Finance and Fat

I guess I didn’t really know how it would go, but this Christmas came and went just as quickly as the others before it. However, the big difference this year is that Christmas won’t be lingering in the form of credit card debt or budget regret. I can’t even begin to express how good that feels!

We didn’t plan all year long and we didn’t start saving last Christmas, but we did sit down in November and make a plan for Christmas- and we stuck to that plan. We took a portion of the money that would have gone toward extra debt payments in December and budgeted $800 for Christmas. That included gifts for everyone on our list, cost of food for hosting Christmas dinner at our house, and a little extra padding for unexpected expenses. I am happy to report that we came in under budget, by about $90.

This is the first Christmas I can remember that we didn’t use a credit card and didn’t over spend. Working with a budget for every person on our list was quite liberating. It made it easy to decide what to buy for someone- if we planned to only spend $25 on someone we wanted to make sure we got the best value we could for the money.

What to do if you took on debt to pay for Christmas this year:

If you had to use credit cards to pay for Christmas this year, don’t beat yourself up over it now. Recognize the mistakes you made and take action TODAY to prepare for next Christmas and to be ready to handle it with cash. If you don’t have one yet, open a savings account for Christmas. Call it your ‘Christmas Fund‘ and only use the money for Christmas. Decide now how much you need to spend for next Christmas and divide that total by 11 or 12 (decide if you want to count this month or start in January or whatever). The best advice is to set up an automatic transfer each month for your monthly Christmas Fund contribution so that you won’t even have to think about it. Personally, I don’t like to set up automatic payments or transfers for non-essentials so I will manually move the money each month- decide what works for you here and what you can safely commit to doing.

An example- I opened our Christmas Fund yesterday (with ING Direct) and funded it with $50. I chose $50 because I always start my new ING savings accounts with $50 (no particular reason for that). We have decided to budget $1,000 for next Christmas, which leaves $950 to save from January through November (11 months = $86.36 per month). That’s it! Next Christmas is taken care of! Of course I need to make that transfer a part of my monthly budget, but we can afford it so that won’t be a problem. So whatever your budget may be for next Christmas, decide it now, plan for it now, and get started TODAY! I promise you won’t regret it.

Remember, by preparing for next Christmas now, not only are you taking control of your money and making it work for you, but you are reversing the damaging effects of interest that you would be paying to a credit card company and actually earning interest all year long on your savings account. Compound interest working against you is the enemy of financial freedom and wealth. Compound interest working for you is your greatest ally in changing your financial future and becoming wealthy. This distinction is probably the greatest difference between the poor and the wealthy- don’t let this be another year that you move in the wrong direction.

Best of luck and Merry (cash) Christmas! 

If my bank charged me a 10% fee to transfer money between accounts, I would promptly be seeking a new bank. However, if those fees were being paid to me, it would help my savings to build up over time. That is the premise behind my simple idea to help increase my emergency fund.

We have all heard the advice ‘pay yourself first’ and I do that, but I am intentionally keeping my savings rate low while I work to get out of debt. I started a basic emergency fund with $1,000 and I set up an auto transfer of $25 each month to slowly build that up.

It seems that starting an emergency fund is all you have to do to start creating financial emergencies in your life! Only a couple of months after making the fund I have accumulated nearly $1,000 in ‘emergency’ type unexpected expenses. I have put back all of the money I have used from the account, but when I have to tap into that $1,000 balance it always makes me start to wonder if that is really enough- even while I’m in this debt repayment phase.

To help build the balance a little faster I decided to implement a rule that I would repay any withdrawals from the emergency account plus a flat 10% fee, rounded up to the nearest dollar. It’s unlikely that an extra 10% would negatively effect my budget in any way and it will help to build up a more comfortable cushion of cash. It is also a smart system because it responds to my actual emergency fund needs- if I am making a lot of emergency withdrawals, then it makes sense that I need to be saving more for emergencies. If I rarely touch the account, then it makes sense to keep it low while I am working on getting out of debt. This month, I had to spend $170 from the emergency fund to get our oven fixed, so when I get my paycheck next week I will be transferring $187 back into the account.

This is a simple idea, but it goes along nicely with my philosophy of small steps and slow changes that add up to big progress over time.

Since the topic of cash back debit cards came up with the recent ING Direct 1% cash back offer (temporary promotion), I thought it was a good time to talk about how I am using my PayPal debit card to earn 1% cash back on my purchases all of the time.

I have had this PayPal account for a number of years, but rarely used it for everyday purchases. Last month it occurred to me that I could start transferring my spending money there as a way to help budget my spending (similar to the envelope system) and earn the 1% cash back bonus.

Not only do you earn cash back on purchases, but the money sitting in your PayPal account earns interest too (currently 4.88%). It is free to transfer money to and from your checking account, but it does take 3-4 business days so always give yourself plenty of time. You can make instant transfers, but I believe you can only do so with a fee.

