Knowing that simple changes to food habits can save big money, let’s look at how compound interest can affect our major purchases.  We all like new things – new gadgets, new items for the house, and new cars.  Sometimes we like them so much that we are willing to do whatever it takes to get them.  This can include paying outrageous interest rates when we don’t have the cash.

     Marketing executives, sales associates and stores that we frequent know this and often take advantage of it.  However, when we look at it in perspective, we may begin to feel differently about actually making that jump.

Store credit cards – a good or bad idea?

     For example, let’s say that we found a bedroom set that we absolutely love.  The current price for the whole room is $4,000.00.  Let’s also assume that the furniture store offered to finance our purchase over three years.  We would only have to pay $157.00 a month, and we can have the furniture delivered today.

     While $157.00 a month may not sound like a lot of damage to pay in exchange for having a new bedroom set, let’s take this example a little bit further.  Based on these numbers, the furniture store is financing us at 24% annual interest.  Now that’s ugly.  What’s worse, once we finish making our monthly payments in three years, we will have paid $8,012.00 for a $4,000.00 bedroom set.  That’s twice the original asking price!

Cash is better

     It would be much better if we are able to pay cash rather than finance the purchase.  We can create a plan to save the money over time.  Let’s look at two options:  saving for three years and saving that same monthly payment.

     There are many options that we can choose to use to save this money.  In this example, we will assume that we are saving in a vehicle that is earning 4% annual interest.  This is higher interest than a bank savings account.  If we were to put the money in the bank, the money would not grow fast enough.  We have to find another investment vehicle that we are comfortable with.

Option 1:  Save over three years

     If we wanted to save a fixed amount each month for three years, we can reach $4,000.00 by saving $105.00 each month.  This is much less than the monthly payment that the furniture store required.

Option 2:  Save the same monthly payment

     If we were comfortable with the $157.00 monthly payment offered by the furniture store, then we can save that amount each month for 2 years to reach the desired $4,000.00 goal.  This option cuts one year off of the furniture store’s payment plan.

     Neither of these options will allow us take the bedroom set home today, but we can save $4,000.00 in unnecessary interest by waiting until we can afford it.

     This concept can be applied to almost any major purchase we so desire.  Being disciplined enough to exercise patience and cut back on our need for instant gratification can save us thousands of dollars in interest.

     I completely understand what it feels like to work all day and not want to go home and cook.  But fast food is not the answer.  Not only is it a nutritional no-no, but it also leads us into a financial hole that could ultimately impact our credit score.  Let’s look at this more thoroughly.

Fast food

     To keep it simple, let’s assume that we went to our favorite fast food spot and purchased meals for the whole family.  Whether an adult meal or a kid’s meal, we will assume that they cost $5.00 each.  With five family members, we are talking about spending $25.00.

     If we did this once a week, that would add up to $100.00 a month.  If that $100.00 were to earn 10% interest annually, it would turn into $20,145 after 10 years.

Restaurants

     This can look even worse if we go to a restaurant as opposed to eating fast food.  Restaurant meals are usually much more expensive than fast food.  For example, if the restaurant has an average meal price of $15.00 per person, the bill for a family of five would run around $75.00.  Doing this once a week would have a monthly cost of $300.00.

     If we saved $300.00 every month for 10 years at 10% interest, we would have over $60,000 saved.

     I know that this situation is not very realistic.  We can’t just give up all eating out.  So, let’s just try eating out twice a month.  That brings our monthly expense down to $150.00.  Saving the money from the other two weeks would give us about $30,000 at 10% interest over 10 years.

Rushing can cost us

     I have also been known to rush to get myself and my daughter out of the door on weekday mornings, not having enough time to eat breakfast or to pack a lunch.  But buying coffee and donuts on the go or buying fast food on lunch breaks can get dangerous for our wallets.

     Many of us enjoy Starbucks, or some other gourmet coffee, on a regular basis.  These coffee beverages can easily run about $5.00 each.  As a regular donut eater, I know that donuts are usually somewhere between 75 cents to $1.00.  I usually buy them two at a time.

     If we were to buy coffee and a donut every day on the way to work, that would add up to $6.00 a day, $30.00 a week, and $120.00 a month.

