What Would Happen if You Plan and Budget for All Spending

by David@MoneyNing.com · 8 comments

UH2L‘s comment sparked another idea on slowing down the mini David in me that likes to splurge.

So when I want to buy nice things that are somewhat expensive, I plan ahead and I budget.

What would happen if we stop buying everything from now on when we want them and instead plan and budget for it? Want that iPod? Allocate $100 a month towards it with your future paychecks. A shiny looking knife set? Gotta have a plan first.

The idea is simple. Instead of buying something on the spot, you simply delay the purchase by putting a plan together. You would still buy it, just after your future income arrives.

Thinking about this a bit, I see some amazing benefits:

  1. Makes You Wait – As you know, most of what we buy are based on impulse. By delaying the purchase, most of what we really “need” might not even be necessary in a few weeks (or months).
  2. Overspending – It’s much harder to over commit your spending (with credit cards or not) because you aren’t paying for something without the necessary funds. You won’t be caught off guard in a month when your bills finally come knocking on your door.
  3. More Workload – Once you implement this idea, there will be more work with wanting to buy something as there’s actually “work” involved. This has a negative psychological impact to spending in general, which helps you not want to buy (this is the same idea, only backwards, as the positive influence of saving money).
  4. You Don’t Decrease Your Savings – I really like this benefit, since planning for it with future income means you won’t dip into your savings for purchases. The savings might not go up, but the trend long term is still pointing the right way.

Pretty cool huh?

Of course, in order for this to work, there are a couple things to keep in mind.

  1. Discipline – You absolutely need to carry this through. It will be hard at the beginning but it will pay off big time if you stick with it. As with anything else, it will also get much easier once you are used to practicing it.
  2. Do It for Everything – Now that I think about it, forget whether it’s a necessity or not and just implement it for everything unless it’s time sensitive (supplies running out, or emergencies like a flat tire for example). Put everything you want to buy through this system and you will know whether they are really needed or not pretty soon.
  3. Never Hurts to Try – As far as I see it, it doesn’t hurt to give it a go.  Just make sure you don’t tell your loved ones that their gift is coming in six months because you read this article. (Note that if you already told them and they egg the screen, remind him/her that it’s the monitor that gets messed up and not this site).

Your Turn

What do you think about this idea? Is it viable? Do you already practice it and what are the results?

Tricks to Help Deal with Unaffordable Purchases

by David@MoneyNing.com · 9 comments

Whether it’s a lavish lifestyle, a luxury experience or an exotic products, we have all desired something unaffordable. Sometimes, just the fact that it’s unattainable makes us want it even more. How do we cope with it when it happens? Here’s my version of this last night.

Off and on, my wife and I would look at houses. No, we don’t plan to buy one yet, but we are slowly narrowing our focus by learning about our preferences.

Last night, we saw an area that we really liked. It might be the views, it could be just the photos of the house or it’s possibly the school district, Two things for sure though – we fell in love with it and the selling price was too high.

Okay, so it’s $200,000 (at least) over our tentative budget. In many areas of the country, you can actually buy a whole house with that lump sum.

Then I thought about this some more, and realize that it’s not the end of the world. I came up with several remedies to deal with unaffordable purchases.

  1. Figure Out What that Experience Gets You – Knowledge is half the battle. Know what that expense will get you go a long way in understanding whether it’s really necessary. Does that Porsche or Gucci bag fundamentally make your life better?
  2. What About Alternatives – Does the extra $200,000 dollar, or $1,400 per month for 30 years (approx. with 6% interest and 1.25% property taxes) bring you more joy other than the instant gratification? With that sort of cash, you can pay for tons of “instant gratifications”. Is that better?
  3. Search Your Past Experience – It’s not the first time this occurred. What happened when you fell victim to your impulses before? Has it worked out or did the excitement die down with you holding the huge bill? Was there no regrets about it or did you really wish you hadn’t take the plunge? Organizing your thoughts can sometimes give you the answer you are looking for. At the very least, it will give you an insight into what works or doesn’t work for you.
  4. Know Your Goals in the Outset – If the purchase is necessary and you are just looking at a product that is too expensive, knowing your goals with this purchase really helps. The reason why I want a house is for stability and a comfortable place to raise a family. Does that extra $200,000 get me that or is it merely bigger and thicker granite counter tops?
  5. You Can Still Afford it, Someday – As my mom once said, “it’s not where you are but where you are going that matters”. You might not be able to afford it now but what’s to say that you cannot afford it in the future? Maybe flying that private jet to Paris is just the motivation you need to achieve your financial goals.