For part of the month of October (only about two weeks of the month), I earned $5.35 cash back on this card. That isn’t a lot of money, but if you think about the interest you earn on regular checking and savings accounts, it’s a pretty good return on your dollars (it certainly blows away the interest earned on my small emergency fund). I put this money in my passive income fund, a category I am always looking for ways to grow, so I am working hard to try to maximize the bonus.

My plan for November is to use it a lot more and I will pay all of the bills I can with it, such as utilities and any other merchants who will accept it. I think I’ll earn quite a bit more this month and I will share the details next month. It takes some planning to get this done right because of the delay in transferring money so I started by looking at the money I would need to spend for the first two weeks of the month and made that transfer as early as I could.

Risk: Here is the biggest caveat, PayPal accounts are not FDIC insured! If PayPal fails and I lose my capital, all of this effort will be for nothing. For that reason, I don’t keep a lot of money in the account- only what I expect to need to spend for the month on things I can buy with a debit card. That being said, the fact that Ebay owns PayPal and PayPal is used all over the Internet for processing payments takes away most of my fear that it will go out of business.

I know there are better deals out there on rewards credit cards, but if you don’t want to use credit cards, this 1% deal is quite nice. Like any debit card, you can use it anywhere that takes credit. The cash back appears instantly on your account with each transaction that clears.

If you want to sign up and don’t yet have a PayPal account, you can use the link below to check it out. This is an affiliate link and I will get a bonus for new accounts. I didn’t write this post to try to earn a bonus, I only figured that since I’ve given PayPal this free promotion the least they could do is send me a little money.

When is it okay to spend money and how the heck do you draw the line between frugal living and being a cheap miser?

This is something I am struggling with a lot lately. It started with my plan to purchase a new MacBook this month and continued with my October spending review.

I think I’m doing really well at saving money and cutting my spending, but I got some great comments on those aforementioned posts that made me start to wonder and I read this post about frugal living at Paid Twice and started to feel bad about the amount of money I spend on things I don’t need.

So when is it okay to spend some money? Should I have the attitude that I’m in debt and my money should only go to necessities until the debt is paid off? Is it okay to buy something if I budget for it and I have the cash to pay for it and it doesn’t harm my budget in any other way? It’s not like I’m looking for permission to make a purchase because obviously I am working hard at managing my money and this is something I have to figure out for myself. I’m really just looking for ideas on how to approach this issue. Please share your approach to the NEEDS vs WANTS battle and when you think it’s okay to loosen up and spend some money (if ever).

I have identified a few problem areas or areas of opportunity in our monthly budget. These categories are the most variable and the most controllable out of everything (controllable as in they are not fixed expenses like utilities). For us, these categories are Groceries, Eating Out, Entertainment, and Household. Groceries is exactly that, only groceries. Eating Out is any restaurant, vending machine, or any other way to spend money on food that isn’t at the grocery store. Entertainment includes any sort of fun or recreation expense, such as video games, music, or going to an NFL game. Household is a broad category and includes anything we need around the house, such as paper towels, cat food, soap, etc… you get the idea.

The reason I chose to focus on these categories is that they are not strictly needs, but mostly wants and therefore not necessary to live on. Household and Groceries are part needs, part wants, while Eating Out and Entertainment are purely wants. I have found some large variation in these categories now that we are watching our spending closely and that leads me to believe there is room for savings.

Groceries- we spent $628 in August, $195 in September, and $460 in October. That is an average of $428 per month, but that still sounds like a lot for two people. The fact that we were under $200 once makes me think we can save a lot of money here and I have budgeted $300 for November as a place to start.

Eating Out- we spent $191 in August, $114 in September, and $230 in October. That is an average of $178 per month. Again, the fact that we ’survived’ September while only spending $114 on eating out makes me think we really don’t need to spend the $230 we did on October. I have budgeted $150 for November, which should be a nice medium.

Household-  more of the same pattern, $387 in August, $203 in September, and $279 in October. That is an average of $290 per month. All of those totals look high to me, but since the best we have done is $203, I am budgeting $225 in November and hoping we can come in below that.

Entertainment- would be more consistent, except for the unusual expense of going to a football game in September: $69 in August, $241 in September, and $40 in October. That is an average of $117 per month. I am going to budget $120 for November because I have a planned entertainment expense.

If I stick to my November budget of $795 for these four categories, I will save $218 over our previous average spending and I will save as much as $691 if you take the high spending month from each category. That is serious savings! On the other hand, if we take the low spending total for each month ($552), I may actually be spending $243 too much. That is a lot of spending!

My conclusion is that this is a difficult part of the budget to handle. These categories all come down to needs versus wants and how much money do we want to spend today to satisfy those needs and wants versus what we are giving up in the future to do so. I haven’t found the ideal solution yet, but I think that taking the time to review and looking for ways to cut spending is what it takes for success and on top of that it probably just takes some time and practice.