A couple of days ago I went to a one-day financial planning class.  I got a few nuggets out of the class and I’ll share one with you here.

The instructor spent a few minutes on creating a working budget.  This part was pretty standard.  If you don’t have Quicken fired up, then

• Take a standard list of common spending categories,
• Gather up a month’s bank statements and pay stubs, and
• Categorize the month’s expenses.

This produces a good starting point for a working budget.  But that’s just one of the budgets he recommended drawing up.

He recommended four separate budgets which cover the present, a couple of what-if’s, and the future.  Here they are:

1. The current budget. This is the one that is based (largely) on current expenses, with a tweak or two for spending categories that you know may be too high or too low.
2. The dead-spouse budget. What if my wife died unexpectedly?  How would the spending categories change?  For starters, I’d need to consider day care for my daughter or some other arrangement.  My time commitments would certainly shift around a lot, and that would affect how much time I could spend doing other things to make money outside of my job.  Could I do the things she does now, or would I have to pay someone to do them for me?  More budgetary considerations.
3. The dead-me budget. What if I died unexpectedly?  My income would go to zero.  What would that mean for my family?  How would they manage without my paycheck?  Have I put in place enough other resources so that they can do what they need (and want) to do?  These questions give rise to a whole new set of numbers.
4. The retirement budget. What if I quit my day job?  What other benefits that are tied to my job stay, and what ones go away?  Do the income streams that remain add up to a comfortable existence?  This budget is another whole set of numbers.

What is the purpose of making these budgets?  The main purpose, for me, would be to put the spotlight on holes in my current budget. Take away my paycheck, and what’s left?  Take away my wife’s good works, and what slack do I have to assume?

Do the numbers still work? If they don’t, then I have work to do so that they do work.

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A few weeks ago I received word of a Facebook application called Buddy Bailout.  It’s a spin on the giant corporate bailouts that have happened recently, and in part it plays on people’s thinking: “Why can’t I get a bailout, too?  I sure could use one.”

Maybe one of that person’s friends (a) knows that they could use one, too, and (b) wants to point out the main reason why they’re in the position of needing to be bailed out.

That’s where Buddy Bailout comes in.  How it works (currently):

• Choose a Facebook friend that needs to be bailed out (i.e. has a spending issue).
• Choose from one of more than two dozen common spending issues that best matches what the issue is.
• Post it to their wall, with a message saying something like “Mighty Bargain Hunter thinks YOU need a bailout!” and gives the specific reason why.

Bills.com, the designer of the application, uses this as an introduction to the website, which provides financial information and other services.  The direct, in-your-face communication style of the application reminds me of Larry Winget’s, which can be very effective and helpful at the time when it’s needed most.  Staring your problems square in the face, and accepting responsibility for them, is the first step towards working them out.

Buddy Bailout sends the message in a genuine, often lighthearted way, but the point of the message is still right there.  So for that, I applaud them. Getting people toward responsible spending habits is a fantastic endeavor.  But, as this application is now, I personally wouldn’t have the guts to use it, even if I knew it could do an incredible amount of good for the person on the other end.

These “bailout messages” are wall posts.  Users typically set permissions so that their friends can see their wall posts, so the “bailout message” would be visible not just to them, but to anyone who could view their wall.  The bailout posts are what people need to hear, but probably not what they want to hear even in private, let alone in the semi-public world of their Facebook wall.  For me, it would be a very risky move, with respect to relationships, to post a bailout message for somebody.  It could work out if that person’s friends support my observation, but the message could just as easily be ignored, or worse, attacked.  In any case, everyone knows now that I think my friend spends too much money at Starbucks, and that can’t be taken back.

I know some people aren’t bothered by confrontation, and even thrive on it.  I don’t like confrontation at all, so the thought of it affects how I behave in different circumstances.  Another thing that may come into play is the traditionally private realm of personal finance.  I’m sure open discussion of personal spending habits wouldn’t have happened in the past, but is it time now?

What do you think?  Would you broach the subject of a person’s spending patterns on Facebook?

(Note:  If you have a money question and want to ask it on your own terms, head over to Cash Commons.)

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Cutting costs anywhere that makes sense adds to that budgetary cushion that can be used to pay off debt, add to an emergency fund, save for college, or anything else.  One fairly easy way to do this is to reduce, or eliminate, trips to the vending machines down the hall.  The markup in our building borders on ridiculous now ($1.00 for a candy bar).  And what’s more, although Snickers® would like you to believe that it satisfies, candy usually just makes you hungrier.

