SNL and a "lighter" side of accumulating debt

If you missed it, Jason commented that my last article, "One question that leads to financial wisdom," reminded him of an old "Saturday Night Live" skit about buying stuff that you can't afford. Check it out. And many thanks for the chuckle, Jason.

One question that leads to financial wisdom

Want to get better at avoiding financial trouble? Make a habit of asking yourself a simple question:

Where’s the money coming from?

That may seem like an obvious question to ask whenever you buy anything, from groceries to a car. But it’s one people tend to avoid because they don’t know—or don’t like—the answer. Being financially wise means knowing exactly how you’re going to pay for something before you buy it—besides putting it on your credit card.

No vacation from financial stress
A couple I once counseled had committed to going on a family vacation they could no longer afford. The husband had unexpectedly been unable to work and they were struggling to make ends meet on the wife’s schoolteacher income alone. However, they had made plans months before to spend a week at a friend’s North Carolina beach house, rent-free, with several other families.

Canceling the trip was not an option, the couple had firmly decided. They’d already told their two kids they were going and were reluctant to disappoint them. With the free lodging, they actually considered the vacation “a good deal.” They also were embarrassed at the thought of backing out on their friends, especially for financial reasons.

With the trip just weeks away, the couple had not estimated the other potential costs, such as food, gas, tolls, and activities. They also had no idea how they would actually pay for the trip, other than knowing what credit card they’d use.

A change in thinking
Their perspective began to change when I asked point-blank: “Where is the money for your vacation coming from?”

Once they admitted to me—and themselves—that they didn’t know, the wheels were in motion to find an answer. With a little help, they came up with an overall budget for the trip that included every possible expense they could think of. We totaled up the driving distance and divided it by their van’s miles-per-gallon to get a decent estimate of the travel costs. They set a limit for their recreational spending money—miniature golf was fine, but jet skiing was out.

Scraping up the cash
With a rough idea of the vacation’s cost, the couple turned their attention to finding the cash to pay for it. The wife, who managed the household bills, determined to tighten the family’s belt over the next few weeks and scrape together some surplus dollars. The husband agreed to sell his barely used racing bike that was gathering dust in their garage. They’d also pay for a portion with their modest amount of savings—though not enough to deplete their entire account.

When they returned from the trip, the couple said that sticking to their budget wasn’t easy, but they’d managed. Knowing that the vacation was paid for freed them from worry, if only for a while, and helped them enjoy a little family fun during a difficult time.

“Where’s the money coming from?” It’s a simple question that may require a hard answer. But asking it before you head to that beach house will help keep you out of the poor house.

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Carnival of Personal Finance at Canadian Capitalist

Check out the articles in the 67th edition of the Carnival of Personal Finance, hosted this week at Canadian Capitalist. There are 53 entries, but here are a few that I liked to help you narrow them down:

• The Ideal Budget, at www.bargaineering.com, provides a breakdown of budget categories from the Money 101 classes at www.cnnmoney.com.
• The Life Training Blog shares some principles of being financially secure that are true no matter what the situation of the economy or your income may be.
• A blogger called 2million found a creative way to "save money the MacGyver way" and fix his car using a roll of duct tape and some pliers.

My recent article, "Three ways to help achieve your savings goals" was also among the entries.

The next Carnival will be held at Punny Money, on October 2.

Three months on one income prompts a change

This week marks a notable anniversary in M’s and my household: three months living on one income. All in all we’ve managed well, but I can see things getting more difficult in the months ahead. So we are planning to take steps now to avoid trouble later.

Living smaller
While it hasn’t been easy, living from my income alone hasn’t been too difficult since M left her teaching job last June. The bills are paid. The pantry is stocked, though the shelves get a little more bare before the next trip to the Stop ‘n Shop. We’re surviving without cable television (though disappointed to discover that there’s just as much junk on regular TV from which to shield my teenage stepdaughter as there is on digital TV).

We’ve also achieved a couple goals. We used savings to pay off all of M’s remaining undergraduate school loans. That put us in position to apply for a special federal grant that M qualifies for, which will pay for her recent grad school classes—thus freeing us completely from student loan debt. M also tapped into some of the last cash we received from our wedding (three years ago) to have our kitchen finally painted a color she likes, rather than despises.

Worth the sacrifice
The best part of our one-income life has been seeing M happy and enjoying her new job as full-time mom, which has benefited us all. For example, the start of the school year usually brings a lot of stress, with frantic shopping trips for school supplies in crowded stores and stacks of school forms going unsigned days past their deadlines. This year, my stepdaughter had all her supplies before her first day in seventh grade, and the forms she dumped in a pile on our dining room table were returned the very next day.

