Another huge way your cash goes up in smoke.

smoke2

 

The “cool factor” of smoking has been gradually diminishing in the last several decades as our knowledge about the affects of this addictive habit has grown. However, SO many people I know still indulge in this dangerous pastime. Whether because they have not yet been able to kick the habit or they excuse it because they¬†only smoke “socially” (i.e. when they drink), smoking is detrimental to our lives not only because of what it does to our bodies, but what it does to our wallets and, in effect, our future.

Most Americans don’t worry about the future like we should. Oh we think about it, but mostly it’s thoughts like, “I want to have a better job someday,” “I want to go to Paris someday,” “I’d love to start my own business someday,” “I’ve got plenty of time to save for retirement. I’ll start someday soon,” and “I’ll quit smoking someday, just not today.”

Folks, “somedays” are never going to happen if you don’t start now.

Smoking and doing anything else stupid with your money, like gambling regularly, is costing you BANK. Not just in cash, but your health and your future.

The average pack of cigarettes cost $6 per pack. If you smoke one pack a day, you are spending $42 a week, $182 per month, $2190 per year. I don’t know about you, but $182 a month is a LOT! That is more than my cell phone bill and cable bill combined! And with $2190 a year, I could take a heckuva nice vacation, and pay for it with cash.

Costing You Your Future

My mom was a smoker for over 30 years. She started when she was a teenager and only finally managed to quit in her late 40s. For much of her life, she was a single mom raising two little girls and had to struggle working the night shift in order to pay the bills. Something that would have helped her a lot? Not smoking. Granted, back when she first started and in subsequent years, cigarettes didn’t cost nearly as much. Even when they only cost $2 or $3, not spending that money on cigs would have helped her out a lot.

Don’t get me wrong, my mom is an amazing woman and did a great job raising us, and believe me, we didn’t starve. But she was never able to save much for HER future while she was taking care of us. She is now nearing 60 and has very little in retirement. Some of what she had built up has already been liquidated in order to pay credit card debt, but what she has left will not stretch too far into her retirement. She will need to work far later into her golden years than she wants and her body can take in order to be able to maintain her modest standard of living.

The Numbers Don’t Lie

So how much did smoking cost her? And how much could it cost you? Well, it’ll be harder to estimate what it cost her since the costs of cigarette has changed since she started, so let’s try to estimate what it is costing you. That’s all you really care about anyway. ūüôā

Imagine instead of smoking, you saved that money. SAVING MONEY???? What a radical concept. I know many of my friends who smoke like chimneys who haven’t got a dime in savings, so I know this happens.

Let’s say¬† you are 18 years old and just started smoking one pack a day. If you smoke for 30 years, until you are 48 and then quit smoking, how much money did that cost you? Well, if cigarette prices NEVER went up (and you know they will), it will have cost you out of pocket $65,700.

However, if instead you had saved that money and invested it in, say, a mutual fund making 10%…¬†at age 28 you¬†would have $37,695…¬†at age 38 you¬†would have $139,739… and at age 48 you would have $415,976. If you went crazy and did that until an early retirement age of 55, you would have $857,504!!! Wow, do you think you could have an AWESOME retirement with that money???

I would sure hope so!

The OTHER Cost of Smoking: Your Health

Recently, the American Cancer Society did a study on the lifetime cost of healthcare for a smoker. They determined that every PACK of cigarettes you smoke bring you an additional $35 of health-related costs. Every pack! So using our example, if you smoked a pack a day for 30 years, you could reasonably expect to pay somewhere in the neighborhood of $383, 250 for health care to treat your emphysema, lung cancer, etc.

Yeah, your insurance might cover a lot of that, but you’ll still have to shell out for deductibles, copayments, and coinsurance. Coinsurance alone would be a drain. The typical coinsurance payment is 20%, of the number we just quoted, your part would still be $76,650. That that still doesn’t include your yearly deductibles, which can range from $500 to $5000 or more.

 

The moral of the story…

Smoking is expensive. In more ways than one. This one little habit could cost you hundreds of thousands or even millions of dollars in the end. It could even cost your life.

What do you want the story of your life to be? Do you want to be known as John Doe: Smoker? Or John Doe: Successful business owner and world traveler. Or Jane Doe: Amazing woman of character who fed starving kids in Africa and built schools in Vietnam.

