’s going fine until the 9th of the month…

That sinking feeling

On that day, two tires go flat on our usually-reliable family car. Your dentist sends you a second bill for the work done last month to resolve a clerical error. And your electricity bill is $30 higher than usual. What in the world is happening?!? Why is this all hitting at once???

Unfortunately, these unexpected things do seem to hit us just when we think we’re getting it all together. However, even though they seem like a string of improbable flukes, the root of the issue closer than the mechanic’s garage or the dentist’s office–the problem is us!

When we get used to living life without an advance financial plan (a budget), we quickly lose touch of what we really spend each month. Ask me before I started budgeting what I spent on groceries each month, and I would have said, “like $150 or so.” (reality = $400) Or ask me how much I spent on car repairs per year: “like $450 I think…” (reality = $60 per month)

The point is, our perception of reality is quite different than the truth of the situation, and we tend to underestimate how much we spend each month on these “unusual expenses.”

So be encouraged–you’re not alone when you’re hit by a “string of flukes,” in fact almost all of us have been there! If you’re starting (or restarting) budgeting for the first time, be generous with your grocery budget, and include $60 per month or more for car repairs. You may not need it in the first month, but soon you will, and having $180 sitting in your account waiting to be spent on car repairs makes that phone call from the mechanic a great deal less stressful!

If you haven’t yet downloaded the most recent version of ThriveWealthy, please spend a few minutes trying it out for yourself now. And as always, let us know of anything we can do to improve your experience at TotalThriver.com! Remember, we exist to help you Thrive!