Need vs Wants

One of the great debates when discussing finances is how do we determine whether the item we’re considering is a need or a want?

This discussion has so many possible right answers because every situation is different. We  have a unique level of income relative to our debt and expenses. Usually our income is a set amount each month. We allocate about the same amount to bills every month and we have a certain amount left over after the bills have been paid. Some have nothing left over, largely because of accumulated debt. In either situation, we need to decide how to spend on items that are in the grey area.

 Michal Zacharzewski

Michal Zacharzewski

Do you really need that new widget? For example, many would have no issue saying their six year old, well maintained, dependable car “needs” to be replaced with a “new” car because it’s “old”. And we haven’t had a new car in years. Others would see the added expense of a new car as a definite “want” item.

Face it. If we asked what we NEED to spend money on each month, the list would be quite short. Basics like food, utility bills, house payments, insurance would all make the list. But what about the $425 on average that you spend each month on dinners out? Is that a need or a want? Can that be cut back to a modest $125 thus saving $300 per month? What about the amount spent on vacations each year? If you look back, do you spend a few hundred dollars per year or is it thousands?

How about new furniture? Do you regularly spend money to modernize the household furnishings like a new bigger and better TV, sofa,  remodeled kitchen, new backyard furniture, new family room stereo equipment . This list can go on and on.

Each of you needs to determine what level of discretionary spending fits your budget. I believe that most WANT items should be OFF the list until ALL debt is paid off. Any money spent for “wanted” items could be used to pay down debt faster. We need to get in a position of being debt free. When you are debt free, then you can conscientiously decide what amount is “reasonable” to spend on items that are in the “want” category.

Discuss all of this with your spouse and come to a joint decision. Collaborate and be willing to compromise. You may not see the NEED for something that your spouse would really like to have. It’s OK to find a balance. But agree on this together.

You NEED to be in a place where you each WANT what is best for both of you.

Save or Spend? Who Decides?

Well you’ve done it! You’re now at a place where your debt is under control. Yes, you are still paying off your mortgage but your revolving debt – credit cards and car loans – has been payed off.

Financially stress free marriage, right? Well, maybe not. Many couples have been blessed with enough income so that they have little to no debt. And the debt they do have is easily handled with current income. But unfortunately, many of these couples still fight about money. How can that be? What’s to fight about? They don’t have problems paying their bills and there are no bill collectors hounding them to make payments on past due obligations. So what is there to fight about?

Michal Zacharzewski

Michal Zacharzewski

I have found that the couples who have little or no debt worries, still can have enormous tension over how to spend what they do have. Who determines what amount is spent on what? Who decides when and if and how much to save? Do we spend part of our income on a special vacation? Do we remodel the kitchen? Do we build a new deck and get a hot tub? What about that new entertainment system with the 60 inch TV and surround sound? And of course, the new car. He has always wanted a new Mercedes and after all, it is a very reliable car. And the family has grown, so they need a new SUV to handle the back and forth to school, trips to the coast, and camping each summer.

And we really should get that new ….

You get the point… The wish list is endless. And again, experience informs me that usually one spouse is leaning on saving while the other feels that saving and never spending leaves Jack (or Jill) very sad. One spouse is saying WHOA WHOA WHOA! and the other is saying GO GO GO! Life is frustrating if we can’t spend some money on what we need and want. Certainly we can spend some of the surplus? We don’t need to live as if we have nothing extra each month because everything has to go into savings. How do we decide? Who gets to decide?

Spend some time in the next few weeks thinking and talking about how spending decisions get made in your family. What roles do each of you play in these decisions? Are there particular purchases you have fought about in the last few years? Do either of you ever have negative feelings when a purchase is made by your spouse? Talk honestly and with a willingness to work on making your relationship better.

Next time we’ll look at several tactics to help with planning when you have enough and you are challenged as a couple on how to spend or save.

Get Out of Debt

What’s the best method for paying down your debt? My leaning is to pay off the highest interest rate debt first.