Don’t spend your life on the end of a cigarette.

Spend it being the person you were meant to be.

Time out for some tough love…

 

TIME OUT

THE FLAW IN “CONVENTIONAL WISDOM”

The way we teach things on this show, the way we teach things in our classes, the way we teach things when I speak across America… the way we teach things in whatever we do are based on a series of principles. Because we have discovered that, after going broke and losing everything, it made me stop – that was 25 years ago – it made me stop and look at what conventional wisdom says. And I decided that “conventional wisdom” is an oxymoron.

Conventional wisdom makes people typical, average, mediocre, and morons. I don’t want to be conventional in anything. I don’t want to be typical or average or mediocre in anything. If “normal” is good then that’s ok, let’s be normal. But normal is not good.

Normal in America today is 70% of Americans are living paycheck-to-paycheck, according to the Wall Street Journal. Normal in America today is bankruptcies increase almost every single year. Normal in America today is people work their whole lives and retire and say, “I sure hope the government, which is well-known for it’s ability to handle money, will take care of me.”

Normal in America today is the number one cause of divorce in North America¬†is money fights and money problems. Normal in America today is the stupid-butt belief that you can’t be a student without a student loan. Normal in America today is carrying so many credit cards in your hip-pocket that it throws your back out of whack and you have to see a chiropractor.

Normal in America today is a car with a payment, and no idea that I’m ever going to live without a car payment. Normal in America today is, “I’m going to buy as much house as I can buy as soon as I can buy it, regardless of how broke I am and then can’t figure out why I’m broke and why this house is a curse to me.”

Normal in America today is BROKE, and it sucks. Looking good and no freaking money. Big hat, no cattle. That’s normal.

So don’t talk to me about normal.

Normal SUCKS!

I don’t want to be normal, I don’t want you to be normal, and if you ask me questions about how you can be more normal, you’re not going to like the answer.

Normal does not work! It’s not working. And continuing to do the same thing over and over again and expecting a different result is the definition of insanity, the 12-steppers say, and they’re right! That’s stupid. If you keep doing what you’ve been doing, you’re going to keep getting what you’ve been getting. You don’t like where you are? You need to change the recipe that is your life. You’ve got to change what you’re doing.

I’m so stupid, I started with nothing and I became a millionaire by the time I was 26 years old. I did it all on borrowed money, that’s how dumb I am. I had a million dollar net worth but I was still broke. How dumb is that. The banks got sold to another bank, they called the notes, and I spent the next two-and-a-half years of my life losing everything I owned. I was 26 years old and I made $250,000 that year. Twenty-seven years old I made $6,000 cash, taxable income. Been there, done that, got the t-shirt. I know what stupid looks like up close and personal. I’ve seen him in my mirror.

I know what stupid looks like, I know what it feels like to be so scared you can’t breathe. Sharon would have left me but she didn’t have the money. (laughs) She had no way to leave.

Really. I understand. I get it. And when that happened to me I learned that all the stuff you’re told by about half the financial planning community is ridiculous and stupid. The stuff you’re told by Money magazine is ridiculous and stupid. Have you ever heard a soul that said, “I read Money magazine and it changed my life”?

Seriously. Typical, conventional, boring, vanilla, normal financial advice sucks, because it creates typical, conventional, normal people. And it’s not working.

“Well, Dave, you’re just kind of radical and you’re out there on the edge.” NO! I’m just not normal! If you want to call that radical you can call it, but normal sucks. Who wants to be normal?!?

 

THE TRUTH OF BIBLICAL WISDOM

I figured out that the Bible says the borrower is slave to the lender.

God is smart.

Smarter than you.

And if you don’t believe he’s there, He’s WAY smarter than you.

God is smart: The borrow IS slave to the lender. In the house of the WISE are stores of choice food and oil. A FOOLISH man devours all he has.

Save money. Stay out of debt. Don’t spend everything you make. God loves a cheerful giver. Always be generous with your giving.

Have a plan. Jesus said don’t build a tower without first counting the cost, lest you get halfway up and you’re unable to finish and all who see you begin to mock you and say, “There’s another… normal person.” Because you’re living without a plan. You’d never build a house without a blueprint, and yet you go through four-, five-, or ten-million dollars worth of income in your lifetime and never write it down once. That’s the definition of stupid.

