Tuesday, March 30, 2010

Setting Up a Game You Can Win

Aka “Just Don’t Spend Money” Won’t Work

If you are spending more than you make, your initial reaction may be “I’ll just stop spending money.” Natural as this reaction is, this strategy won’t work because it's based on a negative. You need to set up a game that you can win. You need a sustainable plan for what you will do, not a general declaration of what you won’t do.

A sustainable plan for what you will spend is based on two factors: how much you have been spending and how much you make. Clearly, any spending plan has to fit within your income. Also, the plan is mostly likely to succeed if it is consistent with your current spending patterns. If your habit is to buy two pairs of shoes every month, see if you can get by with one. If you buy a latte every morning, try switching to regular coffee and adding milk. Alternatively, make yourself a cup of tea at home one day a week. Small steps, taken one at a time, will lead to long-term success.

One way to set up a winning game would be to take your “breakfast funds” out of the bank once a week, in cash. Use only that cash for your coffee and pastry and don’t use it for anything else. At the end of the week, do you have any cash left? If not, did you at least keep your breakfast spending within that cash? If yes, you have won! Any remaining cash is yours, free and clear, to invest or spend as you see fit.

I’m using breakfast as an example here. Feel free to substitute any other arena of spending where you would like to trim back.

Final hot tip: never underestimate the small stuff. Small expenses can add up to lots of money over time, either by spending or by saving on that expense.

Becky Jensen holds an MBA in Finance and has been helping people manage their personal spending since 1989. She can be reached through her web site at www.2prosper.com.

Tuesday, March 23, 2010


If you get a monthly bill from your credit card company, you may have noticed some recent changes. I found that my clean and clear statement from Chase has become cluttered and confusing. However, on second look there are gems hidden in all that text. As a friend pointed out, this new information is similar to the nutrition labels on our food packages. At first I thought those labels were ugly and of marginal value; now I read them on a regular basis.

Did you notice the block that says how long it will take you to pay off this account if you pay just the minimum? I received a bill from Macy’s this week for $61. It would take me 20 months to pay it off if I sent them just the $5 that they ask for each month. (And cost me $99.) Just imagine the time frame if my balance was over $1,000 and I paid the minimum! Also noteworthy is the box that offers an alternative scenario - how soon the debt will be paid if you set a different payment amount. Know that this box is just an illustration - you can always pay as much as you are able.

The most important piece of information on your statement is the interest rate you are paying on any outstanding balance. This is not new information and in fact it may be harder to find than it was, but it tells you the cost of the money you have borrowed. Just as you checked the cost of the item before you bought it, you’ll want to stay aware of how much your debt costs every month.

So take a moment and get familiar with your new credit card statement. Some very useful information is tucked in there including how much your debt costs and how quickly it can be gone.

Tuesday, March 16, 2010

How to Eliminate Your Debt

If your goal is to pay off your debt, the first step is to stop using any form of revolving credit. (Revolving credit is a loan that you can borrow against, pay off, then re-use. Credit cards and some home equity lines of credit are examples of revolving credit.) Whether or not you have a balance on the card, stop using it.

The second step is to establish a set amount that you pay on your debt every month. If you “chase the minimum”, if you pay only what you have to every month, it will take years to pay it off. If you have three credit cards with balances (that you don’t pay off each month), you may decide to pay the first one $100 each month, the second one $200, and the third one $300. This means that you have dedicated $600 a month to debt reduction.

After a few months of paying your set amounts, the minimum required payments will have decreased and you will have a choice about how much to pay each card.

Now, let’s get strategic. You can take one of two approaches. The emotional approach is to maximize the amount you pay towards the debt with the smallest balance. So of your $600, you’ll pay the minimum amounts on the two larger debts and send the rest of the $600 to the smallest. This will pay it off as quickly as possible. Once that debt is gone, take your $600, pay the minimum on the larger debt and send the rest of the $600 to the smaller. When that debt is gone, send $600 every month to your last remaining debt.

The advantage of this approach is maximum positive feedback as you see the smallest debt decreasing then disappearing.

