You know you have a problem in convenience stores if

• The clerk knows you by name
• You buy your beer there….by the can
• You buy your saline solution there
• You go there more than twice a week
• You are there on lottery day
• You do “mini grocery shopping” there

If you find yourself doing one or more of the above items then perhaps you should read The Cost of Being Unorganized

The envelope budget system works like this: take about five or six envelopes and label them for your discretionary spending accounts. This would include groceries, eating out, vacations, entertainment, household items and gift spending. I would not recommend setting up envelopes for your utilities or house payment since you do not have much control in affecting those monthly amounts. Plus, it is not realistic or convenient to pay your electric bill in cash. Next, go through these discretionary categories and break down how much you need to put into each envelope per month (or per paycheck).

Sample paycheck of $2000 take-home pay per month:

• Approximately $1200 per month of the paycheck goes to the mortgage, utilities and loans. This leaves $800 for the envelopes
• $400 per month for groceries
• $50 per month for gifts (weddings, birthdays, etc.)
• $75 per month for eating out (this could be merged with the groceries account if you wish)
• $75 per month for vacation
• $100 per month for household items (home improvement items, landscaping, home repairs, etc.)
• $100 per month for clothing

Here’s how it works. Every paycheck you go to the ATM and withdraw $400 in cash (and drive home very carefully!) and do that twice per month to get the $800 in the above example. Once you get home you deposit half of the amounts above (example above was monthly amounts) into each of the envelopes. Then as you spend money during the week you take it from each envelope. Each one acts as sort of its own bank account. I’d recommend recording the amount you removed from the envelope on the envelope itself. Two things will begin to happen to you over time:

1. You will control your money. Not the other way around. Who wants your money (how much or little you have) to control you? Not me.
2. Instead of having too much month left at the end of your paycheck, you will have plenty of your paycheck left over at the end of each month.

A perfect example of the envelope budget system in action occurred to me this weekend while replacing our broken mailbox post near the street. The “household items” envelope at the time had about $60 in it. I took that cash and headed to the hardware store. As luck would have it, the mailbox I found and liked cost $52. That left me with $8 to put back in the “household items” envelope. The way most people do it would be to buy any mailbox regardless of what’s in their bank account or even worse put it on a credit card. My envelope system sent me home with leftover cash in my pocket and control of my finances (only having $60 for this category forced me to keep in within the limit).

My wife and I did the envelope system right after we were married in 1995 and now I’m pleased that we’re back on the system. Another benefit of the envelope system is that you pay cash for things. Paying cash for big ticket items has a bit of a sting to it. Imagine buying a new $900 refrigerator and shelling out nine Benjamins one by one by one to the Best Buy salesman. Believe me…it’s painful watching that cash go out of our wallet.

Another benefit of the envelope budget system is that you enjoy the items for which you’ve saved your money. Most consumers charge their Disney trip and then spend months, interest and frustration paying it off later. With this system you are depositing $100 per month into an envelope saving for that vacation. Imagine how much more fun Mickey Mouse or Space Mountain become when you know the trip was paid for before you ever entered the park or hopped on that airplane.

One final benefit of the envelope system is that it forces you to have a front-row view of where your spending is going. Watching one envelope continue to get cleaned out or seeing another build up over time reminds you of your spending habits. For us personally, the grocery envelope gets tattered and worn in about two months of use, but the “Christmas” envelope is still fresh and crisp like the bills in it.

Bottom line: the envelope budget system makes your money work for you, not the reverse.

The Lifestyle Of Actors And Actresses

People in Hollywood live a lifestyle beyond most of our wildest dreams. They are well-tanned and well-groomed. Most of the biggest name celebrities have figures and physiques of athletes or models. They drive expensive cars and live in expensive homes. Jennifer Aniston singlehandedly created an entire cottage industry for hairdressers wanting to give their customers her exact hair style and look. Mark Wahlberg in the early 1990s (back then he was called Marky Mark) singlehandedly became the most successful Calvin Klein jeans model in the history of the company. He sold more jeans by posing shirtless on billboards and magazines than any other marketing campaign could ever hope to achieve. Bottom line: the more you become ensconced with the lifestyles of the rich and famous, the more likely you are to spend your money on their income. That’s a bad thing.

The Barrage Of Commercials

In the 1960s a typical one-hour show had nine minutes of commercials. Today it is twice that at 18 minutes per hour of programming. A thirty-minute show today now has eight minutes of commercials. Put another way, when you watch ten hours of television you are watching nearly three hours of commercials. If scientists put you in a room and made you watch products pitched to you for 180 minutes it would be very likely that you would want to buy those products either immediately (think pizza when you’re starving) or the next time you are in the store (basically anything by household consumer giant Procter and Gamble). Over time, the mass marketing of these products begins to sink into your subconscious mind. In my opinion, the brands with the least risk of consumers buying generic competitors are Coca-Cola, Kleenex, Jif peanut butter and Wonder bread to name a few. The decades of brand recognition and advertisements dumped into our minds makes the decision to purchase that product a no-brainer. Bottom line: the commercials do affect your spending habits over time although you probably don’t feel it during each commercial.

