Sunday, March 27, 2011

Tax Season: I'm Not Wasting It All This Year

Photo by TomD. via Flickr

As a college student there are a couple of times per year where I receive a fairly large sum of money. Two such times occur when scholarships and financial aid funds are disbursed each semester. Most recently, I finally did my 2010 taxes and am set to receive a much larger return than any previous years. The reason I'll be receiving more is because I became a father last year and was able to claim my son this time around when I filed. As a result of this change in living situation, I will be receiving somewhere around $3,000a nd find myself thinking of how exactly to handle this money most responsibly.

To some people, such a task seems simple. These people can feel free to skip reading this post and spend their time doing something else. For the other 98% of us who never seem to do what we planned to do when we receive a large sum of money, let's see if we can get to the root of such behavior. Maybe this year we can alter it before our checking account balance hits zero once more.

If you hang around any given workplace long enough you will hear employees speak about finances. Often times this comes out in the form of complaints and statements about what said employee would do if they had more money. The catch is when they get more money, they never do what they claimed they would. I see this in myself and others this time of year when we receive a large sum of money in the form of a tax return. After weeks of getting by on our regular incomes, suddenly when we receive this temporary boost in income we start behaving differently. Our weekend outings switch from having two or three beers at the local bar to having premium mixed drinks at the upscale club. The occasional stop at McDonald's for a couple dollar-menu items becomes a visit to a more expensive restaurant for full course meals. All of a sudden your jeans just don't seem to fit right and need to be replaced by a brand new pair of Levi's. Although what we choose to spend it on varies from person to person, I'm sure all of us have, at one point or another, regretted spending part of or all of our tax return the way we did.

After blowing through a couple of financial aid payments, I decided I couldn't be trusted to manage large sums of money on the go. Specifically, I pretended that I could have the funds in the same bank account as my regular income, would make sure to mark the money as separate, and spend accordingly. What happened instead was I would spend my entire weekly income then continually dip into the financial aid money until it was spent in it's entirety. As a solution to this problem, I decided to store the financial aid funds in a separate checking account. I figured this way I'd use my regular account to manage my regular income and wouldn't feel tempted to spend my financial aid money as quickly. Unfortunately this didn't work either. This time, since the accounts were separate, I didn't use the financial aid money to replenish my regular income. Unfortunately, I didn't use the financial aid money intelligently either. Since I saw it as such a large, infinite sum of money, I'd just use it as a means of treating myself. I'd go out to more expensive restaurants, buy pricier clothes, go to classy bars, etc. without feeling guilty as the money was coming from an account with a ton of extra money instead of from my regular income. Though the method was different, the end result was the same; I blew through my financial aid money without putting it to good use.

Through this pocket-emptying version of trial and error, I arrived at the method I use today and plan to use for this tax return. In a sort of paradox, I will prevent blowing through my tax return by spending it, in it's entirety, shortly after receiving it. Wait a second, doesn't one of the staples of frugal living involve avoiding spending impulsively? Yes, that is certainly true. In most cases, impulsive spending is indeed the enemy. In this case however, what seems to be impulsive spending is not at all impulsive. Prior to spending my return in it's entirety, I map out precisely what I will use it for. Usually I have to wait about a week before the money is deposited into my bank account. During this week I make a list of financial priorities. This includes stuff like looking at my debts, thinking of any expensive household items I truly need (usually baby-related) or paying a couple of months worth of bills in advance. Once I have chosen what is most important and how much of my return will go to each specific expenditure, I wait patiently to receive my return. Then when I receive the funds, I immediately spend the money on these prearranged expenditures, leaving no room to mindlessly waste any of it away.

This time my end result is quite different. Instead of looking back a couple of months later, thinking "where did all that money go?", I know precisely where it went. By extension, I won't feel any regret as I realize it was all put to good use and spent living past my usual means for a couple of months. It's an experience I thoroughly believe everyone should have the chance to partake in.

Thursday, March 10, 2011

Financial Awareness

Why Financial Awareness Matters
Developing a sense of awareness about your finances is among the most important aspects of frugal living. I'd even go as far as to say that without such an awareness, it isn't even possible to live frugally. The point being that if you aren't conscious of where your money is going or how much you're spending, how do you know how much you're wasting and what to do about it? Financial awareness is important because it is the key to all financial progress, from a simple plan like forming a budget all the way up to saving for retirement, financial awareness plays an essential role in all financial planning. Mindless spending never left anyone sitting with extra money in their checking account at the end of the week. Conscious spending habits, however, leave plenty of frugal-minded people with extra money in their checking account at the end of the week. By conscious I don't mean being awake (it's pretty hard to spend money when you're sleeping) but I'm referring to being fully aware of your thought process, feelings and behavior when you are spending money.