That’s what I was doing, that’s how I was living. And if you’re living that way you’re stupid too. Stupid.

People do not win at life and at money until they learn how to have quality relationships. Learn how to treat other people. Learn how to BE a good husband, a good wife, a good son, a good daughter, a good mom, a good dad, a good employee, a good employer. Good people DO move ahead in this world. I know, you watch so much reality television that you believe otherwise. Some of you have lost your soul to reality TV, that isn’t reality.

So, we laid these basic principles in our life: We don’t borrow money. We always give. We live on a written plan.

 

MONEY PRINCIPLES TO LIVE BY

We don’t borrow money EVER.

We ALWAYS give. A minimum as an evangelical Christian is a tithe to my local church – that’s my minimum starting point. Always.

We always save and invest. Always. Out of every dollar we make, something is saved and invested, something is given.

We always have a written plan, on paper, on purpose, before the month begins.

We always realize that relationships trump money. Relationships are the only things that are real. They matter. We are not transactional. And it’s more important to be a good dad than it is to be a rich dad. It’s more important to be a good mom than it is to be a rich mom. Think about how you treat people who work on your team, those of you that call yourselves leaders and maybe you’re just a boss. Relationships matter.

We always live on less than we make. No matter what we make we are going to live on less than that. We will adjust the lifestyle to be under what we make. And these days, substantially under what we make. It would be absurd to try to spend what we make now.

What has that resulted in? Over 25 years of living this way… running my life into the wall like NASCAR and exploding it up into the stands? What has it resulted in to live debt free, to live on a budget, to live on less than we make, to always save, to always give, and to always value quality relationships? What has that resulted in? It’s resulted in wealth. And that’s the formula for wealth building.

So pardon me if I think your little credit card points are stupid. Pardon me if I don’t go along with this idea that you want to borrow money to get your education, because I don’t think you should be stupid when you’re getting your education. Pardon me if I think when you lease your car it makes you look shallow because you’re defining yourself by what you drive and you’re driving something you can’t freaking afford because you didn’t pay for it. Pardon me if I figured out how this works and I’m trying to get you to do it for your sake.

That’s why we’re here people. I’m going to be all up in you’re business until you change your life.

Because I care. And I want you to win.

 

Transcript from The Dave Ramsey Show, aired 5/18/14.

(The Dave Ramsey Show belongs to Dave Ramsey and The Lampo Group. This transcript is posted free of charge for the benefit and teaching of my readers and is for educational purposes only.)

 

The four-letter cuss word: DEBT.

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For this post, I better warm up first. I should do a couple of jumping jacks and run in place, maybe stretch out the hammies a little. And then finish off with some quick shadowbox jabs.

Because this post is going to be a fight. And a hard one.

A lot of you might disagree with me. Or think I’m just crazy.

But if you read this post with an open and thoughtful mind, I just might rock your world. And quite possibly… change your life.

DEBT. IS. BAD.

Oh, yes, all of you will nod your heads condescendingly and agree with that statement on principle. But what you are really agreeing to is that a LOT of debt is bad.

But you don’t think that only having a $10,000 car loan is bad. Or a $5,000 Visa balance. Or $600 on your Sears card. That kinds of debt is ok. It’s manageable. Some of you probably wish your debt was that low.

But, honey, ALL debt is bad.

It doesn’t matter how much it is, or what it is for. Debt is a thief.

Debt robs you of your money. It robs you of your future. It robs you of your peace of mind. It robs you of your marriage. It robs you of relationships with family and friends.¬†It robs you of your dreams. Debt robs you of your life’s legacy.

Debt is not Robin Hood. It is Charles Ponzi. (Google him, kids.)

Sure, you might be the one person in a thousand that pays off their credit cards every week, or actually pays off their furniture before the 90 days “same-as-cash” contract is up. But you’re still losing money in other ways.

When McDonald’s started accepting credit cards, their average ticket price went up 43%. That is huge. That means we started spending more the minute we could whip out our plastic instead of having to scrounge up cash. Numerous studies have been done on consumer spending habits pertaining to how much we spend when paying with cash¬†versus credit. One study even¬†looked at¬†what happens in our brains when we spend money. All of these studies of concluded that we spend a lot more when we use credit than when we pay with cash.

