Category Archives: Money Management

Living in “poverty” on $500,000 a year

I know I’m a little late with this, but I haven’t had a chance to write about it until now. As part of the stimulus bill, banking executives won’t be able to make more than $500,000 a year. The New York Times ran a sympathetic article on Feb. 6 explaining the hardship executives will face due to this pay cut.

Among the “necessities” that bankers will struggle to afford on their lowered salaries:

  • $45,000 a year for a nanny
  • $16,000 a year for two vacations
  • $240,000 a year for a summer house
  • $75,000 – $125,000 for a chauffeur
  • $65,000 for private school tuition

Not to mention the inflated yearly costs of housing and lifestyle, as well as other “necessities,” like a few designer gowns a year for charity galas. (Side note: there is, of course, no mention of a yearly allowance for charitable donations.)

I’d like to say the reporter was being facetious. Unfortunately, that doesn’t seem to be the case:

“As hard as it is to believe, bankers who are living on the Upper East Side making $2 or $3 million a year have set up a life for themselves in which they are also at zero at the end of the year with credit cards and mortgage bills that are inescapable,” said Holly Peterson, the author of an Upper East Side novel of manners, ‘The Manny,’ and the daughter of Peter G. Peterson, a founder of the equity firm the Blackstone Group. “Five hundred thousand dollars means taking their kids out of private school and selling their home in a fire sale.”

Sure, the solution may seem simple: move to Brooklyn or Hoboken, put the children in public schools and buy a MetroCard. But more than a few of the New York-based financial executives who would have their pay limited are men (and they are almost invariably men) whose identities are entwined with living a certain way in a certain neighborhood west of Third Avenue: a life of private schools, summer houses and charity galas that only a seven-figure income can stretch to cover.

So, you see, even the absurdly wealthy are living paycheck-to-paycheck, and we’re supposed to be feel sorry for them because they’ve gotten so used to the luxurious life that they’ll no longer be able to afford on a half million dollar salary. Give me a break.

Many of the people facing lay-offs are worried about whether they’ll be able to feed their children and keep their modest homes. They were already living on $50,000 a year or less, but now their yearly income is half that. You’re telling me I’m supposed to view these bankers as victims because they might have to give up their bi-annual vacations?

To me, this is a prime example of people with too much money and no ability to look outside their own sheltered bubbles. Give. me. a. break.

Just for fun, I’ll also share this post from the Consumerist — their suggestions for how CEOs can cut costs and survive at $500,000 a year.

Personal finance is romantic

love-and-money
photo by jeeked

I know I said yesterday that love and money have nothing to do with one another. That’s not entirely true.

It’s true that love doesn’t cost money. There’s no reason to spend any money on love. But money can certainly affect your relationship, especially when you’re having financial problems. It can increase fighting, distract you from the important things, and even lead to divorce.

I know, most people don’t consider budgeting to be a very romantic concept, but money problems can wreak havok on even the healthiest of bonds. Working together to get your finances in order is one of the best things you can do for your relationship.

It fosters a sense of teamwork.

There’s nothing more bonding than setting mutual goals and working toward them together. Teamwork is good for any relationship. It heightens closeness, especially when you succeed together.

It decreases (or eliminates) financial arguments.

Couples fight about money than any other thing. Most of these arguments stem from differences in how you and your partner handle money. But when you take the time to outline your goals and rules together, it allows you to get on the same page about money management.

Maybe you still won’t agree completely, but talking it through allows you to find common ground and set mutually agreed upon rules. Though we don’t completely agree about every aspect of money management, Tony and I have never fought about money. We set the rules, and we know what to expect from one another.

It decreases money stress, allowing you to focus on other things.

Anyone who has experienced money troubles knows it can be hard to focus on anything else when your finances are a wreck. Your finances won’t be perfect overnight, but when you take control and start to work toward financial goals, you at least feel more in control. You’ll suddenly realize your mind is much freer to think about more positive things, like how much you love your partner.

It allows you to accomplish your dreams together.

Whether your shared dream is to own a home, take your dream vacation, start a family, or own your own business, getting your finances in order is the first step. There’s nothing more romantic than achieving your dreams together, and fixing your finances can help you make that happen.

This Valentine’s Day, take some time to look at your finances — your mistakes, your accomplishments, and your goals. It may not seem like a romantic way to spend the holiday, but it’s one of the best things you can do for your relationship.