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You will need your list of all outstanding debt, monthly payments, and interest rates. Rank this list by interest rate with the highest rate loan first, then in descending order. You will probably find that you have several credit cards with interest rates of 18% to 21% or more. To me it makes the most sense to pay off the debt with the highest interest rate first because it is costing you the most every month.

For example – You may have cards with 18% monthly interest and a car loan that you negotiated a low rate of 4% or even 0% interest. One credit card with a balance of $5000 and 18% interest will cost you about $900 the next year in interest alone. By paying off the car loan, you save nothing in interest expense next year. But by paying down the credit card, you will save 18% on the extra amount used to pay down that debt.

So, step number one, is to rank your debt. Then find money in your budget by earning more or decreasing expenses such as dining out or lattes or whatever you are willing to forego. Use these funds to pay down the highest interest rate debt first. Continue to pay on all your other debts as usual.

Let’s say that you have come up with $200 per month that you can use to pay down your debt. The first loan that you will  pay down is a credit card with a $1400 balance. If you have been paying $35 per month towards this bill, add $200 per month (total of $235) and you will have the bill paid in full in about 6 months!

After the first card is paid off, add $235 to the payment for the card with the next highest interest rate. If you were paying $75 per month to this next debt, add $235 to $75 and begin making payments of $310.

Continue this process. Over time you will increase the amount used to pay off debt by adding the amount from each paid off loan to come up with a new amount to be used to pay off the next.

But remember: NO NEW DEBT! The objective is to PAY OFF all debt. Yes, you CAN keep up this process until you  pay off even your home mortgage, if you have one.

Objective: Get out of DEBT! Why? Out of control debt can strain your relationship by adding unnecessary stress to your marriage. You won’t be fighting over the bills because you don’t have any bills for debt.

No debt. Try it. You’ll like it. And so will your spouse!

Living Within Your Means, Part 4

Last time we looked at cutting back expenses, staying away from new debt, limiting FUN money to a set amount each month, and beginning the process of paying down debt.

So how do you go about paying down your debt? What debt should be the first to go?

Begin with a list. Yes, here we go again with another list. That’s right. You need to have a complete list of all of your debt. Do it this way.

Your list should have the following across the top:

  • Name of the lender or loan
  • Interest rate
  • Minimum monthly payment
  • Current balance due from your last statement

If you don’t get a regular statement because you pay online, get the balance due and interest rate from the current account information in your online account page.

Next, list all of your debt going down the page. Start with your mortgage if you have a home loan. Next add a second mortgage if you have one, home improvement loans, all lines of credit, all car loans with each car listed separately, boat loans, and RV loans. Then add department store cards, VISA, Master Cards, American Express, and Discover outstanding balances. Finally, add other loans such as student loans, medical debt, family loans, and any other loans.

If you do this list on a spreadsheet in your computer, it will automatically add the monthly payment column and the total balance due column.

Now you have a complete list of what you owe monthly and the total balance due. For some of you, this will be the first time that you actually see all of your outstanding debt on one list. That may be frightening. But look at it!! You actually owe that much. And it will get worse if you don’t take steps to get out of debt.

Here are two simple reasons why you want to get out of debt:

First, it’s expensive. Let’s say you’re out looking at a new Curved 65” HD TVs. And you work a really good deal and “get them down to $2000” and after all, what’s the big deal, on your credit card it will only be about $51 per month.

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What’s the big deal? That new TV will cost you over $1000 in interest. It will really cost over $3000. So is it still a “really good deal”? Paying for something over time with interest can be very costly. That TV will cost you 50% more because you used their money instead of saving and using your money.

Secondly, you need to get out of debt because, no matter how you cut it, it causes stress in your relationship. When all you think about or fight about is money, it hurts your relationship.

More next time on the best way to get the debt paid off….

Live Within Your Means, Part 3

How do you resolve financial problems and fighting when you don’t have enough money to pay all of your expenses every month?

First and foremost, you need to resolve as a couple to live within your means. It is purely a matter of your will and discipline. In some ways it is similar to being overweight. How do you get healthy and get your weight under control? Most people who are overweight readily admit they know they eat too much of the wrong foods. They know the answer is really quite simple: eat healthy and move.

