Money Obedience

A good friend of mine is at the age that makes her eligible for full social security benefits at the beginning of next year. She is very much looking forward to that extra income since her current income does not quite meet her living expenses. (She does not have much of a rainy day fund, either.) One of her big monthly expense is her mortgage payment. That’s right. At her age, she is two years into a 30-year mortgage.

Apparently she used to have a pretty good income and – as it happens with just about everyone – her expenses kept rising along with her income. She never had more than a little savings. When she lost her well-paying job, she dipped into her savings to keep up with her expenses. She started spending the little bit she had saved up in a savings account and then dipped into her 401k account, again and again. Eventually she refinanced her house with a cash-out mortgage. Unfortunately, I think it took a long time for her to adjust her expenses downwards. I think that household expenses easily go up with our incomes but it’s not so easy to get them to go down.

Since that first time she got laid off she has had a few jobs with periods of unemployment between them. She has little real savings now except for some still in her 401k, so she is obviously not in a position to retire. Instead she hopes that she can retain her current job as she keeps getting older. Unfortunately, she’s not in a position to save for a time in the future when she will no longer be able to work. Instead, she’s working to keep that mortgage going.

My friend has in recent years been in the unfortunate position that she has had many periods of several months of unemployment. Those many months without an income would deplete even frugal saver’s money stash. There is not much one can do to prepare for such extreme cases of financial hardship. I don’t think it makes much sense to organize your life expecting to be able to survive any kind of calamity. You would lose out on enjoying many good years as you deprive yourself of joy in expectation of “something really bad happening”. Neither, then, would you take certain risks like furthering your education with a student loan – a very good investment to make in yourself in the expectation of getting a better paying job.

Anyway, I am talking about my friend’s financial situation just to remind you and myself that being prepared for financial hardship is an essential feature of good financial planning. Having a rainy day fund is one of the reasons why I am pretty vigilant with our family finances. In all honesty, I am not so sure that my family could withstand as many months of unemployment as my friend has experienced – I’m fairly certain that we’d no longer be in good financial shape after as many months without an income. Fortunately, my husband and I are lucky enough to be able to live on one of our incomes if one of us lost our jobs, but we would encounter serious trouble if we lost both incomes at the same time and we faced lengthy periods of unemployment where neither one of us could find a job that replaces our current incomes.

When I got my first job I bought a used Ford Escort for very little money and I paid cash for it. At the time I could cover all my regular household expenses with my income, but I could not save much aside from my 401k contributions. Back then I could not afford a lot of things like vacation travel, lots of clothing, and many forms of entertainment.

A year and a half after I started that job I was lured away from my first employer and asked to join another company in the same industry, and I was offered a bit more income. I accepted the job and the higher pay. You can guess that one of the first things I did was spend that money. That’s when I bought my first new car. Yes, right away. And, like most car shoppers, I did not have the money for the car in the bank; so I took out a four-year car loan. Once I started making the monthly payments on my car loan I realized that my take home pay did not really increase that much over what it had been. So, what did this teach me?

First, it taught me that an increasing income usually leads to an increasing household budget. Somehow our expenses always seem to keep up with our incomes. We never manage to save money unless we make a serious decision to do so and to stick by it irrespective of our incomes. (Of course, at a certain low income one has to spend every penny just to meet the needs of living.) But I’d learned a valuable lesson, and each time I got additional raises I tried to remain very careful about spending these raises in advance of having the money in my pocket, or bank account.

Second, I realized that I did not like making these car payments or any loan payments. Writing a check to the creditor was a dreaded monthly exercise. So, I made a point to pay off the loan faster and eliminate debt. After all, I made more money anyway and had a little extra left over even after paying back the car loan. Once I was done paying off the car loan, I started to save money for the next new car I knew I’d need to buy at some point in the future. This plan had three real advantages. (a) It meant that I could not use the raise money to increase my household budget. My living standard basically stayed the same and at a level of my lower income, and the savings goal was just added on. (b) I was a lot happier, and had less stress, because I stuck with a living standard I could easily afford. I just refused to consume more and give myself more worries. (c) When it came time to buy a new car, I truly did have the money saved up, and I that time I brought a brand new car with cash! Just like I did when I bought my very first car. The big advantage here: I did not have to pay the lender any interest! Instead, you can say that I was the one who got paid interest on the collection of car payments I’d saved up in advance. Pretty neat, eh?

I have been fortunate and disciplined enough to avoid taking on debt (besides a mortgage) ever since. I believe that such a debt-free life has added to my overall happiness even if I did not buy all the things that people say may have made me happy. But going to sleep each night debt free surely has made me feel pretty good about my finances, and probably a lot better than any frivolous purchase could have ever done.

The list of money saving ideas gets longer. (Also read the first part “Setting up a Budget - Avoid more money black holes”.)

