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A Case Study in Living Beyond Your Means

Libby is a jack of all trades, master of… well, you know how the saying goes. Media consultant by day, mommy by night, you can usually find her with a glass of wine in hand, provided the kids are in bed!

Living Beyond Your Means

Three years ago, a friend of mine – pregnant with her second child – decided her starter home wasn’t big enough for her growing family. This friend has what you might call a case of “Affluenza” – she’s got a serious commitment to keeping up with the Jones’. So she and her husband started the process of buying a house.

They wanted all the bells and whistles: a large home on a large lot in a great neighborhood near great schools. Unfortunately, their eyes were bigger than their pocketbooks; they couldn’t find a home that suited all their “wants” in their price range. Rather than settle – or stay in their starter home until their budget allowed them to afford their dreams – they took a chance on a foreclosed home.

The home, as well as the surrounding property, was in shambles. The interior hadn’t been updated since the 70s; the exterior, a densely wooded lot, hadn’t been kept up in years. The pool out back looked like a scene out of one of those “When all the people die and nature takes over” documentaries.

But they were committed to buying a house come hell or high water (actually, funny note here: the house was in a flood zone, and they face HUGE annual flood insurance payments), so they put in an offer. After several months – foreclosures are notoriously hard to buy in any type of fast or easy manner – the home was theirs. And that’s when the real work began.

Although they got it for roughly a third under market value, they knew that their new home was nowhere close to fulfilling their dreams at that point. They embarked on an expansive home remodel, starting from the outside and working their way in. The disgusting swimming pool – a safety and health hazard for their now two young children – was the first task. During the work, it was discovered that the fiberglass lining had a crack in it; rather than give up on the idea of having a pool, they chose to sink another $20,000 into the project to rip out the old liner, install a new liner, as well as brand new filtration and a solar heating system for it.

That same summer, my friend pulled her older child out of his preschool and decided to homeschool him. She said money wasn’t a factor; I didn’t believe her.

The next year, they started to tackle bathrooms. But they didn’t have enough money to finish the project, so they only updated their first floor powder room and the upstairs hall bath; the family shares that one full bath, and doesn’t use the on-suite master. They had to turn off the water to that room, because the fiberglass shower leaks, as does the toilet.

The next year, they moved on to the kitchen, while simultaneously doing work on their floors and deteriorating plaster walls themselves.

This year, my friend and her husband learned that the foundation on their home is sinking – something that shouldn’t happen with a 50-year-old house. Instead of moving ahead with their home remodel, they’ll be sinking big bucks into repairing and solidifying the foundation. My friend told me, “This really hurts our 10-year plan to get this house livable.”

My Opinion

My eyes nearly popped out of my head. 10-year plan???? I don’t know about you, but when I think about making a home “livable” for my family, I think in terms of months, maybe a few years, not decades. My friend has spent tens of thousands of dollars already, and obviously anticipates spending much, much more over the next seven years. Of course, my practical mind keeps thinking, “If they had just stayed in their very ‘livable’ starter home for a few more years, they would have been able to afford a home that met all their requirements, without spending all the time and money to renovate a money pit.”

The moral to my story? I think this is a prime example of living beyond your means. My friend couldn’t afford to live in the type of house or neighborhood she thought she deserved, so she bought the cheapest house in the neighborhood. That would have been fine, if the cost to bring that house up to the neighborhood “standard” wasn’t costing her a fortune – and chewing away at whatever money she saved buying a foreclosure.

What do you think? Do you think she’s living beyond her means? Do you think she should have compromised? Why or why not?

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What’s the Smarter Money Move?

Libby is a jack of all trades, master of… well, you know how the saying goes. Media consultant by day, mommy by night, you can usually find her with a glass of wine in hand, provided the kids are in bed!

When you’re a financial blogger, it’s tough to admit that sometimes you haven’t been as wise with your money as you should have been. A while back, I mentioned that my family was feeling a little Disney rich and cash poor; and with our big trip literally just days away, we’re feeling the financial strain.