The Smith’s & the Jones’

Let’s try an example of how this works in our minds. We have two couples: the Smith’s and the Jones’. Both families want to buy a new living room set, a couch and a couple chairs.

The Smith’s are wise and patient. They decided to save $300 a month for 6 months and buy a set for $1800 at that time. Their old living room set is fine and will last another six months. After they get their money saved, they¬†head down to Kroger’s D√©cor Store and pick out a beautiful and sturdy set that is on clearance for $1650. They put the remaining money back into their furniture fund, knowing that they will need to buy bed for their infant son in about a year. They have a wonderful living room set, no payments on it, and are already working for their future.

The Jones’ have to have that new living room set by this weekend. They are having friends over and just have to have something fresh and modern before then. They would like to spend less than $2000, if possible. So the Jones’s head down to Ashleigh Furnishings to do some shopping. They find two sets that they like. One costs $1700 and is modern yet durable; the other set is a bit over their budget at $2200, yet is absolutely gorgeous and the height of trendy. They notice that the store has a 12 months same-as-cash program, so they apply and qualify for $3000 in credit. So of course, they decide to get the more expensive set. Since they qualified for $3000, they decide to get new side tables and lamps to go with the furniture even though they really don’t need them. They walk out of the store with a total of $2900 in debt, but a gorgeous new living room set.

This is a common example of how buying on credit causes us to overspend. You think that you are the exception? I doubt it, darlin’.

I had a middle-aged woman in one of my finance classes who used her credit card for all of her monthly¬†expenses because she got cash back every year. Usually she got around $600 which she used to buy a plane ticket to visit her daughter and grandkids. She thought that she was getting the better end of the deal with the credit card company. I challenged her to go to the cash envelope system for six months, budgeting in each envelope approximately the same amount she spends on her credit card. I told her that by spending cash instead of using plastic she would be less likely to overspend and buy things she didn’t really need. She took the challenge.

Six months later she emailed me with her progress. After calculating how much total she spent using cash in the last six months compared to each of the 4 six-month periods prior to that, she spent over $500¬†LESS using cash – just in 6 months. She¬†found that¬†that most of the things she¬†had been previously¬†overspending on were things she really didn’t need, like a second shirt in a different color, another lawn ornament for her already cluttered yard, eating out for the 4th time in a week. Spending with cash made her really conscious of where all her money going and thus she became more judicious of where and when she choose to spend it.

So if you think you are beating up on those credit card companies with your cash back, travel points, or¬†interest free “promotions”, you simply are not. Going back to the McDonald’s numbers… if you are using a credit card and spending 43% more in order to get 2% cash back, who do you think is winning in this game? I’ll give you a hint. It’s not you.

401k = Filet Mignon. Social Security = Alpo.

Debt robs you of so much more than just your money. It takes your future. Paying $150 in credit card payments every month? How much money would that be if instead blowing that money and sending it to the credit card company, you actually saved it for your future? Well, if you saved $150 a month from age 25 to age 65 in a good mutual fund that averaged 9%, you would have almost $663,000! For just $150 bucks a month! How many of us spend that just on cable tv or Chinese food every month?

Do therapists take American Express?

Debt takes away your peace of mind. When you have mounds of debt and not much savings, a minor catastrophe, like a car repair, can seem like an earth-shaking catastrophe. And a major emergency like a job layoff can cause people to completely go into orbit emotionally, causing depression, stress-related health problems, and occasionally even suicidal thoughts. When you are debt free and have money in savings to take care of small and large emergencies, it gives you enough room to breath and cope with bad things that happen. Instead of freaking out every time Murphy comes to visit, we can just take care of the problem and kick Murphy to the curb.

Debt Marries Divorce

Debt can be a marriage killer. Currently, the leading cause of divorce in America is money disagreements. Higher than even infidelity. Why do you suppose that money takes such a toll on our relationships? Because debt is like acid. The stress eats away at even the best relationships. When a husband and wife can find agreement on how they are going to spend and save their money, budget together (and honor their spouse by sticking to it), and work together to get out of debt and build a solid financial future for their family, that relationship solidifies in a way most couples only dream about. The respect and love that is built is amazing to see.

