Before you make that purchase...

Heather and I have come up with a system that has really started working to jointly control any compulsive spending and I thought I would share it. It started off with the first two questions but we have expanded it to 3 questions we ask one anothee in order to better think our purchases out. I added just some of the sub questions which have come up in my mind when thinking out the answers recently.

1) How often would you really use it?
-- Is it worth buying another item for how often it will be used?
-- Do you need it or just want it?
-- Can you borrow or try it out before committing to spending the money?
-- Is there something that you can sell or get rid of first to offset the cost? We do this with cars all the time, but not other things we buy.
2) Are their cheaper alternatives?
-- Does this purchase have reoccurring costs such as supplies being more expensive than alternatives?
-- What are the tradeoffs to the cheaper alternatives?
-- How long will the cheaper alternatives be good enough?
3) Can the money be better used elsewhere?
-- If you used the money to pay down debt would you end up being able to afford something better in the long run?
-- If you aren't going to use it often, would it be better to support a charity or a friend in need?
-- Would letting the money grow in a savings or an investment account be better while you think it out?

Try it and let me know if you come up with other short questions to add to the list

Saving for college

Reading this Sunday's Wall Street Journal article on saving for college, one might view our children's future ability to have a debt free education as hopeless. In the article, there were some important facts:

For the 2008-2009 school year, the average cost of attending a four-year public school for in-state residents -- including tuition and room and board -- rose 5.7% to $14,333, according to the College Board. The cost was up 5.6% to $34,132 for a private university. (These numbers aren't adjusted for inflation.)

Well, if you round up to $15,000 for public school and 6% per year, in 12 years that will double to $30,000 per year. If you have younger kids you might have a couple of extra years but let's assume those last few years won't get much interest as you pull the money out into conservative investments. It would mean that you have 12 years to save $120,000 per child. This is amazing to me and I can't even fathom at this point being able to save $10,000 per child per year. But, you have interest on your side, right?

Using an investment calculator, I figured that if you could save $430 per child per month for 12 years at 10% return per year, we could save our $120,000 in those 12 years. If you assume 12% return, you only need $375 saved per child per month. At 8% return, you need $500 per child per month. And that's just for an average public school!

What were we thinking having 2 kids only 1 school year apart? I can hope that we are able start saving $1000/mo within a couple of years for the kids but it can't be easy. I can also hope that we, as a society, get control of these college expenses and don't continue to let them grow at such a high rate assuming our children can bear the brunt of it through student loans. Until then - this is something to think about for sure..

Family income with kids

I found myself thinking about what life is like on one income based on a book Heather checked out of the library, a conversation at work with a friend, and chatting with another coworker and my cousin about their part time jobs. Finally, Dave Ramsey has been asking for what people do to earn extra money as stay at home parents and will have a show on it. All of this has occurred this week, and has had me thinking about what life is like on one income.

I think the first question is normally can people afford it. If you have researched the subject, you will hear many people talk about the hidden costs of working and sending your kids to daycare. Doing some searching, I found this "Second Income Calculator", which is supposed to help you figure out how much you are really making or saving paying for childcare.

Whether the second income from the father or mother results in additional income or not, it may mean you are living off less income either way. The DINK (dual income no kids) lifestyle is great but can lead to higher expectations of lifestyle after kids. No one wants to lose the luxuries we enjoy after having kids. But, whether you keep two incomes or one income, your lifestyle must change unless you either:
1) Increase the incomes significantly in one year
2) Live on less than one income before kids

In the end, cutting back will probably be necessary. Sacrificing is necessary. Otherwise, you may end in heaps of debt.

The good news, as I pointed out to my friend, is that later as your family income grows you can easily begin budgeting in the luxuries you used to enjoy again. You can get digital cable again, get an iPhone or something better later, and re-add those services you are losing out on now because you have learned to live on less.

How much of a house can you afford?

Many experts say that your mortgage payment (principal+interest+tax+insurance) should not be more than 25% of your gross income. If you listen to the likes of Dave Ramsey, that mortgage should be no more than a 15 year fixed rate. But, I was looking at what different salaries could afford (maximum) as a 30 year fixed rate under this plan:

$40,000 salary - $122,000 mortgage ($833/mo)
$60,000 salary - $183,000 mortgage ($1250/mo)
$80,000 salary - $244,000 mortgage ($1667/mo)
$100,000 salary -$305,000 mortgage ($2083/mo)

If you change it to a 15 year fixed as Dave Ramsey suggests:
$40,000 salary - $90,000 mortgage
$60,000 salary - $135,000 mortgage
$80,000 salary - $180,000 mortgage
$100,000 salary - $225,000 mortgage

The assumptions I made were that the interest rate was 6%, taxes at 1%, and I used this calculator which adds in insurance. This assumes also a 20% down mortgage with no PMI. That mortgage calculator incidentally doesn't allow you to go over 28% of your gross, which isn't that much more than the 25% rule. It also allows you to indicate other debts.