Counter Intuitive Way of Lowering Your Spending

by David@MoneyNing.com · 11 comments

It’s not that I don’t like saving money (yes I do), but when weeks go by without me splurging, that wallet of mine seems to vibrate by itself. The urge is always to press snooze by buying something, but the silence only lasts for a short while.

It’s amazing to me how this works but it seems like the less I spend, the less I want to spend. I used to want to go out for lunches all the time. But now that I work at home and haven’t eaten out for a while, I don’t feel the need to go out and grab a bite.

I used to have a bowl of ice-cream every night when I was a teenager, and boy would I want one if the sugar rush haven’t started by 9 pm. I still love that sweet taste, but I don’t feel like life is crashing down nowadays when I don’t have a bowl. I think smoking works the same way, but there’s no nicotine in ice-cream I don’t think (at least that’s what the product label tell me).

It even works with diets I think. The less I eat, I less I want to eat. If I continue eating big meals, the more hungrier I get in the days following. It’s as if my stomach can expand and shrunk on minutes notice, but it’s more my desire bubble that does the inflating and deflating.

Reducing your spending this way is not for the faith of heart though. The beginning days are just awful as you have to endure that stupid vibrating wallet. The telepathic vibration is so strong that no matter how well hidden your wallet, it will know how to call for you.

If you can continue to ignore it, the vibration will then become less frequent. Each time, it will have less strength until one day, you don’t feel it vibrating anymore.

If your wallet is vibrating right now, maybe it’s better to let it be so it runs out of batteries by itself.

How I Look at My Money in Big Picture Fashion

by David@MoneyNing.com · 7 comments

What would happen if you were forced to spend a couple hundred bucks? Last weekend we had a flat tire on our way to Palm Springs. Actually, it was two flat tires. There was many emotions going through our heads and most of it was frustration as we were wondering whether we can still get to our destination while helplessly waiting in the rain for the tow truck to come. As minutes turned into hours, we finally realized that at least we are still alive and the only thing we really lost was money and time.

Time we have, and good thing we have funds for emergencies like these.

Speaking of emergencies… Oh emergency fund… Thank you for allowing me to feel secured in times like these.

Lots of readers always ask me emergency funds but so many people just don’t have one setup. Some of the reasons I hear are:

  1. Not Enough Money to Start One – Haven’t we heard this one before.
  2. Savings Offer Low Returns – 2% at an online savings account just doesn’t cut it (Actually, one of the minor benefits of this stock market crash is that many people now think anything positive is a decent return)
  3. How Much is Enough? – Then there are others who always want to know how much is really enough, and when they cannot find out (there is really no right answer to this question), they end up not even starting one.

Torpedo the Account Nicknames

Let me tell you something that’s helped me. Forget about naming accounts based on what they are for. I don’t try to name accounts bill pay and another emergency fund and another spending. What I have are:

  1. Checking
  2. Taxable Investment Accounts (Savings, Index funds, ETFs, Stocks etc)
  3. Retirement Accounts (I used to have a 401k too but that’s been rolled over)

Some of the categories might contain several accounts, but the main point is that I group them based on time horizon. For example, checking is used for bill paying and day to day operations, investments are to grow my money mid-term and retirement accounts are for long term.

Where’s the Emergency Funds Then?

Well, it should be obvious that my emergency funds are mainly in my taxable investment accounts. How much do I need for emergencies are irrelevant because how much I have in the accounts are strictly based on my savings goals and how well the investments do.

What if I Wanted a New Office Chair Fund

Many people have great success by setting up funds for what they want to buy. I used to do that, but I have since stopped because I don’t want to deal with so many different accounts. In order to accomplish this, all I do is setup metrics for me to hit. For example, say I have $5,000 in all my taxable investment accounts. I might say that I will buy that office chair when the total gets to $7,500.

Two Main Benefits of the Time Horizon based Classification

  1. Big Picture – One of the advantages of doing this is visibility. At all times, I can see how I’m doing long term without the short and mid term goals convoluting the picture.
  2. Simplification – This might be the best part because it’s so much simpler thinking about my money this way. No more emergency funds, vacation trips accounts, money to buy TVs, shoes and the like. It’s all really your money anyway right?

A Little End Note

If you think about it, this doesn’t say anything about how many accounts you have or how you will use the money. The visibility of my progress helps me achieve my goals.

Do what works best for you, but always remember the big picture.

