Regardless of whether you are looking to reduce spending for the purposes of debt reduction, or for saving, the first thing that must be done is to identify where you are spending money unwisely. If you are not ready to be honest about a budget breaker, a vice, or a ‘treat,’ then you are not ready to take full control of your financial (in)stability. This may be hard for some people to be able to see, let alone to admit. Sometimes what is quite obvious to some, is totally unseen by others.
I talked to a few of my friends who are both financial advisors. They both came back to this exact point. Especially for those trying to dig themselves out of a financial hole, if they cannot identify how they got where they are it will be very hard, if not impossible, to get where they want to be. One said he asked his clients to discuss this with their spouses or write it down if they were single. Even if they would not be honest with him, they have to be honest with themselves before he could really help correct their course.
For example, there was a man who said his student loans were too much to handle, and he would be able to get out of debt with a consolidation loan. He did not realize that if he paid a little extra on his current loan each month, he would pay it off over five years sooner than the consolidation loan and save over $1750 in finance charges.
He is having trouble making the current payment and certainly cannot pay extra because he will not wake up early enough to make breakfast and save the four dollars a day that he spends in the drive-through. That $80 a month minus the cost of cereal and milk would be enough for him to pay the loan off in 22 months. Instead he will pay 84 months at $40 a month less than his current payment. What happens if the sausage biscuit goes up in price in the next year or three? He may find himself refinancing again before the seven years are up.
There is also a woman who likes to shop. She has $200 a month on her budget set aside for ‘shopping trips’ which is fine if she was not in financial trouble. She is having difficulty paying off her credit cards and makes a late payment, and its associated fee, about once every three months. What is she charging on the credit card? She is charging the portion of her ‘shopping trips’ that exceeds $200, which is quite ironic.
Until she admits to herself that she is not staying under budget, she will never be rid of that debt. In her case she needs to take it a step further and reduce that $200 budget to use the rest to reduce the debt. She told her advisor that her budget comes out just a few dollars short every month and she is making small adjustments to correct this, but is still off the next month. This means that she has to skip a payment on one credit card or the other every quarter.
What he told her was that the budget is a few dollars off, but the credit card debt went up by $150-$200 each month plus the interest, which means the payment due on the combined cards, goes up by $5-$10 each month. This is what she is not budgeting for. Just those few dollars is enough to throw her off to the point where she is making late payment fees which add even more to the amount due the next month. If she were to consolidate her debt, the credit cards would start back at $0, but unless she were to admit where she is going wrong, they will eventually be right back up where they are now. She will then have the same debt that she is having difficulty with now, plus the loan repayment.
I have a friend that is always baffled by the way I do my finances. It makes no sense to her how I am able to stay afloat in this economy when her husband makes more than I do and they are anxiously awaiting their income tax return to catch up on their mortgage payment. They come over once or twice a month to play games, and last month she commented that I did not have any wine. I said that was because there was no money left in the budget so I skipped the wine. Paying the bills before I bought the wine was a completely foreign concept to her. She found out that I actually would qualify for government assistance based on my pay, but I have too much money in my savings.
“How can you save if you are making a few hundred dollars a month less than us?” She asked me.
My answer was simple that I put money in savings after I paid the bills and before I spent any money on things like wine, new board games for us to play, games for my PC or game console, upgrades to my PC, etc. I had added a savings line right to my budget, so my discretionary funds ended up being smaller, but I had erased all debt except my mortgage, and I have enough in savings to feel comfortable.
This woman and her husband have asked me several times what my secret to financial freedom is. I gave her a container of homemade laundry detergent that I made from a simple recipe that I found on the Internet. She looked at me like I was insane. Last week she asked how I could afford to buy fresh vegetables for my kids to snack on. Apples were $3.99 a bag and her kids would eat a bag in two or three days. That is too much money for her already overextended budget to handle. Her kids were eating Oreos for snack that day. She did not see that one either.
Her husband told me a funny story. Well he thought it was funny. When they get up in the mornings, his girls have their pajama pants rolled up past their knees, and have kicked all of their covers onto the floor. These are the same people who always ask why I keep my thermostat set so low in the winter and so high in the summer. It is obvious to me that they are wasting money on their gas bill by making their girls sleep in a sauna, but they cannot figure it out. They keep asking me the same question, but do not understand my answers.
My advisor friends agree that for most people, it is food and entertainment that is causing them to overextend. They are told that it is children many time, but in reality it is not changing the way they handle food and entertainment once they have kids. A couple can afford to eat out more often than a family can. This can be because the couple has more money available for food, but mainly because the family is ordering more meals and each trip to a restaurant simply costs more. This sounds easy, but is hard for some to see. Likewise, it costs more to go to the movies once you have kids, but some folk just cannot give up the theatre experience. This would be fine if they made concessions elsewhere in the budget, but most do not. Simply if you have kids you have to buy extra tickets, or pay a baby sitter, to go out.
There are many places in our lives where we make decisions that affect our financial situation. Most of us understand that if we are not meeting our goals, we need to do something about it. Before whatever we do to try to help can actually help, we need to identify the cause of the problem itself.