     Buying lunch adds up, too.  It would not be hard to spend $10.00 on lunch.  Doing that every day would also add up to $200.00 a month.  If there are two spouses doing that, the cost doubles.  Children buying snacks out of vending machines and school cafeterias could add another $100.00 a month to the bill.

     Let’s put this all together.  When we add up all of the areas where we tend to eat out during the week, it is easy to see why our money runs out so quickly.

     These miscellaneous food expenditures can easily add up to several hundreds of dollars a month.  When we add that to the regular grocery bill, we can find ourselves spending $1,000.00 or more each month on food.

Making better choices

     Our money stretches much further at the grocery store than at any convenience food location – and we are able to feed our families much healthier meals and snacks.

     If we work on eating breakfast at home, buying lunch and snacks during our grocery store trips, and cutting back on our fast food and restaurant meals, we will have much more money available to save toward our children’s future education expenses, our own retirement, or any of a number of other dreams that we may want to reach.

     We can get so caught up with paying bills and trying to enjoy life that we forget to plan ahead for the little things.  Life is full of surprises, and we need to be ready for them.  When it comes to our finances, not only should we beware of credit counseling companies, but we should always have an emergency fund available.

Think of the end goal

     Our ultimate goal should be having at least three to six months’ living expenses readily available.  We do this to be able to provide for our families in the event that something tragic happens or if we find ourselves unable to work, such as following an accident or a layoff.

     This means that if our monthly expenses average $2,000, then we should work toward having $6,000 to $12,000 in reserves.  This sounds like a lot of money to have sitting around, but we would definitely feel relieved to have it available if the need were ever to arise.

Start small

     In the meanwhile, though, we should still have a smaller lump sum in reserves for smaller emergencies, such as if the car needs servicing.  If an unexpected emergency arises, there are two things that we want to avoid:  (1) pulling out our credit card to cover the expense or (2) paying cash for the emergency and having to put off paying bills or taking care of our household.

     We want to put together a plan that enables us to build our emergency fund as quickly as possible.  While we want to ultimately have three to six months’ expenses saved up, we can set a beginning goal of maybe $1,000 and intermediate goals of $5,000 or $10,000.  These goals give us a great start and can be excellent motivational tools toward reaching the bigger end goal.

Keep it real

     However, we need to be realistic in how we approach this project.  We cannot be so gung-ho about doing this that we try to sacrifice everything to make it happen.

     The most important thing to keep in mind is that this cannot be a crash diet.  Crash diets never work with food, and they won’t work with saving our money.

     The main goal here is moderation, not elimination.  Elimination only forces us to crave what we no longer have, and we end up binging and splurging, spending more than we should to compensate for the loss that we are feeling.

     We should look for areas in our spending where we may not be making the best decisions.  If we just cut back in these areas gradually, it will be a more comfortable transition.  We don’t want the yo-yo or see-saw effect to happen.

     We are looking for consistency as we create our emergency fund.  First, we determine what our end goal amount should be.  Then, we take the initiative to get started, understanding that reaching smaller goals will ultimately get us to our big goal.  Above all, we want to set realistic action steps so that we are able to make changes that will eventually become lifelong habits.

     There are many challenges that we face when dealing with creating and staying on a budget.  One of the most common mistakes that I hear about most often from my clients who are learning how to stay on a budget is not keeping good records.

     This is especially the case with spouses and joint checking or savings accounts.  Remember that family requires a joint effort.  Joint accounts tend to have a greater number of problems because there is more than one person accessing the account.  Joint accounts require much more communication between the users to avoid unexpected surprises.

Remember to record

     Regardless of whether the account is joint or single, we should make sure that we frequently record every deposit and withdrawal that occurs in our bank accounts.  Balancing our checkbooks regularly will help ensure that we are still on the right track as far as our budgets are concerned.

     We also want accurate records of our available funds should we ever run into the need for a quick decision.  If we keep our records updated consistently, we can reduce the stress and anxiety that comes from looking at massive amounts of unrecorded receipts and bills.

     Many of us choose to have our paychecks deposited directly into our checking accounts.  Although most of us would not feel the need to complain should our accounts have more money than we expected, we should make sure that we record these deposits accurately.  We should record every deposit we make, whether it is done electronically, at the ATM, or inside a branch.