My Situation

My husband’s locked-in, annual raise is less than 6 weeks away – but between now and then, we have another big bill to deal with: the first tuition payment for my son’s preschool. And here’s the kicker: if you pay for the full year’s tuition up front, you get a 5% discount. But there’s a problem: right now, I don’t have the extra money in our day-to-day account to pay for it all up front in cash, like I want to do. I hate losing the 5% discount – for his program, it would amount to roughly $150.

What’s a discount-loving mom to do? I’ve got a couple of options:

  1. I can cash in some of my savings bonds. My grandmother gifted me with a saving bond for every birthday, religious holiday, and graduation from the time I was born until I graduated from high school. Most were only $25 bonds, but they definitely add up. Only a handful have reached full maturity; the rest still have interest to earn – but that amount is just $214.50, and some have as long as another 10 years before they hit their full value. At a 1.19% interest rate, I know these bonds could be doing more “work” for me elsewhere.
  2. Selling some of our stocks. When my daughter was born six years ago – on the same day that Lehman Brothers filed for bankruptcy – my husband and I started thinking about jumping into the stock market. When she was a few months old, we bought our first stocks that weren’t part of our 401k or Roth accounts. We only invested a few thousand bucks, but those investments have done exceptionally well in the time since. We don’t really consider them part of our retirement; they’re more of a “rainy day” fund. However, these stocks are solid earners, so I’m not thrilled with the idea of selling, especially since I’d be looking at capital gains taxes at year-end.
  3. Reduce my 401k contributions for a few months. I realllllly don’t like this idea; even when I was only working as a full-time freelancer and my husband was making $32k a year, we still managed to fund our retirement accounts each month. However, if I scaled back from my current contributions for a few months, I’d be able to save up the money for that tuition payment without having to pay taxes on that cash (like I would from selling savings bonds or stocks).

So what would you do if you were me? What’s the smarter money move? Or should I just give up on the 5% paid-in-full discount and pay the monthly tuition instead?

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Bonuses For Using Credit Cards

I was having a discussion with some colleagues, who also work in the personal finance industry, about the merits and non-merits of using credit cards. A couple of members in the discussion pointed out a few positive aspects of using credit cards. Namely any bonuses or rewards you can receive for using the cards.

Besides the ease of use and not having to carry wads of cash around when one travels, one of those participating in the discussion likes to use a particular credit card they have for the frequent flier miles they receive. British Airways have partnered with American Express to offer frequent flyer points. These points can be redeemed for flights or upgrades. Some cards like the British Airways American Express offer one (1) point for every £1 spent. Others such as the Virgin Atlantic credit card through MBNA, offer two (2) points for every £1 spent.

One very interesting aspect to this is that my colleague who was participating in the discussion, travels a lot for their job, and they use this credit card to pay for all their business related expenses; of which their employer reimburses them for. However, they still get the points and subsequently the frequent flier miles, which they can redeem later for personal use.

A pretty good situation for them if I say so myself.

Many credit cards do offer some forms of bonuses or points as an incentive to use the card. These points can add up and for some people be quite useful in making future purchases or for travel. The bonuses can also be companion passes, and upgrades to business class. For some of the cards the points do not always need to be redeemed for travel or airfares.

I saw where one credit card company were offering cash back rebates on every purchase. They were offering a £3 rebate on every £100 spent using the card. American Express has a cash back programme where they offer 5% cash back on all purchases during a three (3) month period. Again, these can add up.

One fundamental key here to remember is to not carry a balance each month on the card. All those that were a part of our “merits of credit cards” discussion, did agree that carrying a balance negates any positive merits or bonuses you may receive. Interest rates on most credit cards are high due to the nature of the type of credit they are; even low rate cards can still have an interest rate which can add up if you carry a balance each month. In some instances you may be better off looking for short-term loan options, such as eCashWindow.

So a different perspective on credit cards and their usage. It can also have an influence on which credit cards you may decide to apply for, or use.

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Discover Fraud Protection… They’re Not Kidding!

From moneyaftergraduation.com.  Hilarious!

Libby is a jack of all trades, master of… well, you know how the saying goes. Media consultant by day, mommy by night, you can usually find her with a glass of wine in hand, provided the kids are in bed!

A few weeks ago, a good friend of mine – we’ll call her Sarah – got the type of phone call every financially-responsible person dreads. A collection agency phoned to let Sarah know that due to her failure to make payments on her wireless service, her account had been sent to collections. But Sarah didn’t have a wireless account with the company that had referred her to collections; she’s been the victim of identity theft.