“If you loaned your brother-in-law $100 buck and never saw him again… was it worth it?”

Debt can¬†destroy relationships with friends and families. We all have seen a relationship with a friend or family member stressed or ruined by lending money or co-signing a loan. Borrowing money or co-signing a loan immediately changes the tone of your relationship with that person. If the person doesn’t pay or takes their grand old time paying you back, you start to¬†feel disrespect and resentment for that person. You start to pay attention to how they are spending their money. You see their Facebook pictures at a wine-tasting last weekend and get peeved that they are out spending money in wine country when they could have used that money to pay you back sooner for the money you borrowed them to catch them up on their rent last month. Yes, I know some people do pay personal loans back and do pay timely. But you always have to consider the downside when you are thinking about loaning money to a friend or c0-signing on that car for your boyfriend. What will happen if they don’t pay the money back? Am I willing to lose a friend or the money, or both? Am I willing to make a second car payment if my boyfriend¬†loses his job? And if he dumps me, takes the car, and quits making the payments am I willing to risk the hit to my credit or even a repossession? I know we all want to think the best of our friends and family, but we have to consider that the thing could go very, very wrong. Are you willing and even ABLE to take that risk?

Debt: where dreams come to die…

Debt can cause you to sacrifice your dreams. I am friends with a girl who is an incredible Christian. She went to a private Christian college and decided that after she graduated she wanted to be a full-time missionary in South America. However, when she graduated from college she had over $60,000 in student loans that she had to start paying six months after she graduated, which would be about the time she wanted to be down in the Amazon. After running the numbers, she was incredibly disappointed to conclude that with her vast amount of student loans she would not be able to go into the mission field for at least 5 years. In the meantime she would have get a regular job and put her dreams on hold.

 

The moral of the story…

Debt is Ocean’s Eleven¬†to¬†your money. Don’t let debt steal your life away. You deserve better, and so does your family, your future, and rest of the world. Imagine what the world would be like if everyone got out and stayed out of debt. Do you think the economy would be stronger, more secure? Well, let’s get you out of debt first. Then we can work on Uncle Sam… yikes!

. . . because it’s GOING to rain.

Number 3-

 

We all know we should be doing it. But by and large, we are not. In order to be successful in handing your money, you must make savings a priority. That means, when you get paid, you need put money into savings before you do anything else. Pay yourself first. You need to save for three specific things: 1) Emergencies, 2) Purchases, and 3) Building wealth for retirement.

1. THE EMERGENCY FUND

When I was a little girl, my¬†mother told me¬†that I should save for a rainy day. Now, when you are 6 or¬†7 years old, you think that saving for a rainy day means having money to go to Chuck E. Cheese instead of the park when it’s raining out. As it turns out, “rain” looks a lot more like a cracked radiator, a leaky roof, a vet bill for kennel cough, or an emergency room copay. “Rain” looks a lot like life.

“How much should I save?”

Most financial professionals agree that an adequate emergency fund is enough money to cover 3 to 6 months of expenses. That way, if you get laid off (which is the worst money fear people have), you are still able to pay your bills until you find another job without having to dip into your retirement fund, borrow from family, or live off your credit cards.

Now for many people, this is a lot of money to save! Depending on your lifestyle, your full emergency fund could be anywhere from $5,000 to $25,000 (or more). However, if you are familiar with Dave Ramsey and¬†his¬†Baby Steps, he recommends saving a starter emergency fund of $1,000¬†and then begin¬†to pay down your debt. This¬†amount of money¬†is a great place to start with your emergency fund because most people can accomplish saving this much in a¬†few months or less and it¬†creates a little buffer between you and life. It won’t last long if you¬†get laid off, but it will cover the small emergencies that come up, like a blown tire or an emergency root canal.

Families who have high monthly expenses, however, might want to put a little more aside than just the $1,000 for their starter emergency fund. Some people like to start with the amount of their house or car insurance deductibles. I have found a good rule of thumb is to save about 4-5% of your yearly household income in your starter emergency fund. So if you make $25,000 per year, you should shoot for $1000-$1200. If your household makes $75,000, you save around $3000-$3500.

Not every family is the same, so you have to figure out what is best for you. Some people might choose to save the full emergency fund before moving on to paying off debt if their total debt is substantial. If would like my recommendation for your personal situation, please feel free to contact me.

