Making Ends Meet

The real trick to getting your money under control is using mind tricks. Having Yoda around would help. Unfortunately we have no way to Dagobah.

It has been common belief among economists for decades that humans, given two financial choices, will always choose the choice that is best for them. If you ever “accidentally” bought a car you will understand just how overwhelmingly stupid that statement is.

Almost every day we make financial decisions that make less than good sense. For instance- you have two choices- spend $2.00 on 20 ounces of Coke or spend $1.00 on 67 ounces? Spend $1 a night for movies for 22 nights a month or pay $17 a month for 30 nights of movies?

The reasons we make silly financial decisions is actually a whole line of study in itself- it’s called Neuroeconomics or behavioral economics. And it boils down to this- choosing a cold 20oz Coke when you are thirsty at the gas station is not the same decision as getting a warm 2 liter from the grocery story later tonight.

In other words there are lots and lots of reasons we make the decisions to spend our money the way we do.

That brings us back to the ways of the Jedi.

Just being aware that your mind and emotions can lead you down financial paths you don’t like can help you make the right decisions.

The biggest mind trick is a key part of what I teach in the Three Piece Plan.

When using the Three Piece Plan you separate out your “Everyday” spending money. This is a mind trick. Actually it’s a reverse mind trick- when your money is all in one place you think you have more to spend than you actually do– that’s the trick. And it’s what gets you into debt.

So you pull a fast one- you pull out your spending money, put it in a separate account and suddenly you don’t spend more than you should. Simple trick. Super effective.

The old saying is wrong. Or at least from an emotional point of view it is mis-leading.

The old saying goes, “It all adds up.”

It would have more impact if the saying went, “It all multiplies out.”  The only problem is- that saying is lousy…”It all adds up” is much catchier!

Now look, everyone is sick of the same old story, “If you just cut out that $4 cup of coffee you could save twenty million dollars a year.” Can anyone come up with an original magazine article? Besides how many people do you know who actually get a $4 cup of coffee everyday?

It’s not the small habits that necessarily make the difference. It’s just the pesky math.  If you take the family out to eat twice a week and it costs $30 each time then you spend about $260 bucks a month- over $3,000 a year.  You can eat at home for a third or less of that amount.

Now the problem is that I think that you probably need to go out and eat- at least as our society is now. It gets you out of the house. It is fun. The food tastes good. You can’t just never eat out again. This is not about that. It’s about the principle.

Every time you spend money the effects of that multiply. Do you play golf every week? $50 a weekend for 40 weeks a year is $2,000. Have a shopping habit? $100 here, $20 there, a fabulous $9 pair of shoes over here. And pretty soon you are spending $300 a month.

Keep it in mind– “It all multiplies out”   Not in and of itself as a behavior modification tool- but as an awareness tool.

“Wow, I notice that I go to Red Box 3 times a week. That’s $156 a year.”
“I go to Sonic every night after work. Wow, that’s $27 a month.”
“My mobile phone plan costs $150 a month. My goodness- that’s $1,800 a year!”

Then if you are married you take both of your habits and expenses together and it really adds up.

The consequences and the solution:
The solution is not elimination, it is modification. Really, if you like Red Box then go to Red Box- but maybe you only do it twice a week- savings: $52 a year.
And say you go to Sonic three times a week instead of 5- savings: $156 a year.
Then you take a look at your cell phone bill and you realize you have a feature you don’t use- your bill is reduced by $30 a month or $360 a year.
Just these three little items and you have spent  $568 less.

Have you ever wanted to take a Caribbean cruise? That’s the consequence part. You can take a 5 day Caribbean cruise for around $600.  So by doing all these small things over and over and over you multiply your spending.  Instead you could almost pay for a cruise!

The important thing to remember is this- don’t try to cut all this stuff out. Obviously you “need” a mobile phone these days and going to Sonic is a ritual you cherish and a good movie is how you unwind.  So keep all these things around- just do them a bit less often so you can do big stuff more.

(Notes- Sonic- $1.50 a day, 5 days a week, 4.33 weeks a month.  Red Box- $1 a movie.)

Each of these “Ten Reasons” needs their own blog post. But if I want to get them in here for you site visitors to be able to see.

Ask me questions about them-  then once you read them you should fill out the form below to get started with your own Three Piece Plan.

