Over the last couple years I have written many posts extolling the virtues of paying for things with cash. Shopping with cash causes transactional pain - that little twinge you feel when Uncle Benjamin leaves your wallet to be replaced by a few George Washingtons in change. That hurts.

When you swipe plastic, especially plastic representing money that doesn’t belong to you (credit cards), it hurts much less. This is why spending with credit cards is so dangerous. But spending cash can be dangerous, too, for an entirely different reason.

We are a couple months into saving for a Disney vacation in the upcoming year. While we are determined to cash flow the entire trip we also want it to be memorable for our kids. Neither child has been to Disney, and none of us have been on vacation for a couple years. You can probably see where this is headed.

Just because we plan to use cash, there are still plenty of opportunities to be separated from our money, and fast, especially at Disney World! It’s a trap many others have fallen into with big expenditures. The fact you are paying with cash doesn’t necessarily mean it makes sense, financially.

Cash does not equal affordability. I used credit cards for much of my twenties, racking up debt while away at school and again after returning home. I recognized that I could not afford many of the things I charged, but justified their purchase for a variety of reasons. It was school tuition, books, baby expenses, medical expenses, new clothes, and much-needed vacation, etc. Since I was charging these items and not paying off the full balances each month the financial sins were rather obvious each time the credit card bills arrived, and I was greeted with an even higher balance than the month before.

Since we stopped using credit cards a couple years ago, choosing instead to live on a cash basis, I have found that measuring affordability is a little more difficult to do. After all, just having the cash in hand doesn’t guarantee smart spending decisions. There are always opportunity costs associated with spending.

By not spending $100 on a new pair of shoes, or a new tool, or whatever strikes your fancy, you’ll have $100 to do something else such as save and invest that money. That investment will likely grow your original $100 over time, so the money you are giving up in growth represents the opportunity cost of spending that $100 on a new cordless drill today.

In our case, the cash saved for our Disney vacation could be used to pay down our remaining debt, or build our emergency fund, or to invest for retirement. We are giving up plenty of opportunity to spend that money on vacation, but it is a sacrifice we are willing to make for a memorable family vacation. Saving and paying cash does not make the trip any cheaper, but at least we won’t be dragging credit card debt back with us from Orlando.

RDS of SmartFinancialValues.com left an intriguing comment in response to a recent weekend post asking readers if they would be willing to sell all material possessions to become debt free.  RDS mentions that when it comes to their possessions “the transformation from desired, valued item to clutter happens very suddenly.”  It forced me to reflect on the life cycle of a few of my own purchases in the past, and how I feel towards those items today.

The Object of My Desire

I had it bad.  I looked at pictures of her in magazines, videos online, and often rode by during lunch breaks just to catch a glimpse of her. Her name was Silverado, as in a Chevy Silverado.  After a teenage obsession with wanting a car I quickly decided I needed a truck.  And not just any truck; I wanted a Chevy truck.  One with four doors and a big cab with a comfy interior, but enough power to haul whatever I wanted to wherever I needed.

This truck fever stayed with me through the early years of marriage, though I resisted the temptation to buy. That was until, in a moment of weakness, I stopped at the car lot and test drove the truck model I had been watching for all those years.  This particular truck was sporty–shiny black exterior with tan leather seats and a chrome sports package.  It also had a dual exhaust which gave the engine a throaty sound on acceleration.  I was in love.

So I pulled the trigger and financed the truck, ignoring the little voice in the back of my head telling me to walk away.  I told myself I could afford the $350 a month payments, and the increased insurance premium.  After all, I worked hard.

For those first few days and weeks I thoroughly enjoyed that truck.  I looked for excuses to drive places.  But after a few months the payments started to catch up with me.  Our insurance premium renewed and I saw a noticeable increase when projected over the full six months.  The thing was pretty, but it did use up gas, and because I was doing more “pleasure driving” I burned even more of it.

