Beating Broke

Personal Finance from the Broke Perspective

How Much is It Worth to You?

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In every purchase we make, we should ask ourselves how much is it worth to me?  It’s a very simple question, but in many cases, the answer may surprise you.  And it applies to much more than items.

Let’s try a few examples.

I’ve been keeping my eye on LCD HD receiver televisions.  With the big switchover in February and all the fear marketing going on about the loss of signals, my family may need a new television.  We don’t currently subscribe to a cable service, so we get our tv over the airwaves and will need a HD tv or a subscription to cable.  The tv’s that I’ve been looking at are in the $500 range.  Not a huge amount for tv’s nowadays, but quite a bit for my debt averse family.  Each time I look at them, I have to ask myself if having television is worth $500 to me.  We currently don’t have cable and we only receive one channel over the air.  And to be honest, it wouldn’t be a huge loss to us.  Except.  Except that I like to watch Football in the fall.  Except that my wife is addicted to COPS.  Except.  Except.  Except.  With each exception, the TV or cable subscription becomes more and more worth it to me.  I become more willing to spend the money to get the TV or Cable because of them.

Much like cable, there are some services that demand the question too.  In my hometown, there is only one full service gas station.  All the rest are self service.  The full service station charges $0.02/gallon more for their gas.  This is a non-question for me.  I don’t mind filling my tank up.  I only end up filling up about once a month, so it isn’t a big deal if I have to stand and pump gas for a few minutes.  However, with temperatures falling (it’s about 30 here today) I can certainly see why there might be some people who are asking themselves if the extra $0.02 per gallon is worth staying in the warmth of their car while someone else fills the tank.

The more my wife and I budget and track our money, the more often I find myself asking this question.  Is this service or that item worth the extra money?  Is the convenience worth paying more for or am I just being lazy?  More and more, I find that the answer is No.  In many cases, the convenience isn’t worth a little more slavery to debt.  Each penny that I spend on that convenience is another penny that I cannot use to pay down debt.  Maybe my answers will change when we get rid of our debt, but I think by then our lifestyles and attitudes will have changed significantly enough that the answer will often still be no.

How Much Should Your Emergency Fund Be?

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If you’re smart, and you are since you’re reading Beating Broke, you’ve got an emergency fund.  But just how much do you have in your emergency fund?  And how much should you have in that fund?

Ramseyan thought:  Start with a goal of $1000 and then after your bills are paid off, move it up to cover at least 6 months of expenses.  This is the current plan that my wife and I are using.  We built up our intitial fund of $1000 and have been letting it sit in our e-trade savings.  It’s just under $1050 at the moment and growing at about $2-$3 a month.  Nothing big, but much more than we ever had before.

Some will say that Ramsey is a little off on this thinking.  Many people, my wife and I included, couldn’t even make it a month on $1000.  Those same people would suggest that you build up a 1 month expenses emergency fund at the minimum.  They may be right.

The key here, is that we’re discussing personal finances.  It’s personal.  When my wife and I decided to take the reins and take control of our personal finances, we didn’t have an emergency fund at all.  We had just completed reading Dave Ramsey’s Total Money Makeover, so we followed (are following) his baby steps plan to get ourselves out of the hole.  We’re Beating Broke. (Do you like how I slipped that in there? 😉 )

The Beating Broke thought: Because we’re talking about personal finances, it’s important for you to gauge your risk and build an emergency fund that is appropriate.  Certain things will raise the risk of an emergency.  If you’re driving an old car, for instance, the risk of a breakdown is higher than if you were driving a newer car.  If you’re health is a little worse than average, the risk of you having a medical emergency could also be higher.

The higher your emergency risk, the larger your emergency fund should be.  I suggest starting with at least $1000.  It’s a good number, and for many, it’s more than what you already have.  If you can continue to grow that emergency fund without derailing your excess debt payoffs, do so.  Continue to build it until it is at least 3 months expenses.  In the end, shoot for a constant emergency fund of at least 6 months expenses.  Try to keep it to no more than 12 months though.

Why no more than 12 months?  Because you’re likely keeping it in a high-yield savings.  The 3-4% that they are currently paying is good, but you can do better elsewhere.  If you’ve already got 12 months of expenses in the bank, you can take any excesses and do much better through investments that will get you a higher return.  Presumably anyways.  History would say so, and it usually doesn’t lie.

Most importantly, you must have an emergency fund.  If you don’t then this whole article is pointless.  It will give you a peace of mind that you’ve been missing and make it easier to pay off your debt.

As usual, the advice here is merely that of a lowly personal finance blogger and not that of a financial professional.  Before making any big money moves, you should consult a professional.

Beating Broke Rules: Budget

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If you’ve ever been involved with a company’s financials or been an investor researching a company, you likely know that they all have budgets.  In fact, they would have a pretty big problem if they didn’t have budgets.  And even with budgets, they still have problems when those budgets are unbalanced at the end of the quarter.  An unbalanced budget that is in the red can cause a paper loss of millions (or billions) in stock price.  That makes for a lot of unhappy investors (read owners).

Why shouldn’t those same rules apply for your personal finances?

Beating Broke Rule: A budget is a must.

Let’s face it.  Only the Government gets away with an unbalanced budget.  If you or I were to take up similar fiscal actions, we’d be declaring bankruptcy every year.  The bottom line is this; If you want to be fiscally responsible and be in control of your finances, you’ve got to have a budget.  And it must balance.  Must!

Let me finish by finishing the analogy.  Think of your personal finance situation as a “business”.  You and your Wife (or partner and any children you may have) are the shareholders.  When the “business” does poorly (i.e. runs in the red) the shareholders lose value.  Only, instead of being able to sell the stock and find a better performing “business”, you have preferred stock that is non-saleable.  What’s more, you’re the CEO, CFO, CIO, and mail room attendant.  There is nobody you can fire for poor performance and you can’t trim your labor costs with layoffs.

The only way for your “business” to perform well is to have a budget that balances.  If you really want to make your “shareholders” happy, you’ll find a line item in there for savings as well.

Analogies aside, a budget can really help you see where your money goes and helps you get in control of your money.  Instead of trying to find a few dollars at the end of the month to pay bills, you might just find a few extra for an ice cream cone or two.  If you’re curious how to create a budget, read my article on building a simple budget to learn how we created our first budget.