According to the Bureau of Justice Statistics, nearly 17 million Americans were victims of identity theft in 2012. That basically means that 7% of American adults had their identity stole in some way, shape, or form in just that year alone. That’s a pretty terrifying thought.

Love Letter

I’d never been a victim of identity theft… until yesterday. And it’s not so much the crime that left me in awe, but the way in which it was handled by, of all things, my credit card company. This is a love letter to that company:

Dear Discover Card,

When I logged on to my account yesterday to see that somebody had made several hundred dollars worth of purchases from a series of online retailers I’d never heard of, I was terrified. I had visions of financial ruin in my head, and was nearly paralyzed with fear. Instead, I managed to call your 1-800 number. Within a minute, I was speaking to a customer service representative, who immediately transferred me to a fraud protection specialist. The latter informed me that because Discover Card has a 100% anti-fraud guarantee, that I wouldn’t be charged for any of the fraudulent purchases. Furthermore, your employee closed the compromised account, opened me a new one, helped me switch all my automatic payments over to the new account, and launched an investigation into the fraudulent purchases… all in under 12 minutes.

I’ve spent more time in line at the pharmacy; more time waiting for my toddler to go #2 in a public restroom; more time trying to navigate my health insurance provider’s website. Yet in just 12 minutes (11:38, to be exact), you managed to not only calm all my fears, but resolve the situation.

Customer service is a rare thing these days, but yesterday, you proved to me that it still exists. So thank you. Because you took what could have been a scary situation and turned it into a chance for me to applaud your company for doing things the right way.

Yours sincerely,

Libby

What You Should Do in Case of Identity Theft

So what should you do if you find yourself, like I did, a victim of identity theft? First, call your credit card or bank to dispute the charges. Ask for a copy of your dispute in writing – you’ll need that if you plan to notify the police of the fraudulent activity, which you should, if for no other reason than to get it on the public record.

If your case of identity theft was launched, like mine was, over the Internet (I’d used a popular online website – which shall remain nameless – to order a slipcover for a loveseat the day prior, using the compromised card; it was the first time I’d ever shopped at this site, and I’ve got a feeling the two things are not merely coincidence), now’s the time to check your computer’s anti-virus software to make sure it’s up to date – that way, you reduce your chances of becoming a victim a second time.

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The Ice Bucket Challenge: A Lesson for Haters

Libby is a jack of all trades, master of… well, you know how the saying goes. Media consultant by day, mommy by night, you can usually find her with a glass of wine in hand, provided the kids are in bed!

I spent the better part of my 20s wearing a “Livestrong” band on my left wrist – not because I was particularly into cancer research or awareness, or even because I was a fan of Lance Armstrong (back in the days when people would actually publicly admit to liking the now-disgraced Tour de France champion).

No, I wore the bright yellow band because it was the thing to do; I also spent much of my 20s drinking out of a Nalgene water bottle and wearing New Balance sneakers for the same reason. I paid $1 for the Livestrong band from a guy who was selling them in the student union at college, and aside from that, I never donated a single penny to Livestrong – or any other cancer research organization, for that matter.

The Ice Bucket Challenge

So when I first saw all my friends dumping cold water on themselves, their spouses, and their children – all in the name of “charity” – I figured it was another fad, just like the Livestrong bands. And I wasn’t impressed.

I haughtily told anyone who would listen – my frozen, soaked friends; the clerk at the grocery checkout; my waiter at the great burger place in town – that when I got tapped for the Ice Bucket Challenge, I was going to take the moral high road and donate the $100 to ALS (also known as Lou Gehrig’s Disease) rather than taking “the easy way out.” (If you’re not familiar with the Ice Bucket Challenge for ALS, you can visit the ALS Association’s website here for more details.)

I nodded my head in agreement when I read Facebook posts from friends who wrote things like:

Please stop pouring buckets of ice water on your heads and just give a few bucks to a charity (any charity) instead!”

Comes to a Head

And then my best friend in the whole world challenged me, on the very same day that a man I work with reminded me that his father was quickly losing his battle with ALS and likely wouldn’t make it to Christmas.