We still had some debt hanging around from my journey to finish school.  My wife was staying home with both of our kids.  In what now seems like an overnight epiphany the shine wore off that truck.  I sold it two weeks from the time I decided I wanted to sell it, and felt only a slight twinge as the new owners backed out of my driveway on a Saturday morning.

The Life Cycle Of A Purchase

What happened with my truck inevitably happens to all of our purchases.  The shine begins to fade, our enjoyment of them lessens over time, and eventually they become more of a burden than they are worth.  Call it what you want–the law of diminished returns, buyer’s remorse–the only variable in the equation is time.

Occasionally things retain sentimental value long after the useful life is lived up, and we hang onto them for posterity, knowing that future generations of family may have some interest in our heirloom.  However, given enough time all of our prized possessions wind up in the landfill next to a forty year-old styrofoam cup.

Does knowing this ahead of time keep us from buying too many things now?  Of course not, else all the people who say “You can’t take it with you” wouldn’t have to remind us.  That still doesn’t mean that things cannot be enjoyed while we are here.  It simply means that objects of our desire are just that, objects.  Their only value is the one we assign to it, not what a marketer has priced it to be.  Try to focus your life energy on acquiring only things that have a lot of value to you, not someone else.  Through this lens, things like paying premiums for a name brand, or buying just to impress others will seem like a monumental waste.

When I was a kid I remember being so depressed the day after Christmas, knowing Santa would not make a return trip for some 364 days. As a grown up, I developed new reasons to become depressed after Christmas: bills!

Fortunately, in the last couple years we have managed to get a handle on our Christmas spending.  But it hasn’t always been that way.  Early in our marriage we bought presents for everyone under the sun (and to make matters worse, I married into a large, extended family).  I guess I was suffering from “new son-in-law” syndrome. The symptoms include overspending around the holidays in an effort to impress your new half of the family.

The years of overspending at Christmas were not a total loss, as we did learn some debt reduction tactics out of the exercise, and it did manage to cure our mega-consumer habits. So if you find yourself preparing to dig out from holiday bills, I offer the following tips I’ve collected along the way.

Take an inventory of the damage.  This first step is by far the most painful. To devise a game plan for digging out of holiday debt you must first figure out how deep you are buried. I suggest firing up a spreadsheet on the computer, or even dragging out a legal pad and pen, and listing each of your credit cards.  Update each card’s balance with current information from their website or voice response unit (you can wait on statements to roll in, but if you are already anxious I recommend getting a jump start).

Use extra savings to pay down debt.  If you went a few hundred dollars over budget, and have that money in savings, I recommend transferring some money around to pay off the debt. Only take this route if your savings balance is high enough to pay off the debt and leave some for emergencies.  The last thing you want to do is clear out all of your savings, because as soon as you make the payment you will encounter an emergency–guaranteed.

Rework your debt snowball plan.  If you have racked up more debt than you can pay off in one swoop then you will have to come up with a debt snowball plan. Line the balances up smallest to largest and pay minimums on all but the smallest.  Throw every single bit of “found” money in your budget at the smallest debt until it is gone.  Yes, that includes the money your great-aunt slipped into your Christmas card.

If you racked up quite a bit of high-interest debt, such as credit card or store card debt, consider a low-interest consolidation loan to pay off the high-interest debt and then snowball the loan.  If you go this route, be sure to close out the store card accounts and cut up the credit cards or you risk going right back into debt.

Do not allow history to repeat itself.  When your debt snowball has completely melted turn your attention to saving some Christmas cash to spend next year. Set up a dedicated savings account and funnel a little money there each paycheck throughout the year. By November you will have a few hundred dollars to spend on Christmas, saving you from post-holiday debt blues.

 
Photo courtesy of Paul Keleher

When things are running along pretty well it becomes easier and easier to settle into a routine of saving money, making frugal choices and avoiding new debts. However, if your life is like mine, just about the time you get settled something comes out of nowhere to completely derail your plan.  Earlier this year Murphy came to visit (you know Murphy, if it can happen it will).  We went through a few demoralizing weeks with problem after problem–things breaking around the house, people getting hurt, etc.