Which brings me to my secret snacking weapon:  oatmeal. Plain, old-fashioned Quaker Oats.  Not the “instant” oats, but the big, giant container of oats.  I get ten pounds of oatmeal for under $8.  That breaks down to less than a dime per serving, and a serving is a full cup of oatmeal.  That’s a heck of a lot cheaper than a candy bar, and much more nutritious.

Here’s what I do.  Adapt to your tastes:

• Keep the oats dry in some kind of closed container. I use a plastic coffee container.
• Bring a 1/4-cup scoop to measure out a serving. Or a 1/2-cup.  Doesn’t matter too much.
• Scoop half of the oats into a mug, then put any flavorings you might want in. I use cinnamon ($4 for 11 ounces at Costco) and honey.
• Scoop the other half on top of the flavorings. I do this because pouring the hot water on in the next step makes the cinnamon clump if it’s on top.
• Pour hot water in to whatever level of consistency desired.

I tend not to get bored with the same foods over and over again, so this works well as a snack for me.  Even if you don’t want to go all-out with buying oatmeal 10 pounds at a time, the smaller container in the grocery store is still pretty cost-effective.

One of those little money saving things for your budgeting arsenal.

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We just had an offer accepted for a new home a couple of days ago.  As such, there’s now a flurry of excitement and financial activity going on in our household now, and there will continue to be excitement even after our current house is sold.

Part of this excitement involved taking the first steps to adjust to a new mortgage payment.  My wife put down some numbers for what our expenses are currently, added them up, and came to the conclusion that things were going to be really, really tight as far as making ends meet.

This surprised me more than a little bit.  The difference in the mortgages between the two houses wasn’t gigantic:  only a few hundred dollars per month.  Were we that close all this time?  Did we really spend $1,000 per month on food for our family of three?  Are our monthly credit card charges reasonable, extravagant, or at a bare minimum?

If we had been tracking our expenses more carefully over the past year, I wouldn’t be doubting the numbers like this. I’m guilty as charged:  I still budget by The Force and we’ve managed to (yet again) squeak by for a few years doing it this way.  But I think I had a realization tonight:  We can’t afford to do this kind of thing anymore.

It’s more than just realizing that there’s fat in the budget that can be cut.  ($1,000 for food was high, by the way.)  It’s realizing that having a concrete saving and spending plan, and monitoring that plan, is critical.  Spending and saving without tracking things is just wandering, and after a while, you just don’t know where you stand.  Like I just found out.

Being unsure of where you stand financially isn’t pleasant. Take some steps to track your spending and saving, as I’ve started to do (again) with Quicken.  I’m going to try my currently-owned version (Quicken 2007 Home and Business) for a while to see if I can get the hang of it.  So far it seems easier than the last few times I’ve tried it.  I don’t think that’s Quicken’s fault.  I’m letting it do more of the work it was designed to do, like automatically updating transactions in accounts instead of me rolling up my sleeves and entering everything by hand.  I’ll go through to check them, but it’s probably a good compromise to have Quicken do the bulk of the work.

(This post contains affiliate links.)

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I do software development at work.  A term that gets thrown around a bit is code smell.  It’s a catch-all for any number of programming practices that indicate more serious underlying problems, or that indicate that quick fixes were made that will be more costly to maintain down the road.

Basically, the code smells a little bit.  There’s nothing really wrong with it, but it’s getting close to its “best if used by” date or it’s past it a bit.  You want to incorporate lessons learned sooner rather than later to get the smell out.

Personal finance is the same way.  There are money smells that indicate that, although there’s probably nothing really wrong yet with your finances, your personal finance situation is turning a bit and can get rank further down the road.  Liz Weston’s article, 8 signs you’re headed for financial disaster, calls out a few of these money smells:

• Surprises on your bank account statements. You have some of those extra fees for overdrawing your account in some way, and didn’t expect them.
• Lack of savings. This indicates that you’re tapped out and could easily go into the red.
• Lack of discretionary income. This indicates that your breathing room is gone, and that you could easily go into the red.
• You’ve taken out a payday loan. These are typically viewed as loans of last resort, as they carry very high interest.  This indicates that other funding sources have dried up.

There are others on Ms. Weston’s list, but they’re more indications that things not only smell bad with your finance, they’re downright spoiled.  Missed loan payments, for example, indicate that serious problems have already arrived.

