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Posts Tagged ‘priorities’

Check Please

November 1, 2012 1 comment

The Congressional Research Service  issued a report to the Senate Budget Committee outlining the federal spending for benefits to lower income people in the U.S. during Fiscal 2011 (year ending September 30, 2011).  The U.S. government spent $746 billion on programs for lower income people.  If you add in state spending, the total exceeds $1 trillion.

According to the Census Bureau, there were 16.8 million families living below the poverty level in 2011 ($23,000 for a family of 4).  By simple math, this means the federal and state government spent nearly $60,000 for each family in poverty, which is nearly three times the amount they earned during the year.

Less than 10% of the support is in the form of direct cash payments.  Of the $746 billion spent by the federal government, $318 billion is for Medicaid and prescription drug subsidies.  Approximately $66 billion is in the form of direct cash assistance and $73 billion is in the form of tax credits.  The remaining $290 billion of support is delivered through 80 different programs designed to help lower income families.

Given the choice, a number of families might choose to ask for a $17,000 in lieu of the other programs.

It might seem crazy, but do you think it’s efficient to have 84 different programs to help needy people?  Each program has its own objective and purpose, but there is a cost for employees, office space, computers, etc.   The more money spent on overhead, the less is being spent on actually helping people.

A few years ago I helped a school with a grant for an afterschool educational program.  I was surprised and dismayed to discover that over 20% of the grant money was going to be spent for a grant administrator, who would do nothing but complete reports and monitor the work of others.  Sadly, I think that grant is indicative of how many government programs and grants operate; a large chunk of the money is gobbled up in administrative costs.

I’m not against helping lower income families.  In fact, I think we have an obligation to help those who are most vulnerable and in need.  The issue is how the assistance is delivered.

It has been nearly 50 years since Lyndon B. Johnson declared a war on poverty and introduced the Great Society.  Trillions of dollars have been spent over the past 5 decades, yet the poverty rate in the U.S. is almost exactly the same as when this great endeavor began. 

Maybe we should consider eliminating a number of programs and giving more cash to those who are in need.  This seems outrageous to most conservatives, who often think people are abusing the system.  Many of us have witnessed people using their food stamps to purchase cigarettes and alcohol.  There will always be people who abuse the system, and they should be punished when possible.  I also believe the current bureaucratic morass often aids them in taking advantage of the system.

Conservatives frequently complain about people being dependent upon the system.  Part of the solution may be giving people more money, which will allow them to be more independent and self-sufficient.  However, this independence must be coupled with more responsibility for their choices.

Your willingness to embrace such an idea is probably influenced by your view of people.  Do you see them as lazy and untrustworthy, requiring a rigid bureaucracy to monitor and keep them in line, or do you trust people to be independent, make good decision and do what’s right when given the opportunity?  Personally, I would rather be trusted to do the right thing, than have some bureaucrat watching over me.  Given the choice, I would prefer to forego all the programs and simply say… “Check Please.”

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Budget Basics #8 – Ways to Cut Your Spending

I have had the pleasure of living with more money, and the joy of living with less.  I will tell you that it’s always easier to spend more than less.  No matter how much money you make, it’s difficult to ratchet back your lifestyle.

Your motivation for cutting your spending may be voluntary (you’re saving for something big) or forced (you lost your job).  No matter the reason, accept that there is no magic formula or simple solution to cutting your spending.  Your success will depend upon your willingness and ability to exercise self-control and discipline.

The following are a few principles and techniques that you may find helpful.