1. It requires no continuous work- no entering categories, dividing up receipts, etc-   who has time for that?

2. You get paid every week. Or at least that is the way you will feel when you are on the Three Piece Plan.

3. You are doing SOMETHING.  Doing nothing won’t work. So having a simple system helps you keep your mind focused on getting out of debt and not overspending.

4. The Three Piece Plan decreases consumption. Because now you feel like you run out of money more often. So every week you find yourself eating at home, not shopping, etc. And the best part is that you don’t mind it!  You know you have money in the bank and that “pay day” is just a few days away.

5. You build an emergency fund almost automatically. Enough said!

6. You KNOW, instead of guessing and overshooting, exactly how much money you have to spend. This keeps you from bouncing checks, etc.  No more, “Whoops, I thought that check had cleared!”

7. You enjoy your money so it motivates you to spend it right. It is an UPWARD spiral. You spend less, you stress less, you worry less, you take care of things faster, etc.

8.  It is easy to adjust. If you get extra income you are not inclined to spend it so fast. If your income goes down it is easy to look at where you are and adjust accordingly.

9. Communication. It gets much easier on the Three Piece Plan. You look at how much cash you have, or how much you have in your “Today’s Money” account and know exactly what you have to spend. So it is easier to tell your spouse, “Uh, honey, we only have $25 to last two days, can you wait until Wednesday to get your hair cut?”

10. The Three Piece Plan family budget system is sooooo easy to set up. I can literally set up the basis for one in less than five minutes. It also works well for budgeting on a variable income.

Whoops, there goes another one.
And another.
And another.

The seconds just tick by. Gone. You cannot have this second back, nor the last one, and when the next 60 go by they are gone forever.

And oh boy do we ever wish we could have some moments in our life back. Those embarrassing speaking gaffs, or the time you blew your temper, or looked up just in time to rear-end someone.

But here’s a principle  for you– money is like time.

You only have so much of it and once it’s gone it’s gone.

“But you can earn more money, right?”

“You still only have so much of it.”
“I don’t understand.”
“Well think of the money you will earn in your lifetime in it’s totality.”

At birth you get a two dollar bill from your grandma to put in your piggy bank. Then you find money laying around the house, earn an allowance, baby sit, and mow lawns. Then you get a job waiting tables. Then you get another job, you sell real estate for awhile, and you get an inheritance along the way. Soon you retire and start drawing down your savings and collecting Social Security. The last dime you earn in life is a small stock dividend for $3.42 that you never expected. And, oh, by the way you still have that two dollar bill from birth!

Taken all together you will have earned or received all the money you will ever earn or receive. No more, no less.  It’s what I call the Whole Pie Principle.

You only got one money pie- and if you eat it too fast, spill it, or let it spoil you ain’t gettin’ no more.

So the whole point is to use your money like you use your time. Wisely, because once it’s gone you can’t get it back.

The CDC.  The Center’s for Disease Control? Nope.

The Chronic Debt Cycle (CDC).

The family caught in a CDC is the type of family that is most capable of breaking out of debt, breaking out of worry, and breaking out of the CDC for-eva.

You can recognize a Chronic Debt Cycle–  look for this…

… and the worst of the CDC breed– when you find yourself in $15,000 (or $60,000) of pure credit card debt, pay it off after a few years, then find yourself right back in it 12 months later.

… you go awhile without any debt, then a situation throws you back into debt.  A situation such as a move to a different house, a temporary layoff or job loss, the sudden loss of other expected income.

… you only go into debt certain times of year- such as a Christmas time or if you are self employed you survive on credit cards through certain slow months of the year.

… your debt load goes up and down up and down up and down– but you never get it paid off.  Something always comes up and it keeps you in Eternal Debt.

…  you may have never had a credit card- but most of your furniture is paid for $20 a month over a period of years.

… car repairs or vacations make you pull out the credit card.

… you have a home equity line of credit that you periodically tap- then pay off.

If you have any of these (or many similar) things happening in your life then you are in your very own Chronic Debt Cycle (CDC).  The good news is that this is the easiest kind of debt to get out of and stay out of.

The primary problem in a CDC is not lack of money- it’s just sheer lack of planning.

The easiest way out of a CDC is to use the Three Piece Plan. There are certain situations that I will address separately later- like for small business owners.