Then we were cruising along ready for a new school year for the kids when my Mom was diagnosed with a giant cerebral aneurysm (she has been hospitalized in ICU for the past 37 days following treatment).  Daily trips back and forth to the hospital have doubled our gas budget (the hospital is about 30 minutes from our home).  Our eating-out budget has gone up as we were often forced to grab something fast in between visiting hours.  The good news is we have made the budget adjustments and avoided taking on new debts, or withdrawing from our emergency fund.  Here’s how we are making it work:

• Loosen up, but stick to core frugal principles. In a qualified crisis it seems a bit petty to be concerned with pinching pennies, so we have relaxed things a bit by lowering our debt snowball budget.  This allowed us to bump up a few categories that will undoubtedly increase while caring for my Mom.

• Keep priorities in order.  Loosening up a bit does not mean you have a license to go on a shopping spree.  Many times this is the first reaction to crisis, particularly for reformed emotional shoppers such as myself.  No, buying things may make you feel better by creating a diversion in the short term, but when the bills settle and the “newness” of your purchase wears off, you will feel even more guilty over spending the money which adds to the depression you might already be experiencing.

• Make budget adjustments as needed. My wife and I are normally reluctant to modify our monthly spending categories.  However, in an emergency a budget committee meeting may be in order.  Try to keep your overall budget amount the same by reducing non-essential categories to make room for essentials.  For instance, in our case food and gas increased almost immediately, so we reduced “Entertainment” and “Gifts” budget categories.  It won’t get us invited to many birthday parties, but you have to do what you have to do.

• Be less aggressive with debt reduction and savings plans.  Like I mentioned above, we’ve scaled back a bit on our aggressive plans to pay off debt.  As much as I’d like to finish off our remaining balances, it just doesn’t make sense to stretch too far and have to turn right around and dip into our emergency fund, or even worse, borrow money from the credit card we are working so hard to pay off.

• Get back on track as soon as possible.  In the early stages of an emergency you find yourself sort of going through the motions.  However, as things stabilize you will find yourself slowly returning to your normal routine.  When you recognize this is happening you can rebalance your budget categories and get back on track with your original goals.  Remember through all this that your family is your first priority–not Discover Card.  If it comes down to feeding your family and keeping the lights on, or paying your credit card payments, those other guys will just have to wait!

The Today Show recently aired a segment featuring a young couple with two kids who were challenged to cut their spending budget in half.  These types of stories are always intriguing, and not just because it is fun to pick apart another family’s budget (human nature, I suppose).  It is inspiring to see what lessons the people actually learned when the process was over.  Often times individuals have no idea how much they are spending on a particular category because they’ve never taken the time to add up the daily expenses and convert them to a weekly or monthly outgo.  Here’s a look at the couple’s before budget:

The Roberts Average Weekly Spending Budget

• Gas:  $25.00
• Starbucks:  $20.00
• Eating Out:  $165.00
• Grocery Store:  $140.00
• Entertainment:  $100.00
• Lawn/Home Care:  $95.00
• Night Out With Friends:  $40.00
• Shopping:  $75.00
• Total Miscellaneous Expenses:  $660.00 per week

That’s Not a Typo – $660 a Week

The budget probably doesn’t look all that different from other families out there (I even saw a couple familiar frivolous activities I used to engage in, and a couple I still occasionally do).  Like most young families, the Roberts like to eat out several times a week.  I know from experience this gets expensive when you have four mouths to feed.  And from the video it didn’t look like they were dining at a budget eatery for their evening meals.  Even Chick-Fil-A adds up quickly if you visit a couple times a week!  Mrs. Roberts was seen in the video getting a pedicure and manicure, and paying $25 to get her SUV washed and detailed.  All signs pointed to the fact these guys were mega consumers.

