By Paul Williams

Budget. It’s a four-letter word to many people. We hate the
restriction, the deprivation, and tracking all the little details.
But personal finance experts continue to tell us we need a budget.
Don’t get me wrong. Budgets are very useful tools. I think everyone
should try to use one (or something like it) if they really want to
have control over their finances. But I wonder if we don’t go about
it the wrong way when we try to implement budgets.

For someone who’s never had a budget, the whole process can seem
daunting and mysterious. What’s the right way to budget? Why should
I even do it? How do I track all my expenses? While budgets are
quite simple (a list of income and expenses with goals), there are a
number of questions that can come up for the uninitiated. They find
some answers from people who seem confident and knowledgeable and away
they go. They make up their first budget and set high goals. Maybe
it looks like this:

That’s not a bad start. It’s probably missing some categories, but
they covered the major areas. The problem is this person’s been used
to spending $200 a month eating out, goes to a couple movies every
month with their friends, and buys every new Apple gadget the comes
out. Their actual spending is nowhere near their “ideal” budget, but
they don’t think about that.

They try to stick to this new budget, but amazingly they fail. After
going two weeks without a movie or eating out, they cave in and
splurge. They can’t resist the new iPad and buy it even though they
didn’t budget for it. Then they wonder why they didn’t save anything
at the end of the month.

A Better Way?

I think the problem with shooting for your “ideal” budget all at once
is that it requires major changes immediately. It feels like
deprivation. It feels painful. And we don’t like pain. So we give
up on the budget, declare it doesn’t work, and go back to our old
ways.

But maybe there’s a better way. What if we didn’t try to fix our
spending in one fell swoop? What if we simply focused on one or two
areas at a time – making small, incremental improvements every month?
It might take longer, but your chances of successfully reaching your
goal are likely increased. Here’s what this process might look like.

First, track your spending. Without knowing where your money is
going, how will you know where you need to focus? I suggest using
something like Mint or Quicken for this. It takes a little bit of
time to set up, but it can be fairly automatic after that. Do this
for a month and you’ll see where most of your money is going. (It
won’t capture everything because some expenses are irregular or
semi-annual.)

Next, take a look at your spending. Pick one or two areas you’d like
to cut back on. (Or choose to focus on increasing your income.) Set
a reasonable goal for yourself. If you’ve been spending $200 a month
eating out, it’ll be hard to drop down to $50 a month right away.
Instead, start smaller and grow from there. Maybe a goal of $150 or
$175 would be better. Give the money you’ll save a job (like
increasing your savings or paying off debt). Spend the next month
focused on your efforts in these one or two areas. Keep tracking your
spending.

Rinse, lather, repeat. As you continue going through this process,
you’ll make small changes that are noticeable but not drastic. It
might take a year or two to get where you really want to be, but
that’s better than setting ridiculous goals and giving up right away.

This Won’t Work for Everyone

This method probably isn’t ideal for someone who needs to make a big
change fast. If you’re drowning in debt or having a major spending
problem, you’ll have to make a few drastic choices right away. But
once you’re in a sustainable mode, you can start using this strategy.

And I’m not going to pretend this is something new. I’m sure someone
else has suggested it before. I just think it could be a better
alternative for those who have struggled with budgeting in the past.
What do you think? Is this a reasonable process for achieving a goal?
All it really amounts to is breaking a big goal down into bite-size
pieces. Share your thoughts and tips in the comments, and let’s see
if we can improve this idea.

This guest post was written by Paul Williams, a Christian
financial planner in Pennsylvania. Paul regularly writes about personal
finance from a Christian perspective on his website,
Provident Planning.

Have you ever tried building a budget a few expenses at a time? Do you
think going “cold turkey” on spending would be a better way to develop a budget?
Do you have any other ideas on how to implement a budget for someone who’s
never had one?

By Kevin M

Frugality is practically THE staple topic of the personal finance world. Hundreds of posts come out each week telling us how to save money on this or that expense, how to cut costs with more do-it-yourself efforts, where to get the best rates and rewards on credit cards, how to cut your taxes—you name it. And I confess that I regularly write of such topics myself.

But at some level at least, it seems like we may be doing a disservice by focusing so heavily on only one side of the personal finance ledger, while giving short shrift to the other major component: income.

I’ve actually seen the earning more vs. frugality debate written about in a few places, buried among the scores of posts written on frugality and thrift. Maybe the reason is that frugality is easier to write about than making more money. What ever the reason, more balance is certainly needed.