I’d suggest a few more early-warning type indicators:

• You start to ask, “When does the next paycheck come in?” Maybe this one only has a hint of malodor to it, but if there were always three or four paychecks’ worth in the checking account, it would hardly ever matter when the next one came in.  As it is, if this question is being asked, it means that it’s a concern.  There still may be time to shuffle money around from one account to another in order to cover a credit card bill (that still may be paid in full) and the problem is averted.  But it’s still far better to have a lot of cushion in the checking account, not just a small one.
• You start to second-guess yourself about when payments have come out. Related to the above one, earlier this week I had to call up my wife to see if our credit card payment had been taken out of our account.  I knew that it was getting close, and I knew that my next paycheck wouldn’t be deposited until now, so I feared (for a few minutes, anyway) that I had dropped the ball.  What triggered this brief feeling of low-grade dread was seeing my balance on an ATM slip.  It was easily high enough not to bounce anything, but not if my credit card payment hadn’t been taken out already.
• You pull out a fair bit of money from business accounts to fund current personal expenses. If business profits are used to cover current personal expenses rather than grow the business, then this is a money smell because it shows that present demands are cutting into future-oriented pursuits.

We’re embarking on a typically spend-happy few weeks, and things can get really busy.  Please take time to smell your finances!

Any other money smells I’ve overlooked?

Thanks to A Gai Shan Life for including this post in the Carnival of Personal Finance.

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Getting a bolstered emergency fund is a great idea now.  (It usually is, but now especially.)  One way to get to a decent cushion is to spend less so that the extra can go into savings.

Many kinds of expenses can be cut, but the easiest ones to eliminate are ones that you probably won’t miss anyway.  Expenses like the following:

• Seasonal expenses. Are you paying year-round for an activity that you only do in the summer (or winter)?
• Hobby-related expenses for a hobby you’ve lost interest in. Maybe you were gung-ho about scrapbooking, and the stamp of the month delivery just goes in a drawer now because other things have become more important.
• Job-related expenses that aren’t necessary anymore. Say your last job required membership in certain professional societies, or more likely, required a certain kind of dress or appearance.  Or perhaps you’ve moved from up-front sales to more of an office job, and the wardrobe that was necessary for dealing with customers all the time isn’t needed anymore.
• Any luxury that doesn’t deliver like it used to. It could be a monthly massage, a monthly trip to The Melting Pot, premium movie channels, etc.

The Frugal Lawyer saved money on some little things that she admitted weren’t that important, like eyebrow threading, open-toed shoes, and magazine subscriptions.  She observes:

These aren’t huge savings, but the little amounts will add up over time.  Particularly if I am putting the extra money into savings or toward paying off debt.  I’m still looking at my regular spending to find other things that I can trim from the budget.

Little things do add up. What irrelevant expenses can you cut out of your spending?

Update: Thanks to Amateur Asset Allocator for including this post in the Money Hacks Carnival!

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I tell you:  It just doesn’t pay to be human anymore.  Big or small.

I’m well aware of how being fat costs money.  But there are now rumblings on the possibility of the following:  If an individual, or family, can reasonably afford health insurance, but does not get it, they face the possibility of being fined: $950 for an individual, and up to $3,800 for a family.  (These are the current numbers as of 9/9/09.)

Presumably the people that would opt out of health coverage would be healthy people, right?  Those that take care of themselves and go to doctors for maintenance visits only?  Either that, or people who are rich enough that they not only don’t need health insurance, but can also pay out of pocket to get treated correctly, and immediately?

You’re fined if you do, and you’re fined if you don’t. You pay to play the game, and you pay to not play the game.  “Make your choice.”

Just in case this appears too lucrative for the insurance companies, with all of the extra business driven to them because consumers were made offers they couldn’t refuse, they’re not off the hook.  As of now (9/9/09), there’s a $6 billion tax that’s in the works for them.

When you hear “health care reform,” think of stuff like this.  Think about whether this is going to help things or hurt things, and for whom.  Think about who’s going to get soaked in the process.

Then, plan accordingly.

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Usually, a promotion at work is a good thing — more money and more prestige — but it’s not always welcome.  It could infringe on family time with extra hours, or take a toll on health and well-being with added stress.  Or, it could place people in hard ethical situations.

What should you do if you are offered a promotion at work, but aren’t really looking forward to it because it will be long hours and lots of tedium?  This article recommends saying “no” to the promotion.  Not only that, but making it pretty clear that you don’t want to be considered for similar opportunities when they come up.

Turning down a promotion just because it looks to be inconvenient isn’t wise. Maybe it made more sense when the economy was humming along and jobs were easy to come by, but not now, and not for a while.  A maneuver like this is a good way to get on the short list of people to be let go, and this is not the time to be let go from a job.  This is a time for keeping on top of your income streams.  A lot of other things fall apart if your income goes away.

This is a time to become more valuable, more flexible, more productive, more of a team player at work.  Turning down a promotion for personal convenience makes you less valuable, less flexible, and less of a team player.  So I wouldn’t do that.

