Beating Broke

Personal Finance from the Broke Perspective

Almost Time for a Winter Financial Checkup

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What’s a Winter Financial Checkup, you ask?

Winter, and more specifically, the time around the holidays is when most people have the most problems with their finances.  Gift purchases throw off their budgets.  Bonuses give them a unexpected bit of cash and they spend more than they expected.

Whatever the case may be, your financial picture might end up looking more like a Picasso than a portrait of your true financial life.  And your budget might be way off.  It happens.

The holiday season is one of the hardest to budget for.  Between all the gifts and trips that we all buy and make, it’s easy to lose track of where some of our money went or to over spend in a few categories.  But, keeping tabs on our budget is also one of the most important things we can do during the holiday season.

Performing a Winter Financial Checkup

A winter financial checkup isn’t really as special as I’ve made it sound.  It’s mostly just your regular budgeting session but with some special attention spent on predicting some of the extra expenditures.  And if you’re lucky enough, some extra incomes as well.

You’ll want to ask yourself, first, if you’re expecting any extra income.  Usually, this means a yearly bonus or a Christmas bonus.  If you are, now is a great time to plan for that extra income and budget it in.  Extra income is exactly that.  Extra.  It’s unplanned for up until now.  If you are still paying off your debt, I suggest you plan on using at least 50% of any expected bonus for debt repayment.  You’ll have some pangs of regret for things you could have bought, but in the long run, you’ll thank yourself.  The other 50% should go towards your gift purchases and towards any traveling that you are planning.

You’ll also want to take the time to truly plan your gift giving.  It’s a part of holding yourself to a budget.  I guarantee that if you walk into a store to buy gifts without a list or a set spending limit on each person, you will overspend.  Everybody does it.  It’s the spirit of the season.  Generosity is in the air, but you can still be generous without breaking your budget.  Make a list of all the people you intend to buy gifts for.  If you have any ideas for them, make sure you add those to the list.  Now, beside each name, write down the amount that you will spend on that person’s gift.  They don’t all have to be the same.  Your sister might like her $25 scrap-booking kit just as much as your brother likes his $50 tackle box.  It’s the thought that counts.  And if they do care, then you spent more on them than they deserve.

The main reason for a winter financial checkup is to keep control.  That’s what a budget is all about and that’s what will keep your spending in line and your debt shrinking.  Take the time the next time you check your finances to do a little bit extra and give yourself a winter financial checkup.

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.