My husband called me a humbug, and he was right. In my effort to take what I saw as the “moral high road” – skipping the challenge and donating directly to the ALS Association instead – I was forgetting what the challenge was all about.

What the Ice Bucket Challenge is REALLY About

It’s not just about raising money (although that’s a major element – the New York Times reports that the ALS Association’s fundraising for the first 3 weeks of August has gone up nearly 1000% compared to 2013 donations for the same period). The challenge is really about imprinting ALS in your memory. You might forget how you felt after writing a check to charity, but you’re far less likely to forget a bucket of ice water dripping down yourself. What the Ice Bucket Challenge is doing – and doing effectively – is imprinting ALS on our brains; it’s making a disease that’s horribly debilitating, often overlooked, and largely misunderstood a part of our collective discourse.

So I sucked it up, and let my husband (with the help of my 2 kids) pour a vat of frigid water on my head over the weekend. My kids thought it was the funniest thing they’d ever seen me do (it probably was), and my husband insisted that I challenge him in turn. At the end of the day, we were both cold, wet, and $200 poorer – but our hearts were infinitely warmer and richer.

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Arthur Gill is a keen traveller, writer and gardener. When he’s not tending to his geraniums, you can find Arthur tapping away at his laptop writing finance and consumer affairs blogs for some of the UK’s most authoritative websites.

Money 300x199 Have short term lenders been a help or hindrance in the economic crisis?

The economic crisis that hit our shores so mercilessly in 2008 made life extremely hard for millions of hard working people across the UK. Finally the grip of austerity has begun to relinquish, leaving many of us to pick up the pieces and start on the arduous road to financial stability. But out of adversity, comes opportunity, and while many businesses were fighting to survive, there was one innovative new industry that begun to flourish, filling the void left by established companies that were unwilling to trade.

While the banks shut up shop, it was short-term lenders that proliferated across the high streets of the UK, adding to the bleak landscape created by discount stores, pawn shops and other enterprises born out of austerity. Peer-to-peer organisations and crowd funding became popular methods of raising commercial capital, while payday lenders provided hassle-free loans to help private individuals meet their financial commitments.

Courting controversy

Few industries have attracted as much vitriol as the payday lender. While in some instances this has been justified, in others it seems wholly disproportionate. When compared to the banks for instance, which caused the very economic crisis which gave birth to short-term lenders like Wonga in the first place, you can’t help feeling that the press have a hidden agenda. Has anything the payday lenders have done come close to the PPI mis-selling scandal, Libor rigging, the recent business loan mis-selling saga, or even the catastrophic mismanagement which resulted in the hugely cost taxpayer bailouts? No, not even close.

The perception of short-term credit providers as organisations that prey on the poor has long been pedalled by the press. However, in the dark days of credit crunch Britain, when the only alternatives were criminal loan sharks wielding baseball bats, many of us were grateful for a legal source of short-term credit that could not be found elsewhere.

Preying on the poor?

In 2012, Wonga alone provided four million loans to one million borrowers. If the service provided by short-term lenders is so exploitative, so immoral, why is it that so many of us use this service not just once, but repeatedly, in fact an average of four times a year?

The reality in many cases is that, if payday loans are repaid within the agreed period, they actually represent a cheaper source of credit than an unsecured bank overdraft. So why aren’t the banks being taken to task for the dearth of affordable short-term credit?

It is a common accusation that payday lenders are preying on the poor. But payday lenders are merely providing an alternative to criminal backstreet lenders; a legal and closely regulated alternative. Even the Archbishop of Canterbury Justin Welby, one of the payday lenders’ fiercest critics, warned that shutting down payday lenders could put the poor at the mercy of ‘thugs with baseball bats’. So what’s the solution.

Closer regulation

The Financial Conduct Authority (FCA) began its regulatory reign of the payday loan industry in April 2014, having replaced the Office of Fair Trading. The City regulator has already made great strides in cleaning up the industry by introducing two measures to protect customers from spiralling levels of debt.