Here are two facts inherent in the earning more money vs. frugality analysis:

1. Expenses can be cut only so far, short of “living off the grid”
2. Income, at least in theory, has no limit

The bottom line is that while frugality can enable us to maintain our current financial status, only by increasing our income can we elevate ourselves.

The limits of being frugal

As you’ll see in the final section of this post, I’m not anti-frugal at all. But at the same time, it’s important that we consider the limits of what being frugal can accomplish.

In and of itself, frugality doesn’t enable us to move forward. It’s mostly an effort to make living on our current incomes more tolerable. That’s a noble goal of course, but if you want more out of your life, being frugal alone isn’t the magic bullet that will take you there.

One of the major inherent limits of frugality is that it often is a trade off between our time and our money. Perhaps the primary reason any of us would be spendthrifts is because it’s a lifestyle that emphasizes convenience. Paying more money often means we get what we want faster and with less hassle.

Frugality requires time, time to look for better deals, to do research, to spend fixing things ourselves. The spendthrift has none of that to contend with, and while he will have demons of his own to face, the frugalista is not without a few demons either.

All that time spent looking for deals and fixing things is less time available for income increasing activities.

In addition, there’s a circle-the-wagons aspect of frugality that doesn’t lend itself well to reaching out into income expanding ventures. The mindset that serves frugality so well is often in direct contrast to the thinking required to make more money.

Why earning more money is more important

A millionaire computer entrepreneur in the Atlanta area was being interviewed by the local newspaper in one of those “how I did it” articles. This guy come from a modest middle class background, started as an ordinary computer geek, worked harder than his peers, broke out on his own and built his own company.

Within a few years, his company was grossing several million dollars per year, and if I remember correctly, his multimillion dollar fortune came when he sold the company sometime in his late 30s.

I always find those real life rags-to-riches stories fascinating, but what I remember most about this one was a single comment he made, that I’ll paraphrase from memory…

“We don’t realize what we can accomplish once we break free from the constraints of being middle class. Once I broke out of that, there was nothing stopping me.”

Being middle class myself, and thinking that to be a good thing, I had to think about his comment a bit. He didn’t elaborate on “the constraints of being middle class”, but I think it’s not too hard to figure out what he meant.

Fitz at Ready to be Rich gave an excellent analysis of the differences between the thinking of the rich and the middle class in The Real Gap Between The Rich and The Poor Is Not The Money.

He explains that the true difference between the three economic classes—rich, middle class and poor—is in the way they think about money and about life in general. The middle class is concerned mainly with security, comfort and paychecks, while the rich are focused on opportunity, freedom and delayed gratification, among other things.

The rich move forward because they’re purposeful in their drive to do so. The middle class tend to stay where they are, not because they don’t want to move ahead, but more because their primary drive is to keep what they have. This is similar to the mindset of the frugal that we discussed in the previous section.

The best of both worlds: doing both

Here’s my take on the balance between earning more income and frugality: for most people the relationship should be symbiotic, with one endeavor supporting the other.

Frugality should be used not only to enable us to live within our means, but also to get the fullest benefit from it while using the increased budgetary freedom in support of our efforts to make more money.

What can frugality do to help us to earn more money?

1. It can free us from the stress of living on the edge of financial oblivion, of never knowing exactly how we’ll cover next months expenses. Stress interferes with what ever we plan to do; remove it, and the possibilities are endless.
2. If we get really good at it, to where we can live on substantially less than we now earn, it might enable us to quit a job we don’t like in favor of a job or business venture we feel passionate about, even if it doesn’t pay as much as we make now. If we truly like what we’re doing, the chances of making more money may increase.
3. It can enable us to save a sufficient amount of money that we eventually have enough to either invest in a business venture or a least to live without fear of losing our jobs.
4. It can enable us to pay off our debts and to live debt free. Absent debt, we can live a cash-and-carry life that can free us up to do most anything we choose. That kind of independence usually leads to good things.

Frugality just for the sake of learning to live within our means can be a road to nowhere, a never ending quest to keep our heads above water. But attaching a higher meaning to it by connecting it with a future goal can energize the effort and provide us with the higher financial purpose needed to propel us on the way to true financial independence.

If you’re looking for a way to spend more time earning income to help your cash flow, check out my post, The Freelance Blog Writer Side Hustle. Even if you’ve never written professionally in the past, this post will help you get started converting your passions and interests into an income earning business that you can work in from the comfort of your own home.

