Three Steps to Financial Control
By samd4 ([email protected])
November 2, 2000
Foolishness requires two things: a firm grasp of your finances and a silly hat. I am not a hat wearer; I like my head to breathe (why else would the holes be there?) So I will address getting a firm knowledge of your financial situation. This is only accounting, but it can be the tool that will allow you to get to a point, financially, that you can buy me nice things without going into debt. Let's start putting discretion into discretionary spending.
Annualize. Embrace the concept that all of your financial obligations should be figured on an annual basis. Find what you pay for each bill annually. For things like auto registrations, it will be the bill itself. For fixed bills like a car payment, multiply the monthly payment by 12 (1 pint of blood x 12 = 12 pints of blood). That's pretty easy! Now figure those bills that vary with time of year such as heating oil payments. I like to multiply my highest monthly bill and multiply that by 12 ($2.53 less than the national debt). You can find an average and use that number if you have the data on the variable ones.
Fractionalize. Now that you know the annual cost of all of your outgo, divide each by the number of paychecks in a year. If you have one wage earner being paid monthly, divide by 12, if you have one wage earner being paid weekly, divide by 52. If you have two wage earners paid weekly divide by 104. If you have more wage earners, spend a moment counting your blessings. Now you know what you need to take from EACH CHECK for each bill. When you set up your accounts include everything -- spending, transportation, mortgage, utilities, investing and debt reduction, everything! Pay each bill from every check!
Maximize. You are now prepaying all of your bills but you get to keep the money until the bill is due. The benefits are many. There will be no more late fees or raised interest rates, you can get discounts for prompt payment (my property tax bill is reduced 2%, fuel oil is $0.20/gal less) Once fully funded, you have your first month of your emergency fund. You will be able to fine tune your budget (lower the phone bill by changing calling times, send me a gift certificate instead of something that I need to return, etc.)
The single largest benefit is that you will now see what happens when you overspend in any one area because you will need to borrow from another area. Gone are the days when annual payments surprise you and put you behind, because you will have the money ready. You can drastically reduce the cost of renting other people's money (credit). Items can be purchased on sale with cash if you plan for them.
Your income is maximized because you are now in control of your spending. Plug in for debt reduction by figuring an amount that will be put to eliminating bills and add that amount to a bill until it is gone. Use both the old payment and your bill elimination amount on the next one. If possible, prepay yourself for your holiday spending so that you are not in more debt in the new year. Maybe you can work in a vacation account, too.
Once you've gained control, good things will happen. Your blood pressure will be lower when the bills arrive. When the phone rings, you will know that it is not an angry creditor but a friendly telemarketer instead. You will be able to balance your checkbook without praying for slow posting of a check. You will be able to tell the kids "We can't afford that" and have the proof to back it up!