Retail

Recently I made a purchase at a retail store and the sales clerk was thrown a curve ball when I offered to throw in some small change to pay the bill so I would get entirely bills for my change (as opposed to bills and coin change). Since she already rung it up at the register, she could not figure out how much change I should get when I decided to give $5.17 instead of$5 for a $2.17 purchase. I’m not sure if she was math-challenged, financially-challenged or both. She obviously did not know this extremely cool trick for giving out any amount of change without using a cash register or calculator.

Bottom line: this clerk could not compute in her head what my seven-year-old daughter has learned about money in second grade.

Financial

Many consumers do not closely watch bank fees or they do not care. Two dollars here for an ATM fee or thirty dollars there for an insufficient funds fee (that one is obnoxious). Does this add up to more than one hundred dollars per year for you? Two hundred dollars per year? It’s time to tally your annual spending on bank fees and jump ship from your bank if the fees are excessive. The epiphany for me was when I went to cancel my local bank account I’d had from 1987 – 93. I’d allowed this bank to use my money to loan to its customers for six whole years and when I went to close it they did not give two hoots about me. I was appalled when the bank teller did not even say “thanks for banking with us for SIX YEARS” let alone a “is there anything we can do to keep your business?” would have been nice. After that experience, I learned that most banks do not care about you one iota. That is, except for one remarkably, phenomenal bank. I’ve banked with them since 1995 and will until I die. As will my kids and their kids and their kids.

Bottom line: many consumers do not watch their bank fees and costs as closely as they should. Regularly reading my website will hopefully change all of that.

Entertainment

(Ignore this section if you paid cash for your boat or inherited it or obtained it for free.)

I am going to pick on people who own boats. Only people who financed their boat purchases over ten, fifteen or twenty years. Yes, you read that correctly. Did you know that boat loans can be longer terms than a home loan?!! Now, don’t get me wrong. I am thankful for the wonderful memories made from our neighbors the Wegleys by letting us ski on their boat here but I have sometimes wondered how much one needs to love boating to make payments for a hobby that is done only four months a year in many parts of the country. I love swimming, fishing, and water skiing via a boat as much as anyone else, but I have the following the observations:

• “The two best days of a boat owner’s life are the day he buys the boat and the day he sells it.” That expression was obviously coined by a boat owner.
• If you are unfortunate enough to live in a climate where boating can only happen four or six months per year then you need to view your monthly payments as double or triple the normal monthly amount. A $200 per month payment is actually $400 per month if you only boat six month per year, right? $2400 per year turns into $97,000 at 6% over 20 years excluding inflation and taxes.
• Although it may happen elsewhere, I have never personally known someone to downsize on their next boat purchase. People always buy bigger, faster, more expensive. So, think twice during that first purchase. It’s likely your first of several purchases.
• It sure is a lot cheaper to have a friend with a boat than own one yourself.

Bottom line: consumer spending on expensive entertainment may derail other necessities such as retirement or college planning.

The Good News

The State of the Union financially speaking has some good news in it as well. Today an abundance of resources exist to help us financially that did not exist for our grandparents or even our parents. A short list of examples:

• Looking for a college scholarship? You no longer need to look through thousands of pages of books and forms. Just go here.
• Financial calculators are no longer reserved for CPAs and financial planners. You can go here.
• Compare bank, mortgage and auto loans ad nauseam here.

Of course, you can drastically expand on that list to include your favorite financial websites as well.

In summary, the (Financial) State of the Union is that it has citizens who still don’t get personal finance and those who take advantage of the abundance of resources to maximize the savings and investing.

Further evidence of this argument is supported by that fact the U.S. Treasury’s coffers increased sixfold from $7 billion collected in 1941 before the withholding tax was introduced to over $43 billion by 1945. Of course WWII played a large part in expanding the U.S. economy, but the withholding tax hid the true burden shouldered by working Americans. For those who believe a congress with a lot more money to spend is a good thing then the withholding tax was the greatest source of spending money for politicians ever created. For those believe the more money congress has the more money will be wasted the withholding tax was the worst invention ever created. What is the point of this discussion? The point is that your spending habits will have a much bigger impact on your mind if you view them annually rather than monthly, weekly or daily. Some examples:

• A $425 coffee bill.
• $2860 spent on meals eaten out.
• $250 spent on DVD rentals at the local video store.
• $936 spent on extra “knick knacks” for the house or apartment purchased at Wal-mart or Target.