  • Cash – Generally, you will spend less money if you pay cash.  You can also implement an envelope system Dave Ramsey highly recommends.  Basically, you put cash in various envelopes for each type of expense and only spend what’s in the envelope.  For instance if you have a clothing envelope, you only buy clothes with the allocated cash.  When the cash is gone, you stop buying. 
  • Cheaper Options – Review your budget to see how you might maintain a type of service, but use a cheaper option.  Cable tv and cell phones are good examples.  Do you really need the DVR, movie channels or the unlimited data plan?  Eliminating options and extra services can cut your bill by 25-50%.  Having all the bells and whistles may be nice, but it may not be worth the added expense.
  • Cutbacks – Rather than completely eliminating expenditures, reduce the frequency.  Entertainment is a great example.  You can still go to the movies or eat out; just don’t do it as often.  Go once a month, rather than once a week.  You may be able to really curtail your spending if you cutback the frequency and select a cheaper option.
  • Eliminate – Completely eliminating an expense can be the hardest thing to do.  Unless you like to throw away money, you obviously had a reason for spending the money in the first place.  It can be difficult to let something go.  Acknowledge the sacrifice you are making, but keep in mind that’s it’s less important than one of your higher priorities (like paying your mortgage).

No doubt, curtailing your spending is hard.  Changing behaviors and sacrifice is never easy.  You may not get it right every time, but don’t give up… and don’t keep overspending.  It may take a little while, but you can control and cut your spending if you remain focused and diligent.

Hint: Stay more focused on what you are going to gain by cutting your spending than what you are losing.  It will be much more difficult if you are constantly thinking about what you can’t have or can’t do.  Far better for you to think about what you’re going to achieve.  It will be your reward for trimming your spending and managing your money well.

Budget Basics #6 – Monitor Your Spending

I’m assuming that you created a monthly budget, which means you have decided what budgeting tools and technology you are going to use, created a budget and are tracking your expenses.   All of this work has been laying the foundation for you to really maximize the benefits of your budget. 

To start, you should be tracking your expenses and monitoring your budget at least on a monthly basis.  As close to the end of the month as possible, input your actual monthly income and expenses into your budget.  There should be a column which compares the amounts you budgeted with the amounts you actually earned and spent.  Budget software, templates and online services will do this automatically for you.  If you are using Excel or a similar spreadsheet, create a simple formula that calculates the difference.

Look through the categories and review the large discrepancies, positive and negative.  Significant variances can be an indication of an error, or they may have resulted from a change of events (i.e., an unexpected car or home repair).  Your primary objective is to have a reasonable understanding of the variances so that you can consider the implications for your future spending.  Was it an anomaly or something that will be recurring?  For example, if you spent $200 more on food, did you underestimate your food budget, or did you have a birthday party for one of your kids which accounted for most of the extra expense?

Having completed a complete budget cycle, you’re in a great position to prepare your next month’s budget.  Start preparing your budget for the coming month by looking at your budget and actual income and expenses for last month.  Give some thought and analysis to how your spending for next month will compare to last month.  If you know you’ve got to get new tires for the car or have a scheduled medical appointment, include these amounts into your budget.

There will always be something that is unknown and unexpected.  However, the more you work with your budget, the smaller the variances you should have each month.  Remember that your budget should be based upon your goals and priorities. By monitoring your spending and comparing it to your budget, you’ll be able to evaluate how well you’re spending to achieve your goals.

Controlling your budget and spending will be the next budgeting principle we address.

Budget Basics #5 – Track Your Spending

Accurately accounting for how you spend your money is an important step in the budgeting process.  Incorrect information will make it difficult to alter your spending habits to better achieve your goals. 

If you are struggling to pay your bills and manage your finances, accounting for your spending is extremely important.  It can also be helpful even if you have plenty of money.  After seeing how much you spend for certain things, you may decide to modify your behavior and reallocate your finances towards something that is more important to you.

Here is a simple personal example.  I do not consider myself to be a connoisseur of coffee, but I like it.  Starbucks’ peppermint mocha latte is probably my favorite.  Cost… $4-5 a drink.  I usually only drink them when they are featured during Christmas.  I know I can get one any time, but the caffeine, sugar and fat content is too much for my diet to handle year-round.   If I drank one every day, it would add up to about $1,400-1,500 annually.  Alternatively, I can buy a 2.5lb bag of whole bean Starbucks coffee at Costco for $20, which lasts me 2-3 months drinking 2-3 cups per day.  Thus, I can feed my caffeine fix at home for about $100 a year.

