Using Money Wisely
Money is meant to be used, but be sure to use it
for things that are really important in your life.
The "Budget" Issue
When giving their advice about using money wisely, many financial counselors recommend “making a budget.”
We certainly agree with the main principle that budgets are based on. However, we will not use the word “budget” in this section, because this term sometimes brings up negative impressions.
For example, when somebody says, “I’m on a budget,” this might make the hearer think the person won't be be able to go somewhere or buy something desirable because how he or she uses her money is now being strictly limited.
Or a salesperson might say, “This is our budget-priced model,” which could suggest that it's cheaper and possibly not as well made as other models.
At this point, you might ask yourself, “Why should I make a budget if this budget business will only keep me from buying good quality things or doing something I really want to do?”
To avoid these somewhat negative interpretations of the term “budget,” we will talk instead of a MONEY USE PLAN.
We emphasize that developing and following a specific plan for how you want to use your money does not prevent you from buying or doing worthwhile things. On the contrary, it:
- encourages you to carefully think through what you really want to do with the money you have, both short- and longer-term
- helps you keep from making spur-of-the-moment or “impulse” purchases that don’t really give you much value or satisfaction
- helps make sure you will regularly have enough money on hand to take care of important (and necessary) day-to-day or monthly expenses such as transportation to and from work and rent payment
- allows you to plan for and set aside a meaningful amount to be saved toward your longer-range money-use goals.
To get started on drawing up a money use plan, you will need to distinguish carefully between basic,necessary expenses and unnecessary expenses.
Basic, Necessary Expenses
These include what you will absolutely need to spend in order to have:
- enough regular, non-fancy food to keep you alive and reasonably healthy
- enough toiletries (shampoo, toothpaste, etc.) to keep your body clean and healthy
- enough clothing in good enough condition to get by in polite society
- a means of transportation to and from work or for job searching
- a means of communicating with possible employers, sending and receiving messages, and so forth
Unnecessary expenses are any expenses that go beyond the basic needs described above. For example, in the clothing area, a necessary expense would be to make sure you have a clean and respectable-looking shirt for job interviews or other important appointments. On the other hand, buying a Van Heusen pinpoint shirt with pearl buttons and French cuffs would definitely be in the unnecessary category because it goes above and beyond the kind of clothing needed to "get by in polite society."
If you can keep your focus on spending money only for basic needs rather than on "frills," this will be a major step forward in keeping your expenses under control and being able to move from the "debtor" or "floater" category into the "saver" category.
Exercise: Name one or more recent (past few months) things you spent money on that would be considered an unnecessary expense. During the same general time period, were there some necessary expenses you were not able to handle--possibly because too much money had already been spent on unnecessary items?
Developing a Money Use Plan
If you have firmly decided to
- put basic, necessary expenses, rather than unnecessary frills, at the heart of your money-use plan, and
- include regular saving as a very important part of this plan,
here are the step-by-step procedures for making such a plan, tailored to your own specific situation.
First: Put aside a small amount of money to keep with you at all times for emergencies. This should cover several phone calls, one or two bus rides, and perhaps a night at a budget motel. Act always as though you do not have this money, and save it for use only in a true emergency situation.
Second: After deciding on and putting aside your emergency amount, click on Money Use Forms and print a copy of the Estimated Monthly Expenses form.
The Estimated Monthly Expenses form lists nine different types of basic, necessary expenses:
Third: Decide on a one-month period your Estimated Monthly Expenses will cover. This could be either the current month (if you're filling out the form fairly early in the month) or next month (if you're close to the end of the month).
Fourth: Think carefully about, and write down on the form, how much you estimate you will need to spend during this one-month period for basic, necessary items in each of the nine categories. Note: If you're starting in the current month, you'll need to make at least rough estimates of what you've actually spent so far in each category, and then add to these figures whatever more you believe you will need to spend before the end of the month.
The following shows what particular expenses should be included in each category:
- HOUSING – Write down your monthly room/apartment rent or other lodging expense. If you are currently in a shelter or other no-cost housing situation, write zero.
- FOOD – Put down the probable cost of your basic food over the one-month period you have indicated. Remember that you may be able to get some free meals, get groceries from food pantries, make your own lunch instead of going to a fast-food restaurant, and so forth.