Do you think that frugality is a goal all it’s own? Or do you think it’s an effort that should support other financial endeavors?

STRATEGY #9 TO SURVIVE A DOWN ECONOMY

By Kevin M

In the best of times, borrowing seems to be a sensible way to get the things we want but can’t afford to purchase in full right now, but we’re sure we can tackle later with a predictably increasing income stream.

But when economic fortunes shift into low gear—as they are now—the same debt accumulated during better times can become a heavier burden, even one which is impossible to bear. Other than paying debt down and eventually off completely, there isn’t much we can do about the debt already accumulated. But the Great Recession should be a wake up call to all who might have come to view debt as a traveling companion in life.

In 10 Ways To Survive a Down Economy (published on Christianpf.com June 1) we listed ten strategies to help you deal with the bad economy. Our topic for today, Strategy #9:

”Envision a future without debt, and then pursue it.” Gradually pay down—then pay off—your debt. This includes your mortgage. It should go without saying that lowering your cost of living will be a crucial element in this effort as well. (Are you noticing a pattern?)”

Is that even possible any more?

Stop the madness

Even if you haven’t lost your job in this economy, there are enough people who have that you have effectively been forewarned. Debt is NOT your friend, and if you harbor any notions that it is, now is a stellar time to change that view.

Here are steps you can take to get the situation under control if you now have substantial debt:

1. Stop taking on new debt—new debt it not the solution for old debt
2. Cut your living expenses immediately
3. Build up a savings cushion large enough that you can live without credit
4. Once you have a chunk of savings, begin paying down your debt with any system you’re comfortable with
5. If you have debts you can’t pay, contact the lender and attempt to work out a settlement for a reduced payoff; if you have savings, you may be able to get a better settlement with a cash offer.

Once out of debt, stay out of it. If you have to pay for something with a credit card, you can’t afford it. Find a cheaper way. Buy second hand cars and pay cash. If you need financing for college, go to a less expensive school, work your way through and keep any student loans to a bare minimum. Student loans aren’t manna from above, they’re hard debts that will need to be paid back in an uncertain future.

If you buy a house, make the largest down payment possible (20% minimum), keep the term short (15 years) and plan on monthly prepayments to wipe it out sooner. Buy a less expensive home that will enable you to finance under those terms, and if you can’t, you might be better off renting. The practice of perpetual debt has been the undoing of the current housing market.

Save your optimism for your career, your health and your social life, but don’t bet real money that you’ll be able to pay for something over time that you can’t afford now. That thinking has proven to be a sucker bet for too many households right now.

A return to the recent past, or a different kind of future?

For many today, the 1990s are a decade remembered as a time approximating what we might call “normal”, that is, it was a time of economic stability and growth. But often when we think of a time as normal, what we really mean is something more favorable, even desirable, and those were the conditions that prevailed for most of that decade. No one knows whether or not we’ll return to the level of prosperity seen in the 1990s, a decade of low unemployment, low gasoline prices and low interest rates, and what seemed like a certain future. But here’s a clue: the circumstances that produced that gilded decade—the collapse of the Soviet Union and of oil prices in the aftermath of the Gulf War—were events of historic proportions, unlikely to be repeated.

If we’re going to look to the past for clues to the future, we can’t focus our attention on any one time period, especially the more recent ones. The predictable prosperity of the 90s doesn’t in any way invalidate the very different conditions that existed in most of the current decade, or of the 1970s or the Great Depression of the 1930s, another event of historic proportions that molded the spending and savings habits of two generations for decades after.

No one knows what the future holds, so what do we do? Best answer: we err on the side of caution.

What that means, in practical terms, is that we structure our finances on the assumption that the future will see unpleasantness not unlike what’s been experienced in previous times. The idea of taking on debt in that environment—least of all, long term debt—should be something we seek to avoid at all costs. A debt is a fixed cost that will not fall commensurate with a drop in income. For that reason alone, it must be approached with a great deal of caution, especially in times of uncertainty or recognized weakness.