TGIF Round Up: Recession anxiety edition

With all of the terrible financial news lately, it’s been getting harder and harder to stay upbeat. I’m taking all of the steps I can to ensure our financial security (we eliminated our credit card debt, we’re spending as little as we can, and we’re saving as much as possible). I also have no reason to believe that my job is in jeopardy (as far as I know, my company is doing great compared to other recession-strapped businesses).

I still can’t help but think about the worst case scenario. I guess that’s for the best. If we’re always prepared for the worst, then we’ll be prepared to weather it. I just hate this feeling of instability.

All I can do is keep on keeping on. Pay down our debt, save as much as we can, and hope for the best. I just feel like the recession anxiety hit me late, but it’s hitting hard.

On the bright side, there were a lot of great posts in the blogosphere this week! Here are my favorites:

I’m hoping to have some frugal fun this weekend to cheer myself up! I hope you do the same. Happy Friday!

Organizing my finances electronically

Everyone has a different method for paying bills and keeping track of spending. For a long time, I struggled to find the right method for me. I used to track spending with my online banking system, but that didn’t allow me to create a budget. I was constantly looking at my balance and mentally subtracting bills that I knew were coming up. It was stressful and dangerous.

Then I started paying my bills on payday. This helped me avoid the constant fear that I wouldn’t have enough to pay my bills when they were due, but it often left me with a dangerously low balance at the end of the pay cycle.

Now that I’ve been budgeting consistently for about 6 months, I’ve developed a method for bill paying and financial organization that works really well for me. So I thought I’d share it with all of you.

My checking account is for bills and living expenses only. I keep enough to pay my monthly bills with a little cushion for human error, but the rest of my money goes into savings where it can earn interest and stay safe from impulse purchases. When there’s extra money in my checking account, it gives me a false sense of wealth. When I have just enough to cover my bills, I’m not tempted to spend.

Every month on the 1st of the month, I create a zero-based budget using Mint.com. Every penny of income for the month is assigned to a purpose. By this time, I’ve usually already received the bills that fluctuate from month to month — like the electric bill and gas bill. I set all of our fixed expenses first, then I balance our discretionary spending amounts for food, entertainment, and savings based on what’s left over.

I’m able to determine how much I can afford to put into savings, and go ahead and put it away before we pay any other bills. I’ve tried to wait until the end of the month to contribute leftover money to savings. The problem is, there’s almost always nothing left by the end of the month. If it’s in my account, I’ll spend it. It’s easier for me to determine how much I can save, and save it right away to eliminate temptation.

Because I don’t keep a huge surplus in our checking account, I stagger bill payments with pay periods. Tony receives his teaching stipend at the end of every month, but pretty much all of it goes to rent and savings on the 1st of the month.

I’m paid bi-weekly, so I base our bill pay schedule on my paydays. The bills that are due in the first half of the month are paid on the 1st. Bills due in the second half of the month are paid on my second payday. I use Mint to keep track of what’s been paid.

Every other day or so, I check our spending in Mint. I try to make sure we’re on track to avoid overspending. We have very few discretionary spending categories, which makes it easier. I really only monitor food, miscellaneous expenses, and entertainment.

Pairing zero-based budgeting with electonic spending tracking and a consistent bill pay schedule allows me to stay on top of spending. It also lowers my stress. Because my budget is zero-based, I know I’ll always have enough to cover my bills and expenses. That works for me.

Do you know where your money is going?

One thing I’ve learned from the mortgage and lending crisis — you can’t be too familiar with the terms and conditions of your loans, investments, and credit cards.

Now that we’re facing a credit crisis, it’s more important than ever that you’re familiar with the policies of your lenders and investment firms as some institutions are making changes to their policies.

Take some time this month to educate yourself on where your money is really going and whether you’re getting the best deal.

Banking

  • How much interest are you earning on your savings and checking accounts? What are your options for increasing your interest rate? (Consider moving your savings to ING Direct for a 2.5% interest rate.)
  • Are you paying monthly fees for your accounts? If so, it’s probably time to switch banks. There are many banks that offer completely fee-free accounts.
  • How much do you pay for ATM fees and other transactions? You may be surprised to find out how much you’ve been spending on certain transactions.

