To Save Money, Know Where You Spend It
November 05, 1998

To Save Money, Know Where You Spend It

Thursday, November 5, 1998

To Save Money, Know Where You Spend It

Q. My husband and I are 44 and 39 years old. We each make about $50,000 a year. We own a house with a $134,000 principal balance and we have a lot of credit card and other consumer debt. I am currently paying on two student loans that will be paid off in late 1999. But the $13,400 in consumer credit and loans may take us three years to clear.

We contribute $220 monthly to retirement plans, have no outside savings, and seem to live paycheck to paycheck. Our monthly bills include the usual— utilities, car lease, gasoline, insurance, food, clothing, and medical plus child care, membership in our synagogue, and entertainment. I want to get out of debt and cant figure out if weve just made terrible financial decisions or is everybody living like this? Our home, car, child care and clothes are not drastically different from people who have similar jobs/lifestyles.

We have three boys, 15, 7, and 3. In four years the oldest will start college and I am clueless about how we are going to pay for it. What do you suggest?

—K.S., by e-mail

A. Many people live lives burdened by invisible feelings of entitlement, eg. if my job is this good I should be able to have this, this, and this. You and your husband may be in this trap. There are couples with half of your income who regularly save several times what you save. They can tell you where they spend their money and how much they have saved to meet a major goal.

Your problem isnt income. Its spending.

I am not saying this to make you feel guilty. I am saying this so you might become a closer observer of your life and spending habits. In the daily grind, we start to take a lot of spending for granted. Eventually, spending less than $2,000 a week on flowers could seem like a hardship.

Let me give you a less extreme example. A few weeks ago I was telling my wife that I didnt understand how it was that our income could rise but our standard of living remain basically the same. Fortunately, my wife sees glasses as half full, not half empty.

"When was the last time you did yard work?" she asked.

"October, 1984," I answered.

I had somehow "forgotten" about that indulgence. It is a significant monthly expense that I have taken for granted for literal years.

When you say "our monthly bills include the usual" you are missing something. Usual to whom? How much is each bill? Every expenditure not examined is a decision. Worse, its probably a bad decision because none of those dollars will pay off debt, be saved, or increase your security.

What to do?

Put your credit cards away. Get simple. Live on a cash basis. Decide how much you are going to pay on your consumer debt each month. Put your remaining money in envelopes for food at home, food away from home, entertainment, clothing, etc. This may sound silly but it works. When you are out of money in a category, you stop spending.

Little paper envelopes are a lot less silly than believing there is a Tooth Fairy of Financial Planning..

Q. As a result of the uncertainty in the market, we have moved a portion of our stock portfolio into money market funds. My wife asked me what would happen if people panicked and attempted to redeem their holdings and completely withdraw their money from the funds? We know the money market funds are not insured, but are there any safeguards in place? Should we be concerned that our cash is in these brokerage firm money market funds?

—M.B., Colleyville, TX

A. Money market funds have a long history and in the few circumstances where one has become illiquid and "broken the buck" ( dipped below $1.00 per share net asset value) the fund has received a cash infusion from the management company. I think the risk is minimal.

It is possible, however, to earn nearly as much in a government securities money market fund as in a fund with more credit risk. So, if you are worried, Id transfer to a government securities only MMF. Most of the major firms offer such funds.

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