“What exactly should I use my emergency fund for?”

Now, let’s clarify the definition of an “emergency”, because once you have that $1000, $5000, or $20,000 in the bank, some of us spenders¬†are WAY too tempted to look at that money as a leather couch fund or a bass boat fund. NO! It is for EMERGENCIES. ONLY. And gentlemen, needing a bigger TV for your Superbowl party is NOT an emergency. Ladies, buying¬†that leather jacket at the end of season clearance is NOT an emergency. Emergencies are unforeseen circumstances that MUST be addressed immediately in order for your life to continue. Good examples of this would be car breakdowns, doctor¬†copays due to sickness or injury, or home repairs that affect basic needs (i.e. your pipes freeze or your furnace dies).

Many expenses that¬†we want to consider emergencies, aren’t really. You KNOW your car will need routine maintenance, tires, brakes, etc. Plus you KNOW that your car will someday need repairs. That’s why it is smart set aside money in your budget every month for car maintenance and repair. That way, when something needs to be fixed or replaced, you don’t have to use your emergency fund. That same goes for home repairs. You¬†KNOW that eventually something on your home will need to be fixed or replaced, so make a line item in your budget for that too. Especially if you have an older home.

Let’s mention a few more things that we sometimes treat like emergencies that are NOT:

  1. Christmas: it’s always in December.
  2. Kids grow. Who knew?!? They WILL need new clothes at least once a year.
  3. Kids also go to school at the end of summer. Every year. So budget for those school supplies.
  4. If you have kids in activities, budget boatloads. Just because you forgot they get soccer pictures every year doesn’t mean it’s an emergency.
  5. Weddings, birthdays, and baby showers. Yeah, I know they might get sprung on you at the last minute, but they are still not emergencies. Again, having a “Gift” category in your budget is a great way to set aside money for those events that you know are coming and for those you don’t.

Budgeting for expected expenses and saving an emergency fund for unexpected expenses is the best way to begin to get yourself out of debt. That is because¬†when you have a plan and are prepared, you won’t have to put these “emergencies” on the credit card.

“What type of account should my emergency fund be in?”

This questions usually comes up when people get their full emergency fund established. Having $1000 or $3000 in a regular old savings account is no big deal. But when we start talking about $10,000 to $25,000, people start to want to get fancy to try to get a better interest rate.

Stop. Don’t get fancy.

Your emergency fund should always be in something completely liquid, so you can access it very quickly. A savings account, money market account, or separate checking account is all you need. You should never put your emergency fund in a CD or ANYTHING that would charge you a penalty for taking it out before the term is up. You should not put it in annuities or mutual funds or life insurance or (heaven forbid) single stocks. Too dangerous and too hard to get to in a hurry.

Think of your emergency fund as your own personal¬†insurance to cover you in the event of a disaster. And insurance doesn’t make you money; it costs you money. So your emergency fund does not need to be in an account with a high interest rate. It just needs to be accessible and safe. Remember, avoid the fancy.

2. PURCHASES

This is going to be a hard sell. The emergency fund is a no-brainer; everyone knows it’s a good idea to have one. It’s going to be a lot harder to convince you to save for purchases.

In our culture of instant gratification, with information and entertainment available instantaneously at our fingertips, it has become insanely difficult for us to develop and mature the virtue of patience. But you need to do it in order to win with money. Because if you borrow money every time you have¬†the desire for a new car, furniture, or electronic gadget, you will be in debt for the rest of your ever-loving life. If that’s ok with you, fine. Go be mediocre. But if you want be financially secure and become an amazing person with patience, wisdom, and integrity, learn to save money for the things you buy.

The Sinking Fund

When you want to purchase something (like a computer) or you know you will need to repair or replace something (like the roof of your house), all you need to do is determine when you need or want to purchase the item and how much the item will cost. Then, divide the cost of the item by the months you have until the purchase needs to be made. Voila, the result is the amount of money you need to save each month for the item.

For example: You want to buy a new computer for $1200. You have decided that instead of opening a Best Buy credit card like a dope, you will be patient and smart and save the money to buy the PC. It’s May and you want to buy the¬†computer before you go to college in September. So you plan to get an extra job working in the Garden Center at Shopko for the summer, but want to know how much¬†you need to make¬†every month in order to have $1200 by September.¬† $1200 / 4 months = $300 a month. Easy peasy, lemon squeezy.