Credit Cards

  • Is your account still open? Some credit card lenders have started closing dormant accounts, so if it’s been a while since you used your card, check and make sure it hasn’t been closed due to inactivity.
  • What is your interest rate? This may have recently changed, so check your statement or call for the most current information.
  • What is your credit limit? It also may have recently changed, so make sure you know exactly how much it is. A lower credit limit can affect your credit score.

Investments

  • How much are you paying per transaction? If your fees are high, consider investing in lump sums less frequently to make the most of your fees.
  • If you’re paying high fees, consider moving your investments to no-load mutual funds through discount brokers or investment firms.
  • Take some time to check out the prospectus report for your investments. Is it time to change your portfolio?
  • How much time do you have until retirement? If you’re planning on retiring in 5 years or less, it’s time to move your investments out of the stock market and into low-risk bonds. If you’re young, now is a great time for stock market investments because prices are low and you have plenty of time for the market to rebound from its current state.

Mortgages and other loans

  • Are you eligible for refinancing or consolidation? If your credit is good, now might be a good time to consider refinancing for a lower interest rate.

It can be a pain to track down this information, but it’s worth it to know where you stand. Not only is it important to know where your money is going, but it’ll give you a chance to determine if you’re getting the best rates, fees, etc. As long as the market continues to fluctuate, I suggest you take stock of your finances every 3 months to make sure nothing has changed.

Where do you draw the frugal line?

Lately I’ve been thinking a lot about degrees of frugality.

For instance, many of you probably think it wasn’t very frugal of me to join a gym and buy new running shoes. On the flip side, some of you might be like my husband, who believes you can never spend too much when it comes to your health. (For the record, I’m somewhere in between.)

Some of you can’t imagine spending money on disposable diapers, and some of you would rather use coupons to get disposables at a low price instead of paying close to $20 for one all-in-one cloth diaper.

For some, time is worth more than money. Maybe you’ll willing to spend extra money on things that buy you more time.

We all have different ideas about what’s really frugal. As I’ve said many times, frugality is not one size fits all. Not even close. There are a million different degrees of frugality.

Whatever you decide, the important thing is that you draw yourself a frugal line in the sand. Figure out what’s important to you, and try your best to stick with it.

For me, frugality is about balance. It means most of the time I can’t have it all. If I want to spend money on a gym membership, I have to cut some of my entertainment spending. If I want to go to a movie on Saturday night, I can’t go out to dinner, too. That’s where I draw my line. I cover the necessities, and find a way to balance the extra stuff.

Where ever you draw the line, try to be consistent. If you decide to give up meals out so you can afford to go to the movies, don’t look at your frugal friend who spends her entertainment budget at restaurants and convince yourself that you can have it both ways. Remember your priorities, remind yourself of the decision you made, and stick with it.

At the same time, don’t feel guilty if you’re spending money on paper towels or disposable diapers while your other frugal friend uses rags and cloths. Trust your decision, and balance your budget accordingly.

It’s ok to change your mind. It’s ok to change your priorities. But always make sure you’re doing it for yourself and your family. Don’t base your decisions on someone else’s frugal choices. If you’re frugal, I’m sure you don’t believe in keeping up with the Joneses. But you also shouldn’t try to keep up with your frugal neighbors across the street.

Everyone’s line is different. Just make sure you stay on the right side of your own.

Don’t spend your tax refund before you get it

I know, I know. I shouldn’t be getting a tax refund, because I should have my deductions set correctly to avoid giving the government an interest free loan. I know. But the fact is, I typically err on the side of caution. I’d rather give the government an interest free loan than owe a huge lump sum of money during tax time.

This year, we’d probably be expecting a refund anyway since we got married half way through the year. Because I make twice as much as Tony, we’ll most likely get a tax discount for filing jointly. Which means we’d be getting a little money back anyway.

How much? The fact is, I don’t know. But in the past, I’d have plans for what I was going to buy with that money regardless.

I’ve used my tax refund to buy a new wardrobe, take a vacation, and buy more electronics than I want to think about. Sometimes I was so broke that I had to wait until I received the refund to spend it. Sometimes, though, if I knew it was coming, the spending spree started before I even received the check.

This year, I’m not spending a dime of it. I already know what I’m going to do with the money, and it doesn’t involve a spending spree. It’s going directly into a savings account to help us cover the two months out of the year when Tony won’t receive his teaching salary.