Saying “no” to claims on your wallet are fine, though, and the article has a few good ones:

• Saying “no” to letting your third cousin’s date attend an expensive wedding reception
• Saying “no” to chipping in for a colleague’s birthday when you really aren’t friends with them
• Saying “no” to a friend asking for a loan
• Saying “no” to letting a friend borrow your car

Bottom line for hard times:  Keep the money coming in, and keep the money from going out.

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My wife and I rode up to New York State yesterday to visit my parents.  She asked me on the way up, “So what are your big plans for this long weekend?”  I didn’t really know but I knew it would involve (a) seeing my three-week-old niece (who is absolutely adorable by the way); (b) helping my father with some nagging computer issues, and (c) posting a few things for y’all.

This is also a trip back to my home town, and it reminded me of my sophomore year in high school (among other things).  I had a paper route through high school, and it brought in (maybe) $50/week at its best.  (Christmastime was a bonanza: something like $200 in gifts.)

Well, my sophomore year I got in the habit of stopping at the arcade most days after school, or having pizza, or something like that.  Most of the money I brought in went out.  At some point my mother asked how my savings account was going.  When it wasn’t much higher than it was at the beginning of the year, my mom made her point.  “Pretty much everything you earned is gone.”

At the time I just thought, “Oh well,” and I suppose in the grander scheme of things it’s a fairly cheap lesson to learn how easy it is to spend all the money you have at your disposal when there are no real consequences to other people at the time.  (The money was basically spending money; the real needs of my family were easily, and quite nicely, met.)

Fast forward twenty years.

Twenty years.  That’s a lot of time for compounding.   But I wasn’t thinking of things in those terms.  At best I was thinking about saving up for some big expense I was going to incur, but I didn’t really know what that was.  Later, when I was in graduate school and draining my savings account because my stipend barely paid for my dorm room, it might have been nice to have a little extra money then.

There is absolutely no time better to save money that when you’re young.  But this goes counter to what seemed important to me at the time, which was fitting in, hanging out and doing things with friends, buying CDs that I thought would make me cool, blowing off steam playing Gyruss, whatever.  I wasn’t comprehending that these activities would cost me more of my future earning power than they do now.  But time just marches on, and either my money’s working for me — and continues to work for me — or it works for the guy who enabled me to rot my brain a little bit more.

It’s true that we’re only young once, but eventually we’ll be too old to work, and it will make more things more comfortable, or at least more tolerable, if the money is already there when it can’t be earned anymore.

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Not necessarily the kinds that make them financially rich, but things like piano lessons, dance lessons, Tae Kwon Do, etc.

A good friend from church was recalling a story that their new piano teacher told them about another one of her students.  This particular teacher demands that her students practice on a real piano.  (Aside: I didn’t agree with this initially but I can see her point.  I’m not aware of any electronic piano that can substitute for the action of an authentic piano, since regardless of how good the sound coming out of the electronic piano is, without the action of the hammers and the dampers, it won’t feel and respond like a real piano.)

Anyway, the parents of this one student were pretty well-to-do, so they went all-out.  They bought a Steinway grand piano — which costs as much as a luxury car — and built an addition onto their house to display it properly.

The student quit piano lessons within two years.

This was an extreme example, and more than a bit sad for the parents, I bet.  My friend is running into the same issue, since they have an electronic piano and have about nine months before they have to go acoustic in order to keep going to this teacher.  So on top of the expense of the lessons (not cheap) they will need to get a different instrument (also not particularly cheap, though they can probably get by for a few hundred dollars if they find a decent upright piano used).

These next nine months give my friends the opportunity to see if their daughter will stick with piano.  She responded well to this teacher, and it may be true that all it takes is a good teacher that knows how to connect with the students and motivate them.  If their daughter sticks with it and responds well to the teacher, that’s great.  They’d be doing a wise thing by nurturing that talent.  If the interest falls off, that’s also good.  They’d be doing a wise thing to not spend money on an instrument that wouldn’t be used that much.

Parents: Here are a few questions to ask yourselves about whether to spend money on lessons for your kids:

• Do they practice without being nagged?  Being a self-starter is an indication of interest and a desire to get better.
• Do they forego other activities willingly to practice?  This also indicates desire to improve.
• Can the same instruction be gotten more cheaply?  If the child is a real self-starter, they may not even need private instruction.  There are DVD sets for guitar and piano (for example) that cater to students who want to teach themselves.  It’s about $250, once, for all of the DVDs, and if they’re followed properly the child will be a darn good guitar player.  (This is true about many other things, including mastering a subject.)

It’s certainly a good idea not to let your kids give up too early because they might just be in The Dip but when it’s time to quit, it’s time to quit.

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