Another example: You buy an older home with a roof that will need to be replaced within 5 years. The estimated replacement cost is $11,000. $11,000 / 60 months = $183 per month.

The sinking fund idea can be applied to almost any large purchase or yearly/bi-yearly expense: cars, furniture, property taxes, homeowner’s/auto insurance, etc. It’s even a great plan to use for Christmas saving. If it’s March and you want to save $700 by December for Christmas gifts, you need to save $78 per month in your Christmas fund.

Saving for Cars??? Blasphemy!

Are you one of those people who has just accepted the fact that you’re always going to have a car payment? Don’t be a fool! Try this sinking fund approach:

Save up $1000-$1500 and buy a beater. You may think this is crazy, but I bought the car I’m driving now for $1200 dollars and have been driving it for over 5 years. Yes, I’ve had to repair it now and then (alternator, water pump, etc.), but the total cost of repairs I’ve put into it ($2900) over the scope of those 60+ months plus the cost of the car ($1200) has equaled a total cost of $4100. (Again this does not include routine maintenance that would be done on a new car too.) That comes out to roughly $68 a month. That beats the national average car payment of $494 by a mile.

Anyway, back to how we were going to get you off car payments. Buy that beater I mentioned. While you are driving that paid for car, save up what you would have paid for a car payment. Let’s say you would have purchased a car with a below average car payment of $350. If you drive that beater for 10 months and pay that car “payment” to yourself, you will have $3,500 in your car fund and you’ll probably be able to sell that beater for what you paid for it. So now you can purchase a $4,500 car with cash. That’s a decent upgrade, isn’t it?

Let’s do that again for 10 more months. Again, you will have $3,500 saved and you will be able to sell that car for a little less than you bought it. You end up with around $7,500 to buy your next vehicle for cash. Do it ten more months and you can buy a $10,000 car for cash. And so on, and so on. In less than 5 years, you will be able to buy yourself a brand new car for cash.

Now some skeptics will read that scenario and say, “You’re still making car payments every month even though you’re paying yourself. All you’re really saving is interest. And if I can get a 0% car loan, then what’s the difference?” How about this? Let’s say in two years you get laid off and aren’t able to find a job for a few months. If you have a loan on that new¬†car, you are either going to deplete your emergency fund (if you even have one) that much quicker making the payments¬†or risk repossession if you can’t make the payments. If you’re driving a reliable paid for¬†used car¬†and have¬†a few thousand dollars in your car fund to cover breakdowns, you’ll be just fine until you find a new job. Plus, once you reach a certain point in your car “journey” where you’re¬†buying a new enough car that it will last reliably for¬†a few¬†years, you won’t have to continue to save every single month for the next car. Just save the first 10 or so months and then sit on that money until you’re feel like buying your next car. Or you could still save every month, but a lesser amount. It’s up to you.

The point is, if you are willing to drive a lesser car now and work your way up to a new car by saving and paying cash, you are going to save yourself thousands of dollars in interest and have immeasurably more financial peace without the risk having a car loan. If you want to see a fun video illustrating this method, click here and here.

3. SAVING FOR RETIREMENT

This post is much longer than I anticipated, so number 3 will be short and sweet.

You have to save for retirement. You just have to.

If Social Security is not bankrupt by the time you retire, the amount you get will still be much lower than the standard of living you will have been used to while you were working. If you plan to get a company, state, or federal pension, you MUST still save into a separate retirement plan. If your company goes bankrupt or mismanages the pension fund, that money is gone and you won’t ever see it. State and Federal pensions are even at risk for mismanagement and budget cutbacks. (Hello California.) The only completely reliable form of retirement money you can count on is what YOU save.

As far as what to put your retirement in, I will cover the most commonly recommended investment methods in another blog post. For now I will just say that I believe investing in single stocks is too risky and CDs are just dumb. I personally invest in mutual funds, but there are many other options available too. The best advice you can get is from an investment professional. But make sure you find a broker that will¬†TEACH you about what you are investing in – not just TELL you what to invest in. NEVER invest in something you don’t understand just because someone told you to. Many of these “professionals” will just recommend you invest in what’s most profitable for them, not necessarily what is best for you. So choose your advisers wisely, and make sure they treat you with respect and patience and don’t pressure you into anything.