Slightly new focus for our church

Our church, Crossroads Fellowship, sent out an email with a slightly new short term focus which mirrors many of my thoughts and how God is leading me. That is, to help people identify the problems they have with managing their finances and put together a plan to get out of debt and on to a journey of complete financial freedom. Here is what the church sent out today:

If you were unable to worship with us this past Sunday, you can read about our journey with God and how He's leading us in 2008 at www.crossroads.org/pdf/Imagine_Journey_2008.pdf. You can follow along as I walk you through this vision document at www.crossroads.org/audio/Chuck_Imagine_2008.wmv.

If you need help getting out of debt and managing your debt flow our Financial Freedom Ministry provides classes, workshops, resources and budget coaching to help people realize financial freedom. You can discover ways to get out of debt, establish a budget and learn about God's view of money. Take the Crossroads Financial Freedom Personal Assessment at www.crossroads.org/pdf/FF_Personal_Assessment.pdf.

On Saturday, May 17, we are offering a special workshop from 8:30 am - 3:00 pm to help you gain insights that will put you on the path towards financial freedom. Topics include Super Savings, Relating with Money, Dumping Debt and Cash Flow. There will be times when you can meet privately with a budget coach as well as prepare your own action plan for getting out of debt and handling finances God's way. Register online. Cost is $25 per couple and lunch and child care will be provided.

Here are some amazing facts from the charts:

• 70% of Americans live paycheck to paycheck.
• 95% of married couples fight over money and it is the leading cause of divorce.
• Americans spent $1.22 for every $1 they earned in 2007.
• 1 in 6 families may have their homes foreclosed on in 2008.
• 62% of Americans will retire with less than $10,000 income per year.
• Average 28 year old has $66,000 in consumer debt (cars, credit cards and student loans).
• 1 in 7 families is dealing with a debt collector.
• Children today are just as likely to see their parent’s file for bankruptcy as they are for divorce.
• The average household has at LEAST $9,000 in credit card debt.

Saving, Budgeting, and Marriage...

Heather and I were interviewed by Sue Stock from the N&O, our local newspaper here in Raleigh NC, about how we manage money as a fairly young married couple. The article is here at the N&O including a picture of us with our daughter Anna under More Photos on the right. The experience was great, Sue was nice as well as the photographer, Chris Seward, who spent 45 minutes at our house ot get some various photos of us.

Most of the interview we talked about our system of budgeting, called the envelope system. We didn't develop this system but were taught it by people related to the Crown Financial Ministries organization. Our church, Crossroads Fellowship, teaches part of the Crown curriculum as well as information from other popular financial freedom ministries and personalities like Dave Ramsey. As part of enforcing our envelope system, which I will describe in more detail in a second, we use Crown's Money Matters software which they now call Money Map software. They also have an online budgeting software package called Mvelopes which also budgets with an envelope system.

The first key concept in our system comes down to the order in which you handle your money. When we first receive money, Heather divides it into the envelopes immediately. First, we give back to God a portion of the income He has blessed us with in our tithes. Next, we save a portion of our income in a variety of ways, general savings, emergency savings, college savings, college investments, new car savings, general investments, and other such categories. This keeps savings as a priority in our lives and moves the money away from where we are likely to spend it on a whim. Next, the money gets allocated to the various other account "envelopes" we have. This includes things like our utility bills which can be static or dynamic as well as our grocery and gasoline envelopes which we can use throughout the month. There are other envelopes that gather money to be spent later in the year, like travel envelopes, gift envelopes, or our personal envelopes which Heather and I can use personally at our own discretion.

When the month is over, some envelopes may still have a balance and others may not. Things like our grocery and electric bill envelope both often may have balances. However, whereas the grocery bill envelope probably doesn't need a month to month balance carryover, the electric bill does so that there is more money available in a hot summer. The leftover money in the grocery bill may be carried over to spend on a fancy meal the next month or be pushed into general savings for usage elsewhere as needed.

Overall, this system has worked nicely for us. But, a budget system alone doesn't help people stay on budget. It also requires discipline which is the personal struggle for me. Heather is very disciplined but I am not. So, one of the useful tricks which is available with the envelope system is to not make it virtual in the areas where you are having problems staying on budget. For example, if you cannot stay on track with eating out because it just goes on your credit card, we would suggest you move to cash in an envelope to pay for all of your eating out. Its easy to tell if you have enough money when you just have cash in an envelope.

Thats all for now...I may write some more later...