What Lifestyle Changes Were Implemented?

During their weekly spending diet the Roberts participated in a pot luck dinner, rather than going out to eat.  They washed their own car, mowed their own grass, and made lunches at home.  All great moves to cut back on spending.  They also visited a farmer’s market to help cut down on their grocery bill.  Here’s a look at their after budget:

• Potluck Dinner:  $30.00
• Lunch Out:  $6.00
• Farmer’s Market:  $12.00
• Gas for Lawn Mower:  $3.95
• Drug Store:  $24.64
• Grocery Store:  $95.00
• Total Miscellaneous Expenses During the Spending Challenge:  $109.38

Lessons Learned

It’s difficult to determine from an eight minute video whether or not the family’s lives were really changed.  I got the impression from the segment that both the husband and wife enjoyed spending money, and spent freely before the Today Show challenge.  It would be interesting to follow up with them in six months to see how many of these changes “stuck.”  One thing I did see in the video was the family engaging in more quality, family time.  They spent a Friday evening at the park feeding the ducks, and a weekend day playing on a Slip-n-Slide in their backyard.  It appeared they really were living the good life.  I don’t think it occurred to the Roberts prior to this exercise that it was possible to have fun without spending money.  Hopefully they now appreciate that less is more, and that they can put the excess money they were spending frivolously to better use.

I’ve included a link to the video segment:  Living With Half as Much

The development of our household budget has been a wild ride. After we first married, some ten years ago, we rarely sat down to discuss finances, detail a monthly budget, or even discuss longer term plans such as retirement goals, etc. Over time I took on the role of handling the finances in our relationship and made a few half-hearted attempts at a budget on a most infrequent basis. It wasn’t until I finally had a financial wake-up call that I realized budgeting, and better communication about money, were the keys to our financial success. To this day, I have a difficult time setting a budget amount at the beginning of the month and sticking to it.

When Budgeting, Think in Shorter Terms

One of the ways I’ve found success in budgeting is to think in shorter terms. Instead of trying to plan for an entire month’s worth of income and expenses, I’ll just plan out the next two weeks (which works well since I’m paid biweekly). Personally, we find it easier to anticipate upcoming expenses over the next couple weeks than for the entire month. But even a two-week plan has pitfalls. Things always tend to sneak up on us that we forgot to account for when setting the budget. Kids’ yearbooks, medical expenses, or a trip to the vet can blow your budget out of the water. For this reason I’ve started thinking about my income and expenses on a daily basis.

The Daily Cash Flow Battle

I don’t literally mean I lay out a budget every single day in a formal manner. I mean that I break down my incidental, or miscellaneous, expenses budget for the entire month down into a daily amount. For instance, if I set aside $360 in June for incidental spending (eating out, clothes, gifts, entertainment, etc.) then my daily incidentals budget is $12. That means I can spend an average of $12 a day on these miscellaneous budget categories and not break my budget. I keep this figure tucked away in my memory bank and while out and about during the day keep sort of a running total in my head. There was the $3.00 breakfast sandwich on the way into work; $1.00 for the drink out of the machine; $5.00 for a coworker’s kid to go to band camp. I’ve already spent $9.00 of my $12.00 budget for daily incidentals. That means if I want to stop by Target and pickup that new CD that came out it will have to wait until another day.

One Bite at a Time

This plan reminds me a bit of that saying, “The best way to eat an elephant is one bite at a time.” By breaking down an entire month’s worth of budgeted expenditures into a daily limit we are forcing ourselves to keep an inventory of our expenses as we go about our lives. Not much room in this plan for a $40.00 pair of jeans you happened to see in the window on the walk to work. If you continue to win the daily battles when it comes to daily cashflow, ultimately you will win the war against debt and overspending.

photo by IntangibleArts

This is the fourth article in a series on Life Skills for the New Graduate by The Life Skills Network. All week we’ll be featuring tips for new grads. See the bottom of this post for details and the rest of the lineup!