 

The moral of the story…

You. Must. Save. Money.

If you want to have any kind of financial freedom, peace, or stability, you have absolutely GOT to save money. Save an emergency fund, save for purchases instead of buying everything on credit, and save for your future. Because if you don’t, your life is going to be nothing but one long rainy day.

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A lesson for you, me, and Uncle Sam.

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This seems like a fairly simple concept, doesn’t it?

The frightening thing: a vast number of Americans have not been able to master this, including the people who are running our country.

How to tell if this includes you:

  1. Have you overdrawn your checking account in the past year?
  2. Has your total consumer debt (credit cards, car loans, home equity loans, personal loans, line of credit, overdraft protection) increased in the last 5 years?
  3. Has the amount of money in your savings decreased in the last 5 years?
  4. Has the amount of money you have been able to save each month decreased or stopped in the last 5 years?
  5. Do you have more consumer debt (see #2 above) than total money investments and equity in your assets?

If you answered yes to any of these questions, there is a VERY good chance you have been living beyond your means, or spending more than you make. Maybe not every month or every year, but on average you net worth has likely gone down rather than up. This is exactly the opposite of what should happen as you get older.

There are lots of reasons this happens, but most fall in to one of these categories:

1.  Impatience

Instead of saving for purchases over time (furniture, electronics, home improvements, vehicles), you are buying these items with loans or credit cards, often spending much more than you would have had you paid for the item in full at the time of purchase. (Undercoating anyone?)

Often, before the items mentioned above are paid off, replacements are purchased, usually for a more expensive item, increasing the amount of debt. The cycle continues every few years.

2.¬† “I’ll be happy when…”

Many people¬†look to¬†their “stuff” for contentment. “I’ll be happy when I can finally get a big screen TV.” “I’ll be happy when I can upgrade my TV to a flat screen.” “I’ll be happy when I can upgrade my flat screen to an HD TV.” “I’ll be happy when I can upgrade my HD TV to a 3D Smart TV.” It will never, EVER end. If you find your happiness in the pursuit of stuff, you will never, EVER be happy, and you will always spend more than you should.

3.  Keeping Up with the Joneses

A lot, and I mean a LOT, of people completely overspend their budget and go deeply into debt in order to LOOK like they are better off than they truly are. Some people use the excuse that they have “champagne taste on a beer budget.” It’s ok to want designer clothing, high-end furniture, expensive cars. But it’s not ok to buy those things on credit if you do not have the means to pay for them otherwise. If you struggle with this, I recommend a fantastic book by Thomas J. Stanley called Stop Acting Rich.

4.  Laziness, Fear, and Free Spirits

People who tend to be lazy or “free-spirited” often spend more than they make because they do not keep track of their money. These people are often overdrawing their checking account and relying on credit cards for “emergencies” such as groceries or bills after they blew their money at the mall or Home Depot. A prevalent emotion amongst these people is fear. Often they know they are overspending, but actually fear adding up the numbers and facing the reality of their irresponsibility. So they just continue on the dangerous track they are on. A friend I counseled called it “Ostrich Syndrome” because when her money started running out earlier and earlier each month, she stuck her head in the sand¬†like an ostrich and ignored the damage she was doing until she was absolutely drowning in delinquent debt, payday loans, a car repo, and eviction.

Don’t let this happen to you. It is time to “man up” or “woman up” if you are prone to laziness or procrastination. And if you’re a free spirit who is just¬†not good at keeping track of money, it is okay to get help from someone more competent and¬†“nerdy” (like me!), but you must¬†understand that you do need to take¬†responsibility as an adult¬†human and maintain self-control of some measure. There will not be a government¬†bailout or a white knight to save you. You must save yourself.


The moral of the story:

The only way to stop living beyond your means is to make a budget that includes saving for purchases, and actually living on the budget. Every month. For the rest of your life. The next two posts will address the topics of budgeting and saving, and I think you will find that neither are as difficult you think. You CAN do it. You have to be deliberate about how you manage and spend your money, instead of accidently blowing it all by not paying attention to what you are doing.

The alternative is being broke and in debt your entire life. Kind of like Uncle Sam.