The Payoff: Living without debt

For some, living without debt means living without things that we want that debt can pay for—a form of deprivation in many quarters. But consider a different future, one in which debt doesn’t rule your life…

1. A debt-free position, combined with low living expenses and a healthy bank account balance means you’re beholden to no one.
2. Better sleep and more peace of mind.
3. Not being crushed by a job loss the way it will a more typical household.
4. You’ll still have bills to pay, but you’ll have fewer of them.
5. Less money going to pay monthly debts means more money for savings, a problem for many households even in the best of times.
6. Greater mobility, including the ability to pursue new job and business opportunities that others weighed down by debt can’t consider.
7. A life that’s more people-centered and less money-centered.
8. And finally, an unencumbered mind is a productive mind; absent the worry of debt, the ability to tap your creative energies will be more possible than ever.

What ever the future holds, yours will be more positive in everyway if you aren’t carrying a load of debt along with you.

Is that a future worth working toward?

By Kevin M

The cost of living has been rising relentlessly for decades, and while we tend to notice it less during the good times, it all hits home hard in times like these. Forget the official numbers that deny the existence of inflation, if you’re middle class, working class, a struggling business owner, and especially if you’re retired, you know the real story from the trenches on the front lines.

Sure food costs have been bouncing up and down in a range, and gas prices are about 40% lower than they were a year ago at this time, but what about everything else? What about property taxes, utilities, health insurance and all things education related? What about movie tickets, theme parks, medical co-pays and car repairs? Our auto insurance just increased by more than 20% because of state mandated add-ons to cover uninsured motorists. 20%–in 2009—how’s that for timing?

With incomes flat and jobs disappearing, the logical course is to trim or eliminate expenses across the board. Some expenses are easier to reduce than others, but the best strategies overall tend to involve cost cutting on numerous fronts. Here are a couple of the things we’re doing in my house.

Using a wireless router to add an additional internet line. This one is recommended for home or office computers, and can save substantial money if you need additional computer lines but can’t afford the higher monthly cost.

We had one internet connection, but we have two teenagers, and you know what that means. Facebook, computer games, Facebook, email, Facebook, school research projects, and more Facebook. A new internet line would have cost over $200 to install, plus a monthly fee in excess of $45—that wasn’t happening!

On recommendation by several techie friends, we bought a Linksys Wireless-G Broadband Router at Best Buy for $50. The device attaches to your main computer, then to a second computer by cable, giving the second computer full internet access. Though I don’t completely understand how it works, the second computer has different email accounts and a separate identify from the first, with no decrease in service to either unit—a certified miracle of modern technology!

There is NO monthly fee for this arrangement, and it’s totally legitimate with your ISP.

It’s somewhat more complicated to install than the unit instructions tell you it will be; think along the lines of “some assembly required” and how simple that never really seems to be. But once installed, you’ll have two fully functioning internet connections for the price of one.

Buying our clothes at thrift stores. We’re not recreational shoppers when it comes to buying clothing, but in a family of four somebody always needs something for some event somewhere, especially at this time of the year when the start of the upcoming school year is fast approaching. Even with store sales and statewide sales tax holidays, buying a “few pairs of pants, a few shirts, and a couple of pairs of shoes” can easily cost hundreds of dollars. But there is a way to cut this cost considerably.

We’ve become regular thrift store shoppers (See A Thriftier Way to Dress). You can buy gently used clothing, most of it for under $5 per article. A brand name shirt, in near new condition, that might cost $50 in a mall store, can be purchased at a thrift store for $3 (that’s not a misprint!). From time to time, you will come across items that are brand new, labels attached, for similar prices.

Unlike the power charged trips to the mall, you don’t go out to thrift stores with the idea of replacing your wardrobe, as it is a hit or miss venture. We like to go once or twice a month, covering several stores (Goodwill Stores is highly recommended), browsing for items we like and that fit. Price is never an issue! If you buy a few articles on each trip over the course of the year, you won’t need to fight with the herd at the mall at peak shopping seasons. Not only will you save money on the clothing itself, but the concept of buying in small doses over the course of the year is much easier on your budget, especially if you have children.

What are some changes you’ve made or plans you’ve implemented to lower living or business expenses? What expenses have you been able to reduce? Are there any you’ve been able to eliminate entirely? Big ideas, small ideas, they’re all worth exploring.

By Kevin M

If you’re serious about reining in your household expenses, shopping in thrift stores is an option that needs to be investigated. Thrift stores offer an opportunity to buy clothing for pennies on the dollar compared with the cost of retail. Shirts $2, pants $4, typical! If you work in a business where mode of dress is a major issue, or you have a family who seem to burn through clothes with each turn of the seasons, saving money on clothing could be a major boost for your budget, and thrift stores are the perfect place to do it.