The second approach is the numeric approach. Instead of choosing the smallest debt first, choose the one with the highest interest rate. Follow the above system, applying the maximum available funds to the debt with the highest interest rate.

The advantage of this approach is that you will be spending less on interest and hence be saving money. (Note that the interest rate is independent of your minimum payment; the interest rate can be found on your monthly bill.)

Whether you go for quicker gratification or for saving money, the key is to establish a set amount that you pay towards debt every month and stick with it.

Final hot tip: Actually, the most important thing to do is pay your bill on time every month. Late fees can exceed how much you sent as a payment, creating a “one step forward, two steps back” situation.

Becky Jensen holds an MBA in Finance and has been helping people manage their personal spending since 1989. She can be reached through her web site at www.2prosper.com.

Tuesday, March 9, 2010

Three Reasons to Shred Your Credit Cards

There are three issues with credit cards for someone whose goal is to build net worth and financial peace of mind. First, they give us the illusion that we can have whatever we want, right now. Second, even if we do pay them off every month, they make it harder to stay on top of our current financial status. Third, they encourage us to spend money we haven’t earned yet.

Credit cards give us the illusion that we can have whatever we want, right now. A friend of mine had the oddest relationship with her credit cards - they were either her best friends or the father she never had. At any rate, she turned to them to provide what she wanted.

I realized how far I had gone down that path when Bank of America recently cancelled one of my cards. Mind you, I carried a small balance, paid on time every month, and was way below my credit limit. I felt abandoned and betrayed, like a good friend had walked out on me and taken my shopping privileges with her! After a suitable period of anger and fear, I realized several things. (1) Bank of America is a company, motivated by profit. It is not a personal friend of mine. (2) Since my goal is to live within my income, they had done me a huge favor. BofA had stopped being the bartender to my alcoholism. They ended my access to the “endless money” illusion.

If you are a person who pays their cards off every month, I still recommend shredding them. Money works best when it is visible and credit cards allow for invisible spending. You can counteract this by recording every credit card transaction in your checkbook register so that you know your true available balance, but is it really worth the hassle?

It could be said that there are three places to find money: the past, the present, and the future. The past means spending money you earned in the past and have saved up. The present is your current earnings or other income. The future means borrowing - you are spending money now that you have not earned yet. Clearly, your best strategy is to spend from current income and set some aside for the future. Credit cards sabotage that process by making it easy to spend money mindlessly.

The benefits of not using your credit cards include that you will always know how much money you have available, that you will be less tempted to spend money you haven’t earned yet, and, best of all, the money in your checking account is yours. Getting rid of your credit cards gives you peace of mind and power with your personal finances.

P.S. If shredding your credit cards seems too drastic, you can also freeze them. Putting them in the freezer in water in an opaque container works too. If you don’t have six to twelve months of expenses available in liquid savings, you might want to think twice before you cancel any accounts.

P.P.S. Ok, ok, don’t shred them all. If you shop online or if you ever need to rent a car, you will need one card. You might consider sending a payment to the credit card company the same day you make the purchase.

Becky Jensen has been helping people manage their personal spending since 1989. She can be reached through her web site at www.2prosper.com.

Tuesday, March 2, 2010

Hot Tips for Finding "Cash in the Attic"

As we get used to a new economy, where credit is harder to come by and gas prices are unpredictable, many people are looking for just a bit more income to help cover expenses.

“Cash in the Attic” or “Couch Change” is my phrase for the undiscovered resources in your home. If you own it and don’t use it, it is very possible that someone else would be happy to pay you for it. Examples include sporting goods, jewelry, and gently used clothing. You can list your goods on eBay or Craig’s List or take them to your local consignment store.

An advantage and a danger to taking your jewelry and clothes to a consignment store is that you can also shop, finding quality clothes at discount prices. Just be sure that you aren’t spending more than you mean to!

A friend recently discovered a new area of “couch change”. In her divorce she had received savings bonds that seemed like such a small amount that it wasn’t worth tracking. As she gained more insight into her cash flow, that amount of money suddenly became useful.

So look around. There are resources in your house that you probably don’t see anymore.

I am often surprised by what people discover in their homes that is cash waiting to happen. Please feel free to share your thoughts and stories in the comments section below.