Money Matters

Live Beneath Your Means !!!

There's no doubt we're in a time of economic stress; we see it in the news nearly every day. Most Americans are experiencing increased financial strain, some more than others.

They say that every cloud has a silver lining. If you are experiencing severe financial distress (job layoff, home foreclosure), it may be difficult to see any silver lining. But for everyone else, here it is: the "good" that comes out of this difficult time is a clear reminder to all of us that we must live beneath our means.

Financial educators (like me) teach this all the time. But when things are going well with the economy, it's easy for people to ignore us, or to say "sure that would be good, but it's not really that important - nobody I know lives beneath their means." Now, however, people hear or read the message and they nod their heads in sincere agreement - they can see first-hand the real need.

So we should live beneath our means, and build FINANCIAL SECURITY. How do we do that?
1) Spend less than you earn. If possible, spend a LOT less than you earn.
2) Have the insurance coverage you need. Evaluate your coverage regularly and ask questions if you don't understand it. And don't neglect disability insurance.
3) Save, save, save - save for long-term goals (retirement), and save, rather than borrow, for short-term goals (new furniture).

**Most importantly, save an emergency fund. Have money stashed away so you could fall back on it if your income was cut off or reduced. Experts have long recommended that people should have a 3-6 month emergency fund (that is, enough to live on for 3-6 months if needed). Now some experts are saying 6-9 months. But the reality is that most people I talk with don't even have a one-month emergency fund. Sure it will take time to build. But start now. It's better to have a two-week emergency fund than none at all.

4) Make your debt level decrease each month. Do not borrow for short-term satisfaction. Instead, pay down your credit card balances, as well as other debt.

Think about it. Everyone in a financial jam says "If only I had..." Examples: "if only I had saved more; if only I had used my credit cards less; if only I hadn't spent so much on _____. "
***Don't end up in "if-only-land." Instead do everything in your power now, even during this period of economic stress, to build some financial security. Then someday you'll be a person who says "I'm so glad I saved;" or "I'm so glad I got those debts paid off;" or "I'm so glad I quit that expensive spending pattern."

Barb Wollan
ISU Extension Family Resource Management Specialist

Resist the Urge to Splurge

Many young adults expect to start life's journey with all the worldly goods their parents probably took years to acquire. A first apartment, for example, must be equipped like their parents' home they just left. Sure, moving into an empty apartment may be a shock after leaving a fully furnished home. But this desire for instant gratification can start risky financial habits that result in a lifetime of overspending and debt.

Your parents probably started out with used furniture or hand-me-downs from relatives. New items gradually were added after taking the time to save the money needed to make the purchases.

Today, because of easier access to credit at a younger age than ever before, young adults are able to completely equip their home with all that their hearts desire. Credit allows for instant gratification instead of the waiting period required to save for the outright purchase.

Anyone can visit a home furnishings store and secure an immediate line of credit, allowing the purchase of lots of new "stuff." No more need to suffer with used, damaged or (heaven forbid) out-of-style furniture when new stuff is so easily acquired. Unfortunately, it comes with a hefty price tag after interest payments are calculated.

The story of Janelle illustrates this point. Janelle had no intention of purchasing lots of furniture when she first entered "The Ultimate Furniture Store." She was on a mission only to find a dresser, which she had planned to pay for with money she had saved. However, the salesperson informed her that she could fill out a credit application and qualify for up to $5,000 on the spot. Janelle was encouraged to take five minutes and complete the application because that was the only way she would be able to receive a 10 percent discount on her purchase.

Thinking it foolish to pass up any chance to save money, Janelle completed the application. Her buying expectations suddenly broadened. Why buy only a dresser if she could qualify for $5,000 worth of additional furniture? Besides, she needed a better couch to replace her old worn one.

Why miss the opportunity?
Emboldened, Janelle also bought a new white leather couch. It almost filled up her entire studio apartment –- but what a statement it made when her friends came to visit! Everyone said they wished they could afford a couch like hers.

But when Janelle took care of her friend's German shepherd for a few days, the new couch was totally destroyed. The dog chewed the wood legs, ripped holes in the leather and pulled out most of the stuffing. The couch was beyond repair, and would have to be replaced.

When the friend returned from her vacation, she was unable to pay for a replacement on her meager salary. Furthermore, since she had no savings, she had charged more than $1,200 on her credit cards for the trip. Janelle would need to buy another couch on her own.

To make matters worse, Janelle still owed money on her destroyed couch since she had charged the purchase. In fact, in order to afford the monthly payments and keep them low, Janelle had stretched out her loan for three years. Not only did she have to pay for another couch, she was stuck making payments on a couch that was no longer in use.

This story illustrates just one way young adults choose to enjoy immediate gratification. There are many more examples, such as:

Financing a new car instead of buying a used car
Having kids too soon
Choosing a two-bedroom apartment instead of a one-bedroom apartment
Buying expensive electronics instead of lower-end items, such as a plasma wide-screen TV rather than a small-screen regular set
In our fast-paced world, you may feel that your parents' practice of saving for a purchase has become old-fashioned. The culture now says, "You want it, you got it!" But before you reject your parents' philosophy as hopelessly outdated, consider the benefit of paying cash for a purchase rather than simply charging it.

If a $1,000 television is paid for with cash, it costs $1,000. However, if the same TV is purchased with your credit card at 18 percent interest and you decide only to make the minimum payment each month, it will take you 12 years to pay off the balance! And you will have paid double the original purchase price, since an additional $1,000 would have been added through accumulated interest costs.

Resist the urge to splurge! Take the time to save for a purchase instead of financing it, and you will dramatically reduce the cost. Buying with cash involves patience, but the price of patience is well worth the wait.

Article Courtesy of
http://www.mindyourfinances.com/money-management/budgeting/081104-04