BYOB

You can pretty much always save by carrying your own (whatever) rather than buying out. Perhaps you didn’t think of these ways of saving:

- Do you like Dunkin Donuts coffee? Buy the bag of beans, make a pot at home, and travel with a thermos. Not only does this save you in the cost of the beverage itself, it helps the environment (‘cause you don’t use a disposable cup daily), and if you drive there, it saves money in gas

- Use your supermarket instead of specialty stores: buy the package of gum and pop a pack in your pocket, bring a muffin from the supermarket 4-pack found in the baked goods section, or buy the big bag of chips and put a couple of handfuls in a plastic bag. These small efforts can save you a bundle compared to spur-of-the-moment store or vending machine purchases.

- The major league of moneysaving BYOB – is bringing your own bag lunch. Maybe you don’t have time, but if you do, these night-before efforts can translate to major savings. Most of the time, after making my kids’ lunches, I have no time to make one for myself. But I would sometimes pop a frozen bagel in the toaster and put tea in my travel mug – running out the door with these things in hand means I get breakfast and I don’t have to shell out extra cash to buy pretty much the same food at a premium, even if the result is the same (that is, that I have to eat in the car, on the run).

Store “savings” cards

- Ugh – I hate it that every store wants you to have their particular savings card. But that’s how it goes. I try to make sure that their privacy policy doesn’t allow them to sell my name and contact info (and for cases where I can’t verify in advance, I’m on the DO NOT CALL list). Then, I just sign up. At my local Shop Rite, it means that the baby stuff I buy there brings me points that are used toward cash back later. For Loehmanns, that means I get percentage off coupons for my birthday.

- I don’t walk around with all these dumb cards. What I do is keep the key cards only, and I keep them all on one key ring. Then, when I go out shopping, I just grab that key ring. If somehow I don’t have the card with me when I’m shopping, I just give the cashier my phone number and ask whether my key number can be looked up. Normally, it can.

- My savings add up, even though I think it’s ridiculous that I have to be a “member” before I get any discounts. It doesn’t promote store loyalty for me. It just prompts me to become a member of every supermarket in my area! No matter what, I shop where I see the best prices.

Avoid gift cards

- “…use them as quickly as possible, and think twice about buying them in the first place.” Says ConsumerReports.org, one of my favorite “save-money-websites”. I learned this in one of their articles on bankruptcy – didn’t even think about the problem of what happens to your card if the issuer suddenly files for bankruptcy! They also informed me about hidden fees, and expiration dates, and other pains in the you know what. The biggest problem, I think, is that stores make bundles because people lose or don’t use them (before the expiration date). They even have an open letter on their site: “Dear Shopper, Last year, shoppers like you were out $8 billion because of unused, lost, or expired gift cards. Easy money for retailers. Lost money for you. Yours truly, Consumer Reports.” (Learn more by clicking here). If you don’t have time to shop, give your loved or liked ones some cash, or gift subscriptions to magazines like Consumer Reports (they offer print and online subscriptions), Real Simple, or Smart Money.

- Here’s the thing: I’m no angel. I happen to have gift cards in my house right now. They are hanging out in our household coupon drawer as we speak. Even though I know where they are, I don’t carry them around, so I don’t have them on hand when I am walking by the store where I could use it. They proliferate in my house too, when – guess what? – I end up making returns when I’ve lost the receipt!

I’ll tell you, and hubby, that I’ll try to make this a regular contribution, but you’ll have to wait for me to think of more before you get the next installment.

I was having a great deal of difficulty coming up with my second entry here (first one is here ), but at hubby’s insistence I decided to work harder so this blog post would come out sooner rather than later. So, here goes!

Keep track of receipts and warranties
- In many stores nowadays, you can’t return things without a receipt. If you can’t return an item you don’t want, it’s a big waste of your money.
- I don’t have the stats for this, but my husband told me he read a study that says that most people who do not try on clothing in the store will end up keeping the stuff. Could it be because they lose their receipt?
- Just as bad – you buy something and it breaks! Warranties can’t be used if you don’t know the terms. And it goes without saying, warranties can’t be used if you don’t have the receipt (because they need proof of the purchase date to know if the warranty is still operative).
- We at vilkri generally recommend against extended warranties, but there are a few exceptions. Let me tell you what happened with our washing machine… It broke, still under warranty for parts. But the labor was not covered. It was an expensive job getting that machine operable again. But the service guy told us that we are likely to need more service soon (and showed me exactly what might be the trouble). He recommended getting the extended warranty, because the price of that was cheaper than the repairs would be. So we did it – we still need to get some work done, but it will cost us less at the time we sign up for the work. So, if you KNOW you’re going to need it, extended warranties make sense. But otherwise, they’re normally a rip off for the consumer and a boon for the vendor.

Care for the car
- Tires must be properly inflated, or you burn more gas than needed for a given trip.
- Keep junk out of your car – otherwise, you’re paying to transport that unnecessary weight around all the time.
- Know about this: the difference between using the AC and rolling down the windows is practically nil – so just do whatever makes you comfortable!