It’s all been well worth not being able to watch my beloved Phillies on TV every night—even though they are in the hunt for their first baseball postseason appearance in 13 years.

Drain on savings
Still, I can see clouds on the financial horizon. M and I continue to create a spending plan prior to the start of each month—as we have for the last year—but have yet to stay within the plan’s boundaries. We haven’t overspent by much, mostly on things that have “just popped up,” but to compensate we’ve dipped more heavily into our cash reserves than we should be doing at this point.

Those reserves have been further drained by our house and cars. In July the dishwasher died, followed quickly by the basement dehumidifier, and a sporadically leaking toilet. Both vehicles stopped working at different points this summer. Apparently, these material things don’t understand the limits of our resources.

And needless to say, we have ceased saving—for college, the kids’ clothes, Christmas. I still contribute to my retirement plan, though only to the amount my employer matches. In retirement, M and I should actually be in very good financial shape—when we get there in 25 years.

Kickin’ things up a notch
So what to do? In October, we’re taking an Emeril Lagasse approach with our finances and “kickin’ it up a notch.”

Today, we purchase almost everything by credit card. We pay off the entire card balance each month and get rewards points have that helped us save a good amount of money on plane tickets and on our recent Disneyworld trip.

Next month, we’re moving to a cash-based system. We won’t be keeping envelopes stuffed with twenty-dollar bills around the house, but we will be using old-fashioned hard currency for things like groceries, gifts, entertainment, and household purchases.

I expect the move will help us stay within our spending plan’s boundaries—if something “pops up,” we’ll have to decide where the money is coming from to pay for it, or run out before the next payday. But it should also help us spend less. Research says that credit card users spend approximately 30% more than those who make cash purchases. It will be interesting to see if that bit of data holds true for us.

I’ll let you know how our experiment is going, and whether it’s worth trading off the savings from our reward points. In the meantime, keep us in your prayers.

Check out the latest Carnival of Personal Finance

If you're looking for a quick way to get more personal finance tips and helps, take a trip to the carnival.

The blog Free Money Finance is the host of Carnival of Personal Finance #66, elevated earlier this week. If you've never heard of a blog carnival, it's essentially a list of recent postings from a variety of blogs on a specific topic (in this case Personal Finance, but blogs host carnivals on many other topics). The blogger hosting the Carnival vets submissions and posts those selected posts on his or her blog. Free Money Finance was kind enough to include in this Carnival my post from last week, "Money does contribute to happiness, but..."

A blog carnival is a great way to find other blogs on a topic you're interested in. (The whole purpose of a carnival is to help readers find blogs of interest, and to help blogs find readers.) For instance, I visited the blog My Wealth Builder for the first time through this week's Carnival to read his (or her) post, "Getting motivated to save."

So check out the weekly Carnival of Personal Finance when you get a chance. You can find out when and where the next one will be held at www.carnivalofpersonalfinance.com. Best of all, you don't have to bring the kids and it won't cost you an arm and a leg for some cheesy carnival ride.

Three ways to help achieve your savings goals

Building up savings, whether for a short-term goal like a car or holiday shopping, or a long-term one like retirement, is hard. So how can you make it easier? A conversation with my friend Alex, while picking up our kids at church last Sunday, brought to mind these three tips.

Aim to save a specific amount
The YMCA I belong to is in the midst of a massive reconstruction. Walking past the bulldozers into the Y's main building, it's hard to miss the big sign showing the organization's goal for contributions to fund the project: $11 million.

While you don't have to put a big sign by your front door, you should state your own savings goal just as clearly as the Y. Just having an exact figure in mind will help motivate you to take the necessary steps to start and maintain your savings program.

For instance, when Alex started a savings program several years ago (back when he was single), he fixed in his mind to contribute the maximum annual amount allowed to a Roth IRA. At the time, he recalled, that translated into a goal of $2,000 per year. (In 2006, the IRA contribution limit is $4,000 if you're under age 50, or $5,000 if you're age 50 or over.)

Make it automatic
Knowing just how much he had to save, Alex made his IRA contribution a part of his monthly budget. He then took the wise step of having the money withdrawn from his bank account and deposited into his Roth IRA automatically.

If you’re not a disciplined saver, automatic deposits can be huge in moving you toward your savings goal. When you’re making deposits yourself, it’s all too easy to skip one because things are a little tight in a particular month.