7 Facts You May Not Know About the TARP Capital Purchase Program

by David@MoneyNing.com · 8 comments

I was reading an article by Fortune magazine about the TARP funds and one fact caught my eye.  Did you know that the TARP application is only 2 pages?  I mean, is it 2 separate pages with fields on the front and page of each page?  Then I found the official TARP form, and all was clear.  It is 2 pages with 20 fields to fill out, half of which are things like company name, signatures and contact information.

This got me to research a little more and here are 7 interesting facts about the beloved TARP.

  1. Application for banks to receive tax payers money (TARP funds) is only 2 pages while we mail 30+ (at least) page packages each year to pay taxes.
  2. No banks provided specific answers to where the TARP money was spent when Associated Press asked 21 banks that got at least $1 billion in TARP money.  Some banks just say “I don’t know” (according to wikipedia)
  3. Ken Lewis (CEO of Bank of America) wanted to back out of the Merrill Lynch deal and was told by Bernanke and Paulson that BofA had to close the deal.  Those two even told Lewis that renegotiating a better price for BofA is not an option (according to Fortune magazine)
  4. NY Times is keeping tabs on who is getting TARP funds, while the government doesn’t have a list publicly.  (The government does sent out notices, but not when funds are committed.  They just let the public know in batches.)
  5. Before the Obama administration ever took office, $379.8 billion of the whole TARP fund has already been committed. (see NY Times link)
  6. I thought any funds over the first 350 billion was supposed to be voted and approved by congress before the treasury department can use it, but for some reason I never heard of news on that.  (I could’ve missed it, so could someone point me to mentions of it?)
  7. Last week, Eizabeth Waren of the Congressional Oversight Panel said that the government paid $254 billion for assets that were worth only $176 billion in 2008.  So much for making money on these things.

Maybe we should just sit back and relax because it’s not like we can do anything about it anyway.  I wonder if they can at least streamline the unemployment application because at least more people can benefit from that.  A 2-pager would be nice.

Loan Modifications, Foreclosures Affecting Retirement Savings (IRAs and 401k)

by David@MoneyNing.com · 47 comments

house under waterWith foreclosure rates sky rocketing and no end in sight, banks are much more willing to negotiate with homeowners on the specifics of their mortgages. These days, “loan modification” have almost become an industry by itself as banks allocate more and more resources to work on this.

Sparked by all the news surround it, a reader had this question:

What happens to IRAs and other retirement accounts when someone approaches a bank asking for a loan modification? Can the bank take over those retirement savings to satisfy part of the debt (in the case of a short sale for example)?

Loan Modifications

A loan modification is basically a change to the terms of your loan. In theory, it could be lower interest rates, shorter loan terms or even completely writing off the whole mortgage.

From what I’ve read (and heard), lenders will not agree to any loan modification unless you start to show inability to repay the monthly mortgage payments. Once delayed (or missing) payments become frequent though, they might work with you on a loan modification.

The modification process is basically a negotiation where the lender will reduce your monthly payment if it believes it is better off with you paying a reduced mortgage payment. Therefore, the modification needs to be better than your house being in foreclosure (in the bank’s eyes).  In process, the retirement accounts are safe because they are still working with you to get you current with the mortgage payments.

What About Foreclosures

Think of foreclosure as a few months of non-payment.  If loan modifications weren’t enough to reduce your payment to an affordable level (or if there were no loan mods to begin with), a notice of default may be sent to your house after 90 days of missed mortgage payments.  At this point, the lender will seize your house and put it up on auction in an attempt to recoup the cost of lending you money.

If the proceeds doesn’t cover all the cost  such as mortgage, administration fees, lenders may initiate a deficiency judgment (basically, they are suing you to get their money back).  Most believe that lenders won’t even bother with this because this process is long, complicated and expensive.  The argument is that if a homeowner weren’t able to repay the mortgage in the first place, he/she probably don’t have enough funds for the legal actions to be worthwhile.

If however the lender do decide to sue and win in court, you are obligated to repay any debt that the judge grants to the lender.  At this point, it is like any other time you owe someone else money in which you try to repay it with all means possible (job, 401k withdraws etc).

If you don’t want to take money out your 401k and IRA, you can always file for bankruptcy where those types of accounts are safe from debtors.

The Shorter Answer to the Question

Basically, 401ks and IRAs are safe from all types of debtors even though other types of assets (savings, other investment properties and taxable investing accounts) could be in danger.  However, in the case of fraud (as determined by the court), nothing is safe.

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