- TRANSPORTATION – This is the monthly cost of getting to and from work, job interviews, or for other "moving around" purposes. Keep in mind the possibility of walking or biking, and riding the bus only when necessary (especially if you have to buy individual tickets each time rather than use a monthly pass).
- PHONE – Your average monthly land-line and/or cell phone costs (including any extra minutes needed), any phone cost-sharing arrangements with an apartment-mate, etc.
- CLOTHING – Put here the cost of any basic clothing you will need for general around-town wear or for wearing on the job. Keep in mind the possibility of getting free or inexpensive clothing from Goodwill stores or other sources. If you think you will need to spread your clothes-getting over more than one month, put only one month's average expense on the form. For example, if you will need to spend about $120 total over a three-month period in order to have a basic, functional wardrobe, put down $40 on the Money Use Plan.
- HEALTH AND GROOMING – This category includes haircuts, toiletries, sunscreen, reading glasses, prescriptions, medical expenses, and so forth.
- DEBT/JUDGMENT PAYMENT – Write down the total monthly cost of any legally-required expenses (child support, back taxes, credit card minimum payments, etc.) you have to pay. (NOTE: If the total amount of these required payments is much more than you can handle at present, you should try to arrange for smaller periodic payments. In addition to reducing the size of your regular payment, the person or agency may in fact agree to "forgive" some of your total debt.)
- ENJOYMENT – This is included as a needed basic expense, with the understanding that the goal would be to get the most enjoyment for the smallest outlay of hard cash.
- OTHER – Show here any other expense that does not fit any of the above categories.
Fifth: Add up all nine amounts you have shown on the Estimated Monthly Expenses form. This is your estimate of the total amount you will need to spend in an average month to take care of your basic living expenses.
Sixth: On a separate blank sheet of paper, write down and add up the total amount of money you have (or expect to receive) within the one-month period you indicated on the Estimated Monthly Expenses form. This includes:
- any money you have in hand at this moment
- any amount you presently have in a checking account (don't include any money in a savings account)
- the net amount--after any taxes or other deductions--of any paychecks or other checks (such as Social Security, unemployment) you expect to receive during the month
- the amount of money you expect to earn from one-time or pick-up work
- any money you expect to receive from any other source
Seventh: If the total amount of income from the above five sources is less than the total "Estimated Monthly Expenses," carefully re-examine your entries in each estimated expense category to see if any of these amounts can be reduced, for example by:
- walking or bicycling instead of using the bus for at least some of your transportation
- using a lower-cost cell phone service, such as prepaid (sometimes called pay-as-you-go)
- being really serious about finding and using free or low-cost food options, rather than constantly going to fast-food restaurants.
If your total income from the five sources above is slightly more than the total expense shown on your Estimated Monthly Expenses form, you will probably be able to make it through the next several weeks, at least as a "floater."
If your anticipated income is quite a bit greater than your estimated expense, you should be in a good position to start making regular deposits to a savings account, as previously mentioned. The only exception would be if you have major debts that you still owe, especially if they charge interest on the remaining balance. In this case, you should try to apply quite a bit of your available extra income to bringing down your debt. The procedure to do this in the most effective way is described in Getting Out of Debt.
Two Very Important Rules
In order for your money use plan to work, from this point forward you will need to:
- firmly keep from borrowing money or getting loans of any sort
- immediately stop charging anything on any credit cards you may have, cut them into small pieces, and throw them away. This is the best use of scissors you will ever make in your entire life!
If you feel you need to have some sort of card to use instead of cash in some situations, you can apply for a debit card.
In shopping for a debit card, make sure the card does NOT have overdraft protection. It is much better to have the sales clerk at the store tell you there is not enough money on the card, than to have the bank automatically charge you a $35 or more overdraft fee for accidentally going a couple of dollars over your actual card balance.
Exercise: Except for allowing you to buy goods or services you don't have the money to afford (and increasing your unpaid balance and total debt), can you think of any ”advantage” in having a credit card instead of a debit card with no overdraft protection? Is this really an “advantage” or a major disadvantage in terms of your overall financial situation?