The tassels have been turned, the diplomas distributed, and the caps tossed in celebration. It’s the morning after graduation, the pomp and circumstance is over, and reality is setting in. Thoughts of job offers and relocation may be dancing through your head. You are probably looking for a place of your own close to a new job, but not too far from your mom’s cooking. It is an exciting time for new graduates. However, it is also a dangerous time, financially.

New Digs

Next to getting a car as a teenager, few things are as liberating to young adults as moving out and finding a place of their own. Unfortunately, the temptation to prove your independence usually leads to overspending on things like new furniture, decorations, and electronic gear. I remember when I moved into my first place. I had a perfectly good television with a little entertainment center capable of holding my small collection of DVDs, my TV, and my beloved Xbox. However, my new living room was larger, so I would need a larger television. And if bought a larger television I would need a larger entertainment center to hold it. Since the new entertainment center had a place for a stereo I’d need one of those, too, and a few more DVDs to fill in the space around the stereo. You get the idea.

I’ll Just Charge It

While I had all my expenditures mapped out pretty well, going so far as highlighting them in catalogs and printing out their order page from retailer’s websites, I had done a particularly bad job of saving up for the occasion. That’s fine – I have a credit card! Big mistake. I charged a few things here and there, and made minimum payments on the balance. When a new movie came out, or I needed a recliner, or a new mattress, I charged those, too. Pretty soon I had accumulated a fair amount of debt in the name of “upgrading” my new living space.

Save and Spend Plan

Ten years later, and a lot of heartache and hard work to pay off those post-college debts, I can honestly say it’s a struggle to even remember what that credit card balance represented. At the time it was very important to buy a new futon, or a new welcome mat with my alma mater’s logo, or a new surround sound system, but now I realize all that was just stuff. Stuff comes and goes, leaving behind only a trail of guilt and credit card debt to be remembered by.

If I had it do over again I would have made up the same wish list (although it probably wouldn’t be quite as glamorous now) and prioritized the items 1-10, well, more like 1-30. I would open a new subaccount at ING Direct and label it “Wish List.” In this account I would set aside a specific amount of money each paycheck until the balance was enough to buy item number one. I’d transfer the money to my primary checking account and pay cash for whatever was my top priority. Once that was safely in my new house or apartment I would do the same for item number two, and so on.

This concept of saving for specific items forces two habits that are worth taking with you into adulthood. First, it gets you into the habit of saving a portion of your early salary, something you should also be doing for long-term goals, like retirement or a downpayment on your future home. Second, the delayed gratification forces you to scrutinize your list and decide if the new refrigerator with ice through the door is really worth $100 for the next twelve paychecks. Chances are, there are things you would rather do with your money than tie it up for six months waiting to buy a refrigerator. Suddenly, opening the freezer and grabbing a few cubes doesn’t seem like such a chore.

Resist Temptation

As a new graduate you will be subjected to every marketing ploy in the retail furniture book – 0% financing, 90-days same as cash, no payment until 2012. Don’t believe the hype. None of these creative financing options will leave you feeling as good as spending hard-earned cash and owning your new furniture, appliance, or electronic gadget the minute you leave the store’s double doors. There’s no feeling like owning something outright. If you really want to be successful in financial life this is a must-learn lesson, and unfortunately, one you probably didn’t get from your college experience.

Here is the rest of the lineup for the Life Skills for the New Graduate series:

• Monday: 10 Financial Tips for New Grads at My Dollar Plan
• Tuesday: 7 Common Interview Questions For The New Graduate at The Wisdom Journal
• Wednesday: Inexpensive Tips For A Greener Life After College at The Good Human
• Thursday: Tips for Furnishing Your First Place at Frugal Dad
• Friday: 5 Do’s and Don’ts Of Living The Good Life For New Grads at My Super-Charged Life