And so it is with overspending. You need to get control over your income and what you spend.

On the income side, if you have the ability to work some overtime hours or get a part-time job until your debt if paid down, then do it.

On the spending side, you will need to cut any unnecessary expenses. And DO NOT add any new debt. No new car loans, no new vacation expenses, no new buying time-shares (even it if is a good deal), and no frivolous expenses of any kind. It is time to get your finances under control.

Simple Common Sense Marriage principle: You can’t get yourselves out of debt and live within your means by continuing to spend money the way you have been. Or put another way, you can’t lose weight and still have your cake and ice cream while you sit on the couch. Face it! You are going to have to make tough choices. Evaluate together all those categories of spending and eliminate what is unnecessary or figure out a way to accomplish the same objective with less or no money spent.

Make as much money as reasonably possible and cut all expenses except those that are absolutely necessary.

Michael R

Michael R

For example, a large frothy double shot extra cream caramel machiato in the morning and an extra-large very berry whipped cream smoothie on the way home from work are really NOT necessary. You WILL survive without them. And if my math is right, at about $4.00 per visit, that will save you about $40 per week, or $2080 per year.

And that’s just cutting ONE “I can’t live without it” expense!

Now you need to get to work. Only spend money on what is absolutely necessary. When you disagree on what is necessary, discuss this openly and work towards a reasonable compromise. Remember: You need to work at this together.

Caveat: Have “some” funds built in to your budget  for FUN money. Even those on a strict diet can have a small piece of pie or a brownie now and then. But set a limit to the fun money each week or month, whatever you work out, and stay within that limit.

The next Common Sense Principle is to take your savings from cutting back on expenses and begin to pay down debt. That’s right… Get out of debt. The sooner the better. More on this next time….

Common Sense Marriage??

Common Sense in Marriage?? But, marriage is too complicated. There can’t be a simple way to figure these things out. You need to have a specialist, a trained master with degrees and years of experience to even begin to unravel the complexity of issues that married couples deal with every day. Right??

Well, actually, no… That’s not right. Look at the dictionary definition of Common Sense: sound practical judgment that is independent of specialized knowledge, training, or the like; normal native intelligence.

Do we all have the basic skills to deal with the basic problems that plague most marriages? I think we do. Oh sure, we need to exercise those skills and develop them, but the basic skills are already available to us.

I’m reminded of a couple I met with over twenty five years ago. They needed help with their finances. His job only provided a minimal income and they always had problems meeting basic monthly bills. The financial stress was taking a toll on their relationship. They asked if I could help organize their budget because it was getting so bad that they didn’t even have enough money to buy milk for the babies. Wow, that must be pretty bad. There had to be something that could be done. So, with a pad of paper and pencil (yes it was that long ago) I sat down with them for several hours. We started with a detailed list of all their bills. Rent, car payments, food and utilities, insurance, personal items, child care expenses. Sure enough, the budget was tight, really tight. After a few hours, I noticed that I was starting to get a headache. And then I noticed that the room was filled with cigarette smoke. I don’t smoke and will usually get a headache from being in smoke for too long. Ah, I thought to myself. Another budget item not yet mentioned. I asked how much did they smoke and they admitted that they each smoked a pack of cigarettes per day. I asked how much does a pack cost? Well, about $1.50. (Yep, like I said, it was that long ago) Here’s the Common Sense part. At $1.50 per day each, that’s $3.00 per day. That’s $90.00 per month to buy cigarettes. I sat back and said that you do have enough money for milk for the babies, you’re just smoking it.

That’s my point. Sometimes the most basic, simplest solutions are right there in front of us. No specialized knowledge, no advanced degrees, no 30 sessions with a marriage counselor. Just good old basic Common Sense.

I don’t mean to imply that ALL problems can be resolved with simple steps. Some problems are indeed complicated and are quite difficult to resolve. But many of those evolved because basic everyday problems grew and festered until smaller problems added to other problems and then it grew into a mountain of problems. Common Sense: Deal with problems when they are small.

Next time: But what if we have BIG PROBLEMS???