Don’t forget automatic transactions

     Most of us have no problem keeping track of money coming in.  It’s the money going out that seems to slip by.  Most importantly, we need to keep track of all of the automatic deductions that we have authorized from our accounts.

     By far, this is the biggest area of concern and frustration for most families having trouble with their budgets.  Since there is no check to write out, we can sometimes forget that the funds are being pulled until after we get an overdraft notice.

     We should also properly record all ATM withdrawals.  I used to find myself running to the ATM to pull out $20 bills on a regular basis.  Since it was so quick and impulsive, I often forgot to record the withdrawal in my checkbook register when I got home later.  These minor transactions can easily cause our checking accounts to be overdrawn if they are ignored.

Get receipts

     Lastly, when using cash, we still need to ask for and keep receipts.  This is important because we want to get ourselves into the proper discipline of sticking to our budgets.

     It is easy to forget where our cash went, especially after being out all day.  We may start out with a $20 bill and, after spending a little here and a little there, it is all gone and we are unable to account for it.

     As easily as it happens with a $20 bill, it can happen with $100 or more.  The receipts are a reminder to stay within the budget we’ve designed.  Once our patterns are intact and we are comfortable with our budgets, this becomes less important.

     Initially, creating and staying on a budget may feel difficult.  However, we can get things on track by updating our checkbook register, remembering to record automatic transactions, and getting receipts for cash.  These few things could make our financial lives just a little bit more manageable.

     After considering where we are and where we want to be, we need to determine how we will get there.  You’re probably expecting me to share the secret to wealth and success.  I actually have it.  The true secret is preparation.

Use a guide

     A budget serves as our guide to helping us get to where we want to be.  There are numerous ways of setting up a budget.  We need to choose the one that works best for our own personal lifestyles so that we are more likely to stick with it.

     Many beginners choose to start off with the envelope system.  With this method, all of our available cash is divided among our expense categories based on our budget.  As bills need to be paid, the money is taken from the appropriate envelope.

     If we have budgeted correctly, the money should last through the end of the month.  However, once the envelopes are emptied, we should not spend any more money in that particular category.

     This method does help create a sense of discipline when it comes to spending.  With cash, we are better able to see how we spend our money.  We are also much more careful with our purchases because we are immediately accountable for paying the bill.  We are less likely to overspend when using cash instead of credit.

     If a computer-based budget is most comfortable, then we can choose from numerous versions of personal finance software that are available online or in our local stores.  We need to shop around and choose the program that we feel would work best for us.

     I personally prefer a manual, or handwritten, budget.  It is the easiest for me to customize because I can design it to make the most sense for me.

Keeping tabs

     To get a good budget established, it is best to monitor our spending habits.  For two or three complete months, we should keep track of every purchase we make, regardless of whether we use a check, credit card, or cash.  Each purchase should fall into one of the categories on our list.

     This may seem to be a little bit tedious to do, but the results will really help get us to the right budget.  By monitoring our spending, we will accomplish two things.

     First, we will be able to confirm that our original estimations are accurate.  If our first calculations were off, then we will be able to make the necessary changes to the budget so that we have a budget that is easy to stick with.  Remember, a budget is not meant to be a constraint.  We want to have a budget that reflects our actual spending habits.

     Second, we will be able to see where we are making mistakes.  Since we have never really kept track of where our money goes, this exercise can be an eye-opening experience.  We will begin to see how those little purchases add up.

Watch out for impulse purchases

     Small and impulsive purchases are usually the reason that our money does not make it through the month.  Lots of little purchases can end up eating away a significant chunk of our monthly income because we don’t really see it happening.  The money disappears a little at a time, so it doesn’t hurt until we look at the big picture.

     To make this monitoring exercise easier, it is best to ask for receipts for each purchase we make.  In the interim, we can keep the receipts in envelopes labeled for each category.  Then, we should take time at the end of each day (or at least once each week) to review our receipts and tabulate the totals for each category.

    At the end of the month, we get the grand total spent in each category.  After two or three months, we will have more information to work with.  We will then be better able to find trends in our spending habits.  We can compare our actual spending to the original estimates and make any adjustments that are necessary to make our budget accurately reflect our spending lifestyles.

     The most important thing that we should remember is that all of these things take time.  We need patience in the preparation process.  We need patience in identifying our habits.  We need patience in the process of getting on the right track.  But we can do it.