I think I've made it pretty clear in previous posts that I'm a frugal living beginner. Coming from such a position, I have no issues with sharing my personal finance problems and analyzing them to find a solution. In this particular post, I will be addressing my lack of financial awareness in regards and discussing a method for developing conscious spending habits.

A Financial Awareness Realization
This past week, as I signed online to check my balance every morning, I realized that nearly every time I checked there was less money in the account than I had expected. I usually remembered most of what I purchased, so it wasn't drastically less money than I thought I had, but definitely enough to require some time spent remembering precisely where these funds went. Usually, after a minute or two of thought, I'd remember some small expenditures I forgot about. The ten to twenty dollars less I encountered in my account would be explained away by a forgotten stop a fast food restaurant, some snacks at the convenience store or too many trips to a couple of coffee shops. I wouldn't mind if this occurred once or twice a month in very small amounts, say five dollars or less. In this particular instance however, not only was this "where did my money go" scenario occurring daily, but upon adding up the this "lost" money I found I could have easily contributed it to a more useful purpose such as debt reduction, building savings or paying bills earlier than I had planned.

What bothered me specifically about this situation, was a total lack of organization and a display of absentmindedness on my part. It was one of those problems that could be easily resolved but is ignored and thus develops into a larger dilemma. I think a dirty dishes example is one that anyone can relate to. Here's the scenario. You finish eating lunch and put your dish in the sink. As you have somewhere to go and are in a bit of a rush, you think "I'll clean that dish later". Evening rolls around and after finishing your dinner, you feel exceptionally tired and you once again decide to simply put the dish in the sink and go to bed. You repeat this cycle for four to five days. You wake up on one of your off days and decide you're going to make yourself a wonderful breakfast. Once you open the cabinet in your kitchen and find you don't have any clean dishes, you take a look at the sink. The sink is full of dishes and you take twenty to forty five minutes washing them all wondering why you don't wash them right after eating a meal in the first place.

Unconscious spending undergoes a similar process. You spend a couple of days frittering away small amounts of money without checking you balance thinking "I still have a lot left, this is insignificant spending". Three or four days later you check your bank account and see your balance is at least thirty dollars less than the amount you expected to have. Suddenly you wish you actually kept track of your money as you spent it and knew exactly how much you had left over every time you made a purchase. It certainly seems like it would make your life easier.

Becoming Financially Aware
Now that the problem is clear, I'm going to offer a clear solution. As this issue is clearly based upon lack of financial awareness, I will demonstrate how to increase financial awareness. I need you to find a comfortable chair, close your eyes, begin breathing rhythmically and block out all mental images while focusing on a perception of financial awareness. You might even want to whisper the words "financial awareness" to yourself as a means of staying focused.

I'm kidding (though I do respect meditation practitioners) and just having fun with the idea of "awareness".

I have a practical, hands-on approach I plan on employing this week to develop some financial awareness. This week, when I check my bank account each morning, I'm going to take out a piece of paper and write down my checking account balance. I'll put this piece of paper in my pocket and take it with me as I go about my day. Anytime I purchase anything (yes, that includes a seventy five cent soda can) I will pull out this piece of paper and write down the amount I just spent. Before going to bed at night, I will subtract the amount I spent that day from the total balance I wrote in the morning and figure out my new total balance. I will then take out another sheet of paper and write the new total balance at the top of the sheet to use tomorrow. The next morning, I'll grab the paper with the total balance, put it in my pocket and repeat the aforementioned process.

Isn't this the same thing as that annoying checkbook I don't use?
There are some advantages to using this method versus say making a budget in the beginning of the week or keeping a more specific spending record like a checkbook. Often times when people make budgets, they plan out a specific amount for spending on-the-go. Due to the nature of on-the-go spending, often times that twenty dollars a week spending limit for on-the-go purchases is exceeded within two or three days of unconscious spending. Taking time to write down how much you're actually spending helps you stay within your budget goals with very little effort. The method I'm employing is basically the same as a spending record like a checkbook but slimmed down. Unlike a checkbook, I don't have to carry around a bulky, multi-page item. Also unlike the checkbook, I don't feel inclined to have to fill out any additional information. If you're like me, a page which has boxes for writing down dates, store names, check numbers, etc., makes you feel as if you must fill out all that information in order to be organized properly. Using my strategy, none of that is required. Simply write down the amount, and do the subtraction later, no need to worry about taking down the date, what store you're purchasing from and all of that. What truly matters, after all, is being aware that you are spending money.