Setting up an automatic withdrawal service takes little effort through most financial institutions. You usually get a variety of options—weekly, bi-weekly, or monthly withdrawals, at amounts that can be as little as $25 or $50. You can also usually choose the day in the month you want the withdrawal to occur (to correspond with when you get paid, for instance). And once the service is in place, you’ll be surprised at how quickly you’ll learn to live from your remaining income.

Don’t stop
Because he was contributing to his IRA monthly, Alex divided his $2,000 goal by 12, which comes out to roughly $167 per month. But rather than withdraw a rather odd amount from his account, he saw an opportunity to reach two goals with one plan.

Alex started making his IRA contributions at the beginning of the year, so he bumped up his monthly savings to $200. When he reached the IRA annual contribution limit in October, he didn’t stop saving. He continued to make his “contributions” for November and December—except this time into an account for his Christmas gift budget. The following January, instead of paying off a credit card loaded with holiday shopping bills, he went right back to funding his IRA each month.

Saving for the future takes vision and discipline. As Alex found, whatever you can do to build each into your own savings program will pay off in the long run.

Money does contribute to happiness, but...

"If I only had more money...."

It's a common wish. People often feel that the answer to personal and financial problems is having more money. (I include myself in this category, mostly when I'm checking out the prices of single family homes in my area these days.)

But is it true? Would our problems be solved--would we be happier--with more money? Well, yes...and no. Studies show that money does, in fact, contribute to happiness. But I believe being happy takes being money-wise as well.

The wealthy still have bad days
The Wall Street Journal recently explored the money/happiness connection in a couple articles. Columnist Jonathan Clements concluded that money alone can't buy happiness, while "happiness blogger" Gretchen Rubin wrote that "money, spent wisely, can contribute greatly" to being a happier person.

Clements and Rubin used some academic research as the basis for their conclusions. One study found that people with relatively high incomes were twice as likely to say they were "very happy" with their life situations as those with fairly low incomes. No shock there. It's hard to feel happy if you are struggling to pay the rent and put food on the table.

Another study, however, showed that wealth didn't translate into prolonged states of euphoria. People with lots of money were just as susceptible to being in a bad mood or feeling sad during the day as people who have less wealth. A boatload of money, evidently, doesn't insulate you from getting frustrated at a traffic jam or angry with your spouse or kids.

It's not just having money...
But money can contribute to happiness overall, both authors noted. Having money removes the worry of not having money, Rubin said. It also allows us to afford trips to the doctor and hire a housekeeper, thus keeping us healthier and buying us time. If we spend our money on experiences rather than just things--a good vacation with friends or family, rather than a shiny new car, for instance--we are more likely to get more enjoyment out of life, Clements pointed out.

Clements and Rubin are both right, in my view. However, they don't mention an important point: No matter how much money you have, you won't be happy unless you know how to steward it well.

...it's how you manage it
In the financial counseling ministry I serve in, we have "red" cases and "green" cases. "Red" cases are people in dire financial straits, who have little income and can't pay their bills. "Green" cases are those who have plenty of income...but through poor management and financial decisions, still can't pay their bills.

"Green" clients are no happier than "red" clients when they come for counseling. They aren't free from financial worries or much enjoying the life and resources they've been blessed with.

Neither are big-money lottery winners. There has been more than one story of lottery winners who have ended up in divorce, in rehabilitation centers, or bankruptcy court after being showered with more money than they ever imagined having.

That's why it's so important to learn, and apply, basic principles of financial wisdom. Without them, chances are you won't find much happiness, no matter how much money you have.

So strive to avoid or pay off debt. Take steps to save regularly. And make a commitment to give generously. Chances are, you'll be happy that you did.

How to create a household budget

Summer's over, and you've decided you really need to get on a budget. You're serious this time. You're really going to do it. But just how do you go about creating one?

Setting up a household budget is easier than you think. Here are three basic steps to getting started.

Track your expenses
To get a handle on your money, you need to know where it's going. So for 30 days, write down every transaction you (and your spouse, if applicable) make and bill you pay. That will provide a realistic idea of just how you are spending your money.

You can use any method you choose. Jot the transactions down in a pocket notebook you carry with you, keep receipts and list them in a spiral notebook or accounting ledger at the end of the day, or use a computer program or spreadsheet. A friend of mine uses his Daytimer. The key is to find something that is easy to do and makes expense-tracking a habit. (To find some expense-tracking tools, Google "track expenses.")

