Beating Broke

Personal Finance from the Broke Perspective

Are You Rationalizing Your Way Into Debt?

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Staying out of debt is difficult.  Terribly difficult.  It isn’t made any easier if you rationalize yourself into debt, either.  Many of us spend a good deal of our time and energy trying to get out of debt, and stay out of debt.  We do that through so many devices, and each have our own system that helps us along the way.  Budgeting is obviously a big tool that many of us use to make sure that we have enough money to pay the bills, and ourselves at the end of the month.  We figure out how many months it will take to pay off this debt, or that debt, and then budget out that amount over that many months.

Sale © by markhillary

Many years ago, I spent a few years working as a salesperson at a retail store where bigger ticket items were popular.  Computers, televisions, and cell phones were big sellers, and good for commissions.  As part of our training for our jobs, we were trained on the many ways to sell a customer on the item they were looking at, and even how to convince the customer that they needed the upgraded item.  One of those sales tactics was to help them rationalize the purchase.  And, chief among the ways to do that was to take the price of the item, break it up over a set amount of months (24, 36, 48, 60) and tell them how much they’d be spending “a month” for the item.  Suddenly, that $2000 computer (it was that long ago) becomes a $25 a month purchase.  Psychologically, people are more likely to purchase something if it’s under $100.  Even if that “under $100” is in the form of a monthly payment for several years.

Salespeople are the only ones we have to watch out for when it comes to this tactic in particular.  Pay special attention the next time you’re looking at purchasing something.  See how many times over the next month, you attempt to rationalize a purchase based on what it will cost per month on credit over what the total price will be.  I think you’ll be surprised just how often you use that same sales tactic on yourself.

Don’t rationalize your way into debt.  Fight back, and stick to your guns.  That purchase has a total price.  And if you’re buying it on credit, that price will be far larger than if you had purchased it with cash.  More importantly, don’t saddle yourself with more debt just because the “monthly” price is more palatable.

Money is a Finite Resource

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Perhaps you’ve heard the saying “You can always make more money”, or the one that goes something like “They’re always printing more”. Perhaps you’ve bought into the guru’s advice that if you work extra hard, and save every penny, you can make way more money than you’ve ever dreamed of. If so, there’s a small problem.

Money is a finite resource.

Oklahoma Sunset, Oil Well 2 © by Clinton Steeds

Just like oil, coal, water and a bunch of other natural resources that we recycle and reuse regularly to conserve, money must be conserved.  Because, just like those natural resources, it has a finite limit.  And, until you start treating it that way, it will always have the best of you.

I think the key is in the conservation of money.  Yes, we need money to pay our bills, buy supplies that we need, and even to splurge once in a while.  But, we have to learn to conserve what we have.  Just like a natural resource, we have to learn to use our monetary resources wisely, and in a way that will not deplete the reserves that we have.  Because, at the end of the day, if we deplete our reserves, there might not be any more money to earn.

Many of us take for granted that there will be enough clean water to drink for many lifetimes.  But, if we don’t learn to conserve our water, and keep it clean by using it wisely, there might be a day, in our lifetimes, where there are severe water shortages.  In some parts of the world, that already happens.  If we aren’t careful with our usage of money, we might find ourselves in a situation where more money cannot be earned.  We might lose our jobs, have a health emergency, or just outspend our income, and our ability to earn more money will be outstripped.

My point is that if we continually treat money as an infinite resource that we can always earn more of, we aren’t being careful stewards of that resource.  Yes, you should try and earn more, but you also should stay vigilant in how you’re spending your money so that your lifestyle doesn’t expand to meet that new earning capability.

How do you treat your money?  As an infinite or finite resource?

Creating a Simple Budget the Beating Broke Way

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One of the most important parts of paying off your debt and becoming financially independent is creating a budget.  At the very least it gives you an outline of where your money goes and where it should go.  At it’s most extreme, it serves to create strict limits for your spending.  How lax or strictly you adhere to the budget is up to you and how die-hard you are about your budgeting.

One thing remains constant however.   When the end of the month comes, the ending balance should be 0.  Money in – money out = 0.  If you have a deficit, you overspent and need to compensate for that by either reducing budgeted amounts in another category or by reducing the available money for the next month.  If you have a surplus, (good for you!) then you need to budget that money until your end result is 0.  Most of us looking to become debt free will budget any surplus towards excess debt payment.

Here’s how we have things set up at the Beating Broke household.

Income.  We keep a very simple income spreadsheet.  It lists the sources in Column A.  The amount in Column B and any notes for the income in Column C.  All of that gets totaled at the bottom.  That’s all we do with our income.  It’s the expenses that we really need to focus on anyways.

Expenses.  The expenses spreadsheet is a little more complex.  I have a field for the income that I carry over from the income sheet.  I also have a field for a total of all budgeted amounts.  I then have a few calculated fields.  The first is a field that gives me the budgetary deficit or surplus.  I get that by subtracting the total budgeted amount from the income.  A second calculated field gives me the true deficit or surplus.  This is calculated by subtracting the actual amounts spent from the income.  This field is really only useful for balancing at the end of the month, but if you’ve done your budgeting properly, the amount should be small and easy to take care of.

The meat of the expenses spreadsheet is everything else.  Column A holds the categories.  I’ve broken them down into header categories and sub categories.  For instance, the Health header category has sub categories for Health Insurance, Aflac, Prescriptions, and Medical Bills.  I could go even further and list each bill, but that would greatly increase the amount of time I spend on my budget.  I want it to do it’s job (keep my money in order), not take up hours of my time.  Column B holds the budgeted amount for that sub category.  Pretty simple really.  Column C is the amount that I’ve spent to date on that category.  Column D is the % the budgeted amount is of the income/budget and Column E is the % that the actual spent amount is of the income/budget.    I’ve also thrown in some totals for each header category as well as the % of total for those as well.

Each week, we go over our checkbooks, credit cards, and all other financial happenings and enter them in the appropriate places.  By doing it every week, it keeps the task down to a half-hour or less which helps with reducing the stress level of working with your finances.  Especially if they are a little wonky to begin with.

Budget deficit and surplus.  Occasionally, we get to the end of the month and we have a surplus or deficit.  We’ve either spent less than we budgeted for or we have spent more than we budgeted for.  The latter is a little rough, but the first is always fun.  Because we don’t usually figure out the overall surplus/deficit until the month has ended, we can’t budget for the surplus/deficit in that month.  So, I’ve thrown in a field on the Income sheet that is titled “Carryover” and one in the expenses sheet that is titled “Shortfall”.  If we have a deficit, the carryover value is 0 and the shortfall amount is the amount of the deficit.  And vice versa.  This helps with taking the surplus and budgeting it as an extra debt payment or in accounting for previous months deficits.

Most of these ideas are pretty basic budgeting principles.  We’ve tweaked them around a little to fit our financial style and to be loosely based on the Dave Ramsey system.  If you’ve got questions on budgeting that we might be able to answer, drop us a line and we’ll try and answer them as soon as we can.