Moving Forward
If I employ this strategy successfully, I am certain I will go from thinking "where did that money go" to knowing precisely where it went. More importantly, as I stated earlier, it is impossible to live frugally without financial awareness. By developing financial awareness, I will be able to move forward and employ other frugal methods. Each day I will know how much money I have, which will make it easier to spend that money more carefully, reduce wasteful spending and funnel what was once wasteful spending into worthy causes such as reducing debt and building savings.

Wednesday, March 2, 2011

On Building Savings

Photo Courtesy of Shinya Omachi via Flickr

I have always associated building savings with a high level of discipline. It's on account of such associations that I have had immense difficulty saving money. In recent months however, I've strongly reconsidered my stance. What led me to do so? Well, I decided it was time to change my perspective after watching my paychecks be spent in their entirety every week while the amount of fun I had, goods I acquired, and debt I carried seemed to stay at relatively the same level. Taking note of this cause me to ask myself "What in the world have I been spending all of my money on"? This question become more troubling as I added up the amount of funds I've received from scholarships, financial aid, student loans, tax returns and selling goods on eBay. At once I became conscious of the fact that though I've received thousands of dollars in the past year, I didn't save any of it. Not even one dollar.

The frugal experts are probably saying "You have no money in your savings account and you think you can offer insights on frugal living? Are you out of your mind?". Well my friend, the answer is "yes" to the first question and "I don't think so" to the second. While it is true that a frugal expert may know more about building savings, it does not necessarily follow that such an expert is the best person to teach a novice about the subject. From the first post, I admitted that much of what I write pertains to learning how to be frugal and taking initial steps in that direction. I never claimed to be a frugal guru ready on demand to recite current interest rates for various savings accounts. Furthermore, I believe that the average article on savings is too busy preaching to the choir to reach the astounding number of people who have trouble building savings. Sometimes you gotta get back to the basics and address what keeps people from saving before suggesting methods that they aren't yet ready to use.

That being said, I will lay out my plan to build savings. I consider it a simple plan and intend to keep it that way while I master the fundamentals of building savings. My first strategy I have in mind involves thinking small. I make around two hundred dollars a week and will start by putting just five dollars of that weekly income into a savings account. This will be done immediately upon receiving my paycheck to avoid making such a deposit seem larger. I will do this right away because it is much easier to set aside five dollars out of two hundred dollars than five dollars out of twenty dollars. In the former, you barely notice the difference, in the latter you give up a fourth of your remaining income and feel a stronger sense of deprivation. I will continue to make five dollar deposits to my savings on pay day and see how the weeks play out. My theory is that they will certainly play out the same as previous weeks. This is a likely outcome as five dollars is much too small of change in income to cause any inconvenience. The goal is to get to the point where I no longer see the five dollars as a portion of my income and putting it aside becomes so habitual that it's as natural depositing the rest of my money into my checking account. So unlike the previous weeks, I would be saving something every time I'm paid.

If this idea sounds familiar, it's because it probably is. There are similarly structured methods floating around the personal finance world regarding building savings. I remember reading The Automatic Millionaire a couple of years ago and being especially impressed by the whole "automatic" side of David Bach's ideas. The book proposed a method of saving for retirement in which a prearranged amount is automatically deducted from your paycheck and placed into savings. This way there is no sense of deprivation attached to building savings as the money is automatically put away for you and you quickly become accustomed to living without it.

In the method I am trying out, I don't want my process of saving to be completely automated as I would like to improve upon my habits while I'm saving money. In my opinion, the physical act of depositing the money versus having it automatically deducted will give me a sense of control and satisfaction I wouldn't get through the automated method. Many of those who have funds automatically deducted from their paychecks have these funds deposited into retirement accounts. The driving purpose being to build a large amount of money you can live off of once you are no longer working. Such savings seem incredibly far-fetched and uninteresting to a young man like myself and would definitely make me feel like I'm depriving myself now for some future gain. According to my present plan, I am saving without a clear purpose in mind. No you didn't misread that, I said I am saving without a clear purpose in mind.

Well I'm a part of this aimless, purposeless generation of young people aren't I?

Jokes aside, by no purpose, I simply mean without a set finishing line or enticing reward. I'm not building savings for retirement, or to purchase something expensive or anything concrete like that. I am saving money because I'm tired of blowing through money unconsciously and having little to show for it. I suppose I was wrong in saying I had no purpose. The purpose, would be to put my method of saving into practice without consideration of the end result. This time next year, if I realize that I'm still spending my paychecks in their entirety, I want to pull up my savings account balance on the computer and see I have $260.00 in there. I don't want to spend every week leading up to that point envisioning such an outcome. I would rather have saving money built so deeply into my routine that only upon remembering how wasteful I used to be would I notice the big difference.

Once I have that down, then I'll start looking at what I can do with the money I've saved. As cliche goes, you gotta learn to crawl before you can walk.