I realize there is a time and ambiance factor.  It takes a few minutes to brew your own cup of joe, but it’s probably less time than waiting in line at most coffee shops in the morning.  Then there’s the ambiance.  There is something tantalizing about stepping through the doors of a coffee shop and smelling the aroma of a fresh brewed pot.  But for me, it’s not worth the extra $1,000 per year. 

This is simple example of why I think it’s important for you to track your spending.  Dropping $5 at Starbucks is not that big of a deal.  However, when you add it up over the course of a month or year, it turns into real dollars.  For me it’s brewing my own coffee, but it might be something different for you. 

Now that I’ve given you a bit of a rationale for tracking your expenses, here are a few pointers of how to do it.

Your bank and credit card statements will track a lot of things for you.  Checks, online banking and automatic bill payments will cover most of your major recurring expenses.  Your bank and credit card statements also record every time you swipe your debit or credit card.  One key point here – save your receipts.  While spending at some merchants will be obvious, others will not.  Wal-Mart, Costco and a number of other major supermarket chains also sell gas and medicine.  Receipts will allow you to differentiate whether you are spending on food, gas, clothing, medicine, gifts, etc.  Since your statements often come weeks after your purchases, it’s easy to forget what you bought on a particular day.

Although we continue to move towards a cashless economy, you may still pay for some items with cash.  You should have a system to track your cash expenses.  I would recommend an inexpensive application for your smart phone, or a pocket-size notebook that you can write down your expenses. Tracking your cash is very important if your budget is tight or you pay for a lot of things in cash.  Simply throwing all cash expenses under miscellaneous may not give you an accurate picture of where your money is going.  Cash is where a few dollars here and there add up to a significant amount over a month’s time. 

How detailed do you need to be?  There is no universal formula, but here is a quick rule of thumb.  If you thought it was important enough to create a category, then track spending for the category.   If not… what is the use of the category?  As you progress you may adjust your budget by condensing or expanding the categories.

Remember, the key to a budget is to help you make wise decisions.  Maintaining meticulous spending records that have no impact on your spending is a waste of time.  Conversely, improper tracking of your expenditures will distort the reality of where your money is going and hinder your ability to make good decisions.  In a nutshell… good information = good decisions.

After you have created a budget and tracked your expenses, now what?  Monitoring your spending.

What is the Value of Money? (The Value of Money – Part I)

Open up your wallet and pull out what you have in cash (hopefully you have some).  Look at the various bills in your hand.  They all have an identical shape, size and feel.  The only difference is what’s printed on them, but the printing can make a huge difference in the value of the paper.  Imagine if you lost one of those bills, you would probably react differently if it had $100 printed on it rather than $1.

Investopedia.com defines money as a commodity or asset, such as gold, an officially issued currency, coin, or paper note, that can be legally exchanged for something equivalent, such as goods or services.

The value of money is not in the paper or coin.  The real value is what you can acquire with the currency.  The more money you have, the greater value you can purchase, either in quantity or quality (i.e., $10,000 could buy you 50 decent Seiko watches or 1 Rolex).  

The way you handle your money says a lot about who you are as a person. Give me about 30 minutes with your checkbook, and I will have a good idea what you value based upon how you spend your money.  Would that make you proud or embarrassed?

Fortunately, you don’t have to justify your expenditures to me (although you may have some explaining to do with your spouse).  If you’re like most people, your money supply is limited.  Impulse buying and spending money for things that have little value once purchased can diminish your ability to acquire something in the future that is necessary or more important to you. In deciding how to spend your money, you should try to maximize your purchases for those things that have value for you today and in the future. 

If the value of money is what it can acquire, make sure you’re acquiring something you value.  Prioritize your spending to match your priorities in life.

Coming up next… Currency & Commerce in the Value of Money – Part II.