Following on from the work started by the OFT and in anticipation of the FCA’s strict new regime, many less scrupulous payday lenders have already taken their leave from the industry. Of the estimated 210 payday lenders operating in 2012, a third have failed to apply for permission to operate. 30 further payday lenders have also had their licences revoked by the OFT, leaving a more select group of lenders that are committed to playing by the rules.

With few viable alternatives and proposed measures to cap the overall cost of a loan due to be discussed over the summer, it remains to be seen how the curious case of the payday lender will be solved.

Have you ever taken out a payday loan? How did you find the overall experience? Did you consider the alternatives before contacting the payday lenders? We’d love to hear from you, so please leave your thoughts in the comments section below.

 

IMAGE SOURCE – http://pixabay.com/p-2179/?no_redirect

 

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I Am LeBron James

Cleveland

Libby is a jack of all trades, master of… well, you know how the saying goes. Media consultant by day, mommy by night, you can usually find her with a glass of wine in hand, provided the kids are in bed!

My bags were packed; the car was loaded; the directions – obtained via a map from our local AAA office – were on the dashboard. The four most transformative years of my life were mere moments away; I was headed off to college, and I sure as heck wasn’t coming home.

My Roots

I’m from Cleveland, Ohio; my parents are from Cleveland, Ohio; my grandparents – all four of them – were from Cleveland, Ohio. When my great-grandparents stepped off the boat in New York – one set coming from Wales, the other from jolly old England – they headed straight for the rust belt, straight for Cleveland, Ohio. I have roots here, but at 18 years old, those roots didn’t matter. They didn’t matter four years later when, after graduating from college, I stayed as far away from my birthplace as I could. And even when I started a family in my late 20s, I still didn’t see any reason to come home.

And then something changed. I found myself reading the local newspaper – The Cleveland Plain Dealer – even though I lived hundreds of miles away; I started cheering for the local sports teams – the Browns, Indians, and Cavs – even though they were all mired in decades-long slumps; I found what others might consider superfluous reasons to visit my family and friends who still lived in Northeastern Ohio on a more regular basis. Then one day, somewhat out of the blue, I told my mother – who still lives in the house I grew up in – that we (at this point my husband, myself, and our two young children) were coming home; I hadn’t even discussed this with my husband. I just knew my time away from my hometown had come to an end. I didn’t just want to go home; I needed to go home.

Understanding Lebron James

When LeBron James announced his Decision 2.0 a few weeks ago, I knew exactly where he was coming from – literally. I know the area he grew up in (not a great part of Akron, Ohio); I knew where he’d gone to school (a friend of mine was his 12th grade English teacher, his second year out of college); I knew the home he still kept in Bath Township (literally a stone’s throw from where I live now).

But I identified with King James on a deeper level, too. I knew what it was like to grow up in a part of the country that outsiders consistently look down upon. I knew what it was like to take advantage of the first big opportunity to get away, and to look back on that place that had given you life – and so much support – with nothing but scorn. I knew what it was like to vow that I was never coming home.

And, perhaps more than anything, I knew what it was like to realize that the very same place I couldn’t wait to leave was also the place I couldn’t wait to return.

LeBron is right: in Cleveland, we work hard for everything we have. We endure long, cold, miserable winters, just for an opportunity to bask in the sun. This summer, the sun started shining a little brighter. This winter won’t be so unbearable. We’ve recaptured a little bit of Heat from South Beach.

Our prodigal son – like so many of this city’s sons as daughters, myself included – has come home.

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Payday loans: Worse than overdrafts?

Author – Freda Hewitt is a serial mummy blogger. Her blog on living a frugal life receives thousands of views daily.

Card 300x200 Payday loans: Worse than overdrafts?

Do you think that taking out a payday loan will cost more than taking out an overdraft? If so you’re not alone.

Payday loans have received plenty of negative media attention due to their exceptionally high interest rates. They have been branded as one of the worst ways to borrow in terms of interest.

However, it has recently come to light that overdrafts could actually be a lot worse. Barclay’s has sparked concern over the cost of overdrafts after recently changing its interest rates to a daily fee.

Some overdrafts charge over 800,000% interest

A shocking revelation made by BBC News that some UK banks charge up to 800,000% interest on overdrafts has rocked the industry.