Now, if your local Starbucks required you to pay your coffee bill in advance each year $425 would seem like one heck of a hefty bill to pay up front. Bills like these would have been thought to be preposterous in the 1940s when the withholding tax was introduced. In the 1950s Bloomingdale’s department store caught on to the same financial scheme the U.S. government used for collecting taxes. They would put your large bill from the department store onto this new concept called a credit card. For a mere $3 annual fee for cardholders, the Diner’s Club (created by Bloomingdale’s) would let you split up the bill over several payments into smaller chunks. Over the next couple decades this completely changed the culture of consumer spending to view costs in a monthly amount instead of an annual amount. Other changes that negatively affected consumer spending habits are below:

• Christmas savings clubs have become nearly extinct. Today’s younger generation have not even heard the term. The clubs were set up by banks to let you deposit cash on a regular basis so when Christmas came you already had the cash set aside for all of your spending. Christmas spending has done such a 180-degree turn now that we are to the point where credit card companies let you miss a payment (for a hefty fee, of course) in January to avoid sticker shock when you see how much you spent during the holidays.
• Consumer purchasing a car used to look at the total sticker price. Now many buyers only look at the monthly payment and don’t scrutinize the interest rate of the loan or total car cost like they should.
• Car leasing is the same concept only worst for the consumer. The monthly payments are lower than a purchased car, but the consumer has nothing at the end of the lease.

The examples above are just a few of the consequences of living in a monthly-payment-driven culture. True costs are often hidden or misleading because they are divided equally over many months or years. So how can you as a consumer more closely monitor your spending habits so that you spend less? Try the following ideas:

• Record all of your spending for one month. Keep all receipts and record cash expenditures. A rough estimate of your annual spending would be to multiply these figures times twelve. Once you see the larger annual numbers you’ll be able to make minor adjustments to your daily spending that will have major effects on your finances.
• Track common household spending categories such as groceries, eating out, clothing and entertainment. For most consumers those four categories alone amount to $10,000 per year or more. A minor tweak to these categories could yield thousands saved annually.
• Don’t be car poor. Personal finances expert Dave Ramsey recommends that the value of your car(s) should not be more than 50% of your household annual income. This may sound obvious for some, but I have heard callers on his radio show driving $40,000 pickup trucks who earn $47,000 annually.

Using the knowledge from the examples above can help you free up thousands of dollars from spending to be directed to more productive long-term investing goals.

1. Develop a budget. Yes, I know for some of you that’s a four-letter word but at a bare minimum you need to at least know where the majority of your money is going. In Larry’s Burkett’s Complete Financial Guide for Young Couples: A Lifetime Approach to Spending, Saving and Investing he mentions that 10% of us are rich enough to not need a budget, 10% of us actually have a budget and that 80% of us do not. Can you answer these questions within 5% accuracy?
   • How much cash do you withdraw per month from ATMs and where does it go?
   • How much do spending eating out per month? Could you save money when you eat out?
   • Do you balance your bank account monthly? If not, convince me that there aren’t merchants who mistakenly overcharged you for a good or service.
   • How much do you spend on your car and car service per month? For most people this is the second-biggest expense next to paying a mortgage or rent.
2. Decide which items in your spending are a want versus a need. All of us have the same basic needs of shelter, food and clothing. Other obvious needs include insurance (health, auto, etc.), basic utilities such as electricity and water as well as various household convenience items like a microwave and dishwasher. However, what about that Netflix service at $20/month? Or playing golf twice a week in the summer? Or maybe taking a cruise every year? At your previous income level these items could be purchased without much of an impact to the household budget. Now that your income is reduced do you need to play golf so often? Could you take up a cheaper or nearly free form of exercise like jogging, tennis or basketball? If Netflix costs you $240/year could you get similar movies from the library for free? Most libraries now will let you reserve DVDs online through their website. Once you’ve weeded out all the extraneous wants I would estimate many people can save 10 – 30% on their spending. Keep in mind that these may not be permanent spending cuts. They might be only temporary cuts for a couple months or years depending on your situation.
3. Can you lower your grocery bill? You don’t need to take it to the extreme like this couple, but you could start buying some generic brand name items. You can see some major savings buying generic items as detailed here.
4. Are you “car poor”? Noted personal finance expert Dave Ramsey recommends that your car’s value should not be more than 50% of your household income. Let’s suppose your annual household income is $70,000. You drive a $20,000 minivan and your husband has a $25,000 truck. The total value of these automobiles is $45,000 which is 64% of your household annual income. This is a problem. Unless you and the family are living in one of those vehicles this is too much money tied up in the world’s worst depreciating asset. If you can get over the whole car-as-a-status symbol thing, you’ll save tons of money on car spending.
5. Call your bank and see which loans or credit cards they will lower for you. First of all, banks absolutely will not offer this to you out of the clear, blue sky. You need to light a fire under their seat and threaten to leave the loan with a competing lower rate. Or just ask them to lower it like my brother, Dad and I all did here. You will be amazed at how responsive the bank customer service representative is when she realizes that her employer may lose your business.
6. Pay cash. It is amazing how much you appreciate your purchases when you need to save up for them. The reason credit card companies (and casinos) are billion-dollar enterprises is because they have successfully removed the emotion from spending. Anyone can sign the credit card receipt for pay for a $45 dinner out with the family and think nothing of it. But when actual green cash is involved coming out of your wallet bill by bill somehow you are more aware of this spending. And it’s more painful for you, thus reducing your spending.

Hopefully your major pay cut will be temporarily short term or it was a pay cut chosen by you on your terms. If not, I hope the tips above can provide you some ammunition in battling a reduced household budget.