The Basic Setup

If you’re new to thrift stores and accustomed to the shopping experience provided by mall stores and prime retailers, they can be a bit of shock. Usually they’re set in shopping centers that are best described as less than prime, and the stores tend to have something of a bare bones look. This is of course as it needs to be; in order to offer the lowest prices, thrift stores cannot operate in triple A space. But if you can get past the store’s appearance there are true bargains to be had.

Thrift stores are dominated by clothing, but usually have sundry items in the back or corners that can include books, decorative pieces, furniture, and entertainment equipment. Though the arrangements can look a bit haphazard there is an order to it. Racks of clothing are separated by personal status (men, women, girls, boys, toddlers, etc) and, within each section, are arranged by type (pants, shirts, coats, etc). They are segregated by color, not by size as is typically the case with traditional retailers.

If you’re looking for prices, that hand written numeric scribble you see on the tags IS the price. Oh, and they do have fitting rooms.

Significant Benefits

The most obvious advantage is that you can purchase clothing at a much lower cost than at traditional retailers saving potentially thousands of dollars each year. The reason thrift stores can do this is because the merchandise is donated. Charity run thrift stores, such as Goodwill, collect donated clothing from the public, sell it in their stores and use the proceeds for charitable purposes. But as there are many charitable organizations collecting clothing these days, many raise funds simply by selling the merchandise to private thrift stores, eliminating the need to maintain a sales organization.

Thrift stores offer an especially generous advantage in regard to children’s clothing. Kids need clothing more frequently than adults either because they grow out of what they have, wear it out faster or tend to be more fashion conscious. Volume is a major driver in buying clothing for kids. Fortunately, the same factors affect most families with kids, with many people putting the clothes out for charity collection when they’re no longer needed. As a result, much of the children’s clothing in thrift stores is quite obviously barely worn. If your children are young and growing out of their clothing in a matter of only weeks or months, you will save quite a bit buying second hand versus new.

The vast majority of articles for sale are second hand, but most would fit under the classification of gently used. However, you can find some items that are brand new. My wife recently was able to purchase a pair of Liz Claiborne pants for under $5 and they were new–even the retail tags were still attached. Brand new the same article would have been well over $50.

Many items offered are brand name. Geography may play a part here; since merchandise is largely culled from local donations and clothing drives, there does seem to be a greater volume of brand name merchandise offered by thrift stores located in higher end areas, so even if you live in a more middle/lower middle class environment it may be well worth the time and gas to take a drive to stores located in the higher rent districts.

Finally, though most patrons probably don’t think about this, there are environmental benefits to shopping in thrift stores. Any new item you purchase requires natural resources to produce; by buying second hand you are, in effect, buying recycled goods. While many people participate in recycling projects in the disposal of goods, it is an equally significant contribution to be an end user of recycled products. Any product which is re-used reduces the demand for natural resources.

Some Things You May Need To Be Aware Of

Thrift stores are very much hit or miss. Most items are one of a kind. If you find the perfect shirt, blouse or pair of pants, but it isn’t in your size, you will have to look for something similar. It will be difficult to set your heart on buying a specific outfit in a thrift store since there is an overwhelming chance that either it won’t be in stock or it won’t be in your size. As such, it’s probably best to arrange your shopping trips as periodic rather than item specific, and plan on accumulating clothing on a continuous basis.

Put together a list of several thrift stores, and plan on making the rounds once or twice a month, or what ever your schedule permits. Go through all of the merchandise in your section of each store to find items that appeal to you. Go ahead and buy what you find, the prices are so low you won’t regret it later. Shopping in this way will also cut down on the cost and stress involved in large shopping sprees like back to school.

You need to be aware that thrift stores typically have a no refund policy, and since most items are second hand, you must be sure to check all articles thoroughly before paying.

Despite the obvious advantages of shopping in thrift stores, there are certain items I can’t conceive of buying second hand. Underwear is one, shoes are another, but you could probably come up with your own list. Moral of the story: don’t plan on severing your ties to mainstream retailers completely.

Saving money always makes me feel good, but if shopping represents a form of entertainment, and you genuinely enjoy the shopping “experience” you get at the mall, thrift stores can leave you a bit empty. Traditional retail stores focus not only on product selection, but also on ambiance. Product arrangement, store colors, customer service, music and even aroma’s are established to create an environment that just makes you feel good. So do as much shopping in thrift stores as you can–saving a ton of money in the process–then head over to the mall and enjoy the ambiance, and all the more since you won’t be paying for it.