Payday lenders have been criticised in the past for charging up to 5000% interest. In comparison that looks like a pretty small sum compared to overdraft charges. It’s worth noting that this huge interest rate charged by banks relates to unauthorised overdrafts. That is, when you go over the agreed limit of your overdraft.

Santander has been found to be one of the worst offenders with £200 interest being charged on a £100 unauthorised overdraft. This works out at a rate of 819,100% interest.

Banks are arguing that it’s unfair to compare their overdraft rates to those of a payday lender. A spokesperson for Santander told the BBC: “Comparing unauthorised overdraft rates to payday loan rates cause confusion for customers. These high overdraft rates are added to unauthorised use of current accounts, while a payday loan is an agreed credit facility.”

So, when comparing payday loans to unauthorised overdrafts, payday loans do come out on top.

However, authorised overdrafts do usually work out cheaper. You can see a useful comparison between payday loans, unauthorised overdrafts and authorised overdraft rates on Which?.co.uk.

Barclay’s overdraft rates spark concern

A lot of customers have recently threatened to switch accounts after Barclay’s revealed its new overdraft interest fees. Instead of paying monthly or annual interest, customers will now be charged daily fees.

While it claims this should help its customers pay back less in the long term, it’s actually going to see many customers pay up to 15 times more than they currently do. It’s allowing customers to go up to £15 over their agreed overdraft before fees are applied. However, on overdrafts up to £1,000, they will be expected to pay 75p per day. For overdrafts up to £2,000 this increases to £1.50 per day.

This works out at a similar price for borrowing at Wonga, a leading lender. If banks continue to introduce such charges, it’s bound to have an impact on the amount of customers taking out payday loans.

However, both overdrafts and payday loans can have negative effects on your credit. So if you do plan on borrowing, you need to do so responsibly.

Things to consider

When looking into getting a payday loan, you need to take your time to compare your options. It’s important to choose a lender you know you can trust. Make sure the payment terms are clear and you know exactly how much it’s going to cost to take the loan out.

Also, pay attention to the lending criteria. New regulations have made payday lenders clamp down on who they lend money to. This means various checks are often carried out to ensure you can repay the loan.

If you apply to a payday lender and you don’t meet their requirements, your application will be turned down. This will then be marked on your credit report and it will have an effect on what you can borrow in the future. Other lenders will see it as a red flag and may not give you the money you need.

Overall, when it comes to unauthorised overdrafts, payday loans are definitely a cheaper deal. However, it all depends upon how long you’re borrowing for.

While payday loans can affect your credit rating, an unauthorised overdraft will have a more damaging effect. Providing you borrow responsibly, payday loans are currently one of the best forms of emergency cash available.

Just remember to never take out more than you actually need and ensure you can pay the full amount back at the end of the loan term.

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It’s a tale of three families. On one hand, you have my parents; they’ve always lived well under their means, prioritizing education and career above flashy cars and fancy vacations. They kept their debts – and only responsible ones, at that – to a minimum, and their investments to a maximum.

Then you have the parents of “M,” a lifelong friend of mine. He grew up with spendthrifts for parents. On a whim, his father bought a hot air balloon. A later splurge added an in-ground pool to their backyard, which just happened to be so far up north that it was only usable two, maybe three months out of the year.

The third family is my best friend, “J”‘s. To this day, he’s not really sure whether his parents were savers, like mine, or spenders, like M’s. His parents shared precious little about their financial habits with their children.

Of course, I’ll make the argument until I’m blue in the face that my parents’ money lessons gave me the best chances of financial success. They led by example, often bringing me along to the bank or the broker’s office in my teens to show me the importance of having a strong nest egg and diversified portfolio. But the question tonight is, whose parents did them a greater disservice: M’s or J’s?

M’s Finances Today

Today, M’s financial situation is largely the inverse of his parents’ example. He drives a modest car he purchased, lives in a modest home, participates in modest hobbies.

On the surface, he may appear to be fairly secure with his finances. He has a big emergency fund, his debt is under control, and his credit score is high. But beneath the surface, I see problems others might not.

Why is M’s emergency fund so large? Because he’s terrified about putting the money elsewhere, so he continues to build his rainy day savings bigger and bigger.

Why is M’s lifestyle so modest? Because he’s afraid to do anything big or bold, for fear of being labeled a spendthrift or living above his means, like his parents.