I use Quicken, which is great for totalling up the amounts and sorting purchases into categories (the next step). But because it's not as accessible as a notebook or sheet of paper, receipts I need to enter can quickly pile up. I think it's better to start out using plain old pencil and paper.

Categorize your spending
As you track your money, begin thinking about how to sort the different transactions into categories. Obvious ones are Mortgage/Rent, Utilities, Food, Clothing, Entertainment, and Debt (credit cards, car payments, student loans, home equity payments, etc.). However, also be sure to include a Savings bucket that covers money set aside for emergencies, holiday shopping, vacation, etc. Every transaction you make should fall into an appropriate category.

You can create as many categories as you need, and even break them down into subcategories. For instance, you might put DVD rentals, pizza take-out, and tickets to the ball game under the single heading of Entertainment. Or you could put them in separate categories of Videos, Dining Out, and Events. It all depends on what you want to track. M and I bundle things we purchase from the grocery store into a Grocery/Personal Items category, but have a separate bucket for Baby Items (just because I'm interested to know how much diapers, wipes, and the like increase our monthly spending).

Bear in mind that the more categories and subcategories you have, the more complicated your system gets. If it gets too hard to maintain, simplify it. Sticking to your system is more important than determining how much you spent on Starbucks coffee every month.

Set spending goals
Once you've tracked real monthly expenditures and sorted them into your spending categories, total up the separate amounts. You now have a clear picture of your basic monthly budget, and are ready to set goals for how much you can spend in each category each month.

Goals for fixed expenses, like rent or gym memberships, are easy to determine because they are the same each month. Much harder are areas like Groceries, Clothing, and Entertainment, which are almost completely determined by how much you choose to spend each month. Use your expense-tracking record as the basis for these amounts.

Remember, though, that your monthly expenses shouldn't exceed your net monthly income (the amount you have left after taxes). If your budget shows that's the case, you are overspending and you're going to have to make some adjustments to avoid further trouble.

The good news is that you've taken the first step to getting on the road to financial stability. Once you adjust your spending, keep tracking your expenses, and compare them regularly to your budget. In a matter of time, you'll have things under much better control.

Do you use a budget?
How about you? Do you use a budget for your personal finances? If not, how come? How many times have you tried to start one? Why do you think it didn't work?

Credit card deals from the King and more

What do Elvis and Yankees' great Don Mattingly have in common?

They both have their own namebrand credit cards.

That's just one of the interesting things I found at indexcreditcards.com, a website devoted to being a resource for just about every credit card deal that's currently out there. Tim M. of indexcreditcards.com emailed me recently and asked me to take a look.

They're trying to spread the word about the site through personal finance bloggers, interestingly enough. (And, in the interest of full disclosure, the blog that sends them the most traffic in the next couple weeks wins an Ipod Nano or Amazon gift certificate.)

Pretty comprehensive list
Tim's email said that indexcreditcards.com is the "most comprehensive online source for credit card information, including extensive lists of apples-to-apples comparisons of credit cards, helping consumers and small businesses find the best deals for their needs." And it is a comprehensive list, with more than 1,000 cards represented, including those for the King of Rock n' Roll and "Donny Baseball" Mattingly.

But how many people are in the market for a credit card like the one for Ducks Unlimited, which uses money from purchases to preserve wetlands? Or a "Wizard of Oz" card, which uses purchases to support the expansion of the Wizard of Oz museum in Wamego, Kansas? So while it's comprehensive, all that information isn't necessarily useful.

All types of cards
Indexcreditcards.com does include a wealth of information on more traditional cards from the big-name banks and card providers--low-interest cards, rewards cards, 0%-balance transfer cards, and a bunch of others. The site provides interest-rate, annual fee, transfer restrictions, and other details in a few lines for each card that are easy to scan and digest.

But unlike other sites, it doesn't offer a "compare" feature that allows you to look side-by-side at two offers. It also doesn't have a search engine that enables you to look for a specific card.

Easy to navigate
What I do like about the site: It's has a plain, easy-to-navigate home page; you can get wherever you need to go on the site from there. And it doesn't have any annoying advertisements. Though the site does get paid for card signups that originate from their listings, it doesn't try to draw your attention to one card or another.

The site also features credit card news and facts. One disturbing fact: Based on the site's estimates this year, U.S. credit card debt on average tops $3,500 per adult and $7,200 per household.

If you're in the market for a credit card, indexcreditcards.com is worth a look. Then again, if you are have as much credit card debt as the average American, it's a wise idea to consider taking yourself out of the market and paying off those you already have.