I bristle at some of the tax preparation commercials I’ve been seeing on TV lately. “Need a vacation? Bring your taxes to us, and we’ll get you the tax refund you need to pay for it.”

The fact is, a tax refund isn’t “extra money.” It’s money that you should have been getting in your paycheck all year, which means the same rules apply to your tax refund as your regular income — don’t blow it.

I realize there are situations where a lump sum tax refund might be helpful. For instance, if you’ve been avoiding major car repairs because you don’t have the lump sum to pay them. That’s completely understandable. By all means, use your refund to get your car in working order.

But if you’re considering using your refund for something unnecessary, I urge you to think of that money as regular income. Can you really afford to spend it? Do you have a 6- to 8-month emergency fund in place? Are you debt-free? Are you fully funding your retirement accounts and education savings accounts? If the answer to those questions is yes, then maybe you can afford a big vacation or a new wardrobe right now.

But if you’re like me — with a tiny savings account, way too much debt, and a non-existent retirement account — then you’d probably be better off putting that money to more practical use.

Resolutions for another frugal year

I’m so excited about the year ahead! For the first time, I feel like I’m looking ahead with a clear set of goals and the resolve to actually achieve them.

In the interest of keeping myself honest, here’s what I hope to accomplish in the coming year:

  • Finish building our 6-month emergency fund. We’re a third of the way there now, but I hope to finish it by the end of the year.
  • Spend less than our budget. We’re doing a lot better than we used to, but we continue to go over budget by $50-$100 every month. Technically we’re not spending more than we make because we save at least $300 a month, but we’re cutting down our actual net savings by going over budget each month.
  • Make a dent in our student loan debt. Now that we’re credit card debt free, I want to really crack down on our spending and send every extra penny to our student loans so we can be completely debt free sooner.
  • Learn more at my job and grow my skill set. Someday when we have children, I’d like to work from home, so it’s important that I learn as much as I can now to build my credentials and qualifications.
  • Enjoy the present, and try to stop looking ahead to the next big thing. This is a constant work in progress for me. Planning ahead is essential to reaching long term goals, but sometimes my constant planning makes me lose sight of the present. I need to find a balance between appreciating what’s now and planning for the future.

What are your resolutions for the new year?

Reflecting on my first frugal year

Today is the last day of my first full year of frugality. I’ve only been blogging for about half of it, but we’ve spent all 12 months of 2008 cutting costs, saving, and pay down debt.

I’ve learned much more than I can confine to this post (you’ll have to head into my archives for some of the highlights). But here’s the big stuff I’ve learned in the past 12 months.

Budgets aren’t limiting — they’re freeing.

Before I started budgeting, I felt guilty about every extra penny I spent and stressed that I wouldn’t be able to cover the necessities. Now I know exactly what I can afford to spend, and I know what I need to leave for the necessities and savings. A little money goes a lot further when you budget.

We need much less money to live comfortably than I thought.

Before we moved here, our combined income was almost twice what it is now. But we always felt broke because we were blowing our money on restaurants and unnecessary purchases. I couldn’t imagine living on our current income then.

With a little discipline, though, we’re able to live a richer life on half the money. We still do all of the same things we used to enjoy (like movies, eating out, and books), we just enjoy them less frequently or find frugal ways to enjoy them for little or no money. Now we have money leftover for savings and debt repayment.

We actually “need” very few things.

Our ideas of needs and wants were severely out of whack before we started living frugally. Now we know that we don’t need two cars; we don’t need to own a house; we don’t need new clothes every other month. All we really need is each other, healthy food on the table, and a warm place to sleep. Once we recognized the difference between needs and wants, we were able to set priorities so we could still enjoy some of our wants without interfering with our long term goals.

Realizing how little we actually need also gives me great peace, especially in this economy. By eliminating extra wants, we could cut our monthly spending in half in the event of a financial emergency.

Stress free finances are the greatest luxury of all.

There was a time when I thought skipping weekly meals out and entertainment spending would mean getting less enjoyment out of life. Boy, was I wrong. I enjoy life so much more now that we’ve cut those things out, because I no longer feel stressed and scared about my finances.

It’s been a fantastic year, and I’m anxiously looking ahead to next year’s challenges and successes. I hope to learn even more!