Instead of living life to its fullest, I’d argue that M is living his life to its smallest. He’s taken what he learned about money from his parents – which, at its core, only represents what not to do – and turned it on its head. He’s doing everything right, but not for the right reasons. Rather, he’s making these choices out of fear.

J’s Finances Today

When I met J, he was clueless about money. Whereas I knew how to handle the onslaught of credit card companies peddling their wares on my college campus – because my parents had prepared me for their presence – J was overwhelmed. M knew not to apply for these cards because he’d seen his parents rack up big debts; J, on the other hand, was eager to take advantage of this “free money.” Why? He simply didn’t know any better.

By the time J was preparing to graduate from college, he’d taken on tens of thousands of dollars in credit card debt. Terrified by his high balances, he went cold turkey on debt. He used his high-powered career and $80,000 salary to pay down all his credit card and student loan debt in two years. Good for him, right?

Not so fast. After eight years of failing to use a credit card or take on any type of debt – good or bad – he wasn’t any richer. He’d simply started using cash instead of his credit card to pay for an increasingly lavish lifestyle. He had little savings and even fewer investments. Plus, when he decided to settle down, get married, and buy a house, his credit score was too low to get him access to the best loans and interest rates.

Whose Parents Did Better?

If you just heard the money lessons M and J’s parents taught them growing up, you’d likely think J was in a better place to make wise financial decisions. But when you see the impact those money lessons had on their grown sons, I think it becomes clear that M learned from his parents mistakes – and, perhaps, is overcompensating for them – while for J, the absence of financial input from his parents led him down a path of poor decision making due to lack of knowledge.

What lessons about money did your parents pass on to you? What is the legacy of those lessons?

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Time Horizon

I read an article recently where someone described how they set their budget 3-years out into the future.  I can’t remember exactly where it was, so I can’t link to it.  What struck me about that, is there are a lot of unknowns that go into planning that far out.  Don’t get me wrong, I plan for my future as well.  I just don’t budget my food and other expenses for 3-years into the future.  I do analyze things on three basic time horizons: short, medium and long.

Long-Term

I will start by discussing my long-term items.  The biggest by far is retirement.  In trying to figure out a retirement number, I have to make a number of assumptions.  Assumptions such as how long will I work, what my level of pay will be in the coming years and what can I expect for an investment return.  All of these can have a significant impact on my savings estimate.  The other item in my long-term budgeting is college tuition for both of my children.  Since my oldest is 6-years old, I still have quite a bit of time before the expense comes about, but I have already started planning.  Retirement savings are built into the short-term budgeting, while the college savings will begin in a few years.  Since my wife currently stays at home with our children, our plan is for her to start working once they are both in school.  Most of her earnings at that time will be used for college savings.  The rest will be used for retirement and income taxes.

Medium-Term

In this category, I think of things coming in the next 5-years.  For us, there is only one thing that fits into this category, a Disney vacation.  Our kids are 2 and 6 right now.  In 5 years, they will be 7 and 11, which we feel would be a perfect time to take them.  Since we know the trip will have a significant cost, we are trying to set up a plan now to pay for it in 5 years.  We have received some money this year via an inheritance and we have allocated some of it for the Disney trip.  We figure the remaining amount we can save by using a portion of my annual bonus every year for the next 5 years.  This should allow us to enjoy ourselves on the trip and not have to worry about how we are paying for it.

Short-Term

The short-term budgeting is all about the day-to-day expenses to run our household.  The only time it changes is when there is a change in income.  A salary raise is usually what triggers a change in the budget.  I usually already know if there are any changes to expense categories that need to be made.  Since I track all of our expenses, I know if any category is trending above our budgeted amount and needs to be revised.  For example, with 2 growing kids, I have noticed that our food expenses have been trending upward the last few months.  Nothing too dramatic, but on average it’s probably $25 to $30 or so more a month.  Once the next salary adjustment comes in, I will revise our food budget to take this into account.

Adding it All Up

Those three time horizons make up our monthly budget.  It encompasses our day-today spending, as well as our long-term savings goals.  This way we plan for our future, but are also able to enjoy our present.  How do you think of your budget?

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