“A budget is telling your money where to go instead of wondering where it went.” ― Dave Ramsey
Most people out there have probably heard of the saying “champagne taste on a beer budget,” and that is exactly the kind of behavior I have been seeing more and more of lately.
It is not that I have a problem with nice things.
Quite the opposite.
In fact, I like to buy high quality and first-class items. This can include anything from airline tickets to a nice vacation. However, you have to be able to afford it.
You must therefore follow this advice: “Act your wage.” ― Dave Ramsey
Therefore, if you can only afford Bud Light instead of Rosé, then go for the beer.
If you are familiar with the Suze Orman show, she had a segment called “Can you afford it?”
Basically, people would call in and ask if they could afford to buy whatever item was the hot new thing that year.
Suze Orman would require certain criteria like a six plus month emergency fund, a job, income, and a realistic way to pay for the item either outright or over a reasonable period of time.
It was very engaging. By far, the most popular part of the show.
Let’s see if this post can bring back some of those feelings tonight.
If you can’t afford champagne, then it is perfectly acceptable to buy sparkling wine. Just make sure when you pay for it, that you use cash and not plastic or it will not matter how much you think you are saving, if you are paying interest on it. Then beer can turn into the price of champagne.
Interest over time makes any purchase more expensive.
For example, buying a pair of jeans that cost $50 on plastic at a 25% interest rate could turn into a $500 pair if you pay the minimum payment over 5 years. That wasn’t on the price tag!
It seems that if you pay cash you are protected against this type of price inflation. Especially, if you get a 0% deal (teaser rate) and then do not pay it off and are charged interest retroactively from the date of purchase.
So, be very wary when it comes to credit cards. They will give one to anybody with a pulse.
In Elizabeth Warren’s books, The Two-Income Trap and All Your Worth, she discusses how even with two-income earners Americans are still struggling with debt, filing for bankruptcy in record numbers, and still unable to afford housing and higher education for their families.
Credit, in large quantities, is trapping people in an eternal debtor’s prison.
In the book Maxed Out, author James Scurlock talks about how having access to easy credit at young ages (college kids) is ruining people’s financial future before it even begins.
Starting out in a hole due to student loans and credit card debt means playing a constant game of catch up and struggling to get by.
Curtailing spending and only buying what you need and can afford are the only ways to stop this phenomenon of being maxed out.
Therefore, we budget.
However, “A budget tells us what we can’t afford, but it doesn’t keep us from buying it.” – William Feather.
Below I will provide some fictitious examples of how it all goes down similar to the show.
So, let’s go back to the infamous Suze Orman question of “Can you afford it?”
What do you want to buy?
So, let’s say I get some tweets from followers asking if they should make a purchase. Let’s go.
Thank you for tweeting Greenbacks Magnet (GBM for short). What do you want to buy?
FOLLOWER: I would like to purchase a brand new Lexus RC 300 priced at $43,305. My birthday is coming up and I have never had a new car only used. Growing up, my parents said buy new. Why inherit someone else’s problems? I have always wanted one.
GBM: Ok. Show me the money.
FOLLOWER: I have $15,000 in savings, no credit card debt, $10,000 in student loans, no mortgage, no auto or personal loans and $55,000 in my retirement accounts. My after-tax income is $4,150 monthly. My expenses are $3,300 per month.
GBM Email reply: It’s great that your expenses are lower than your income by $850 so that you are able to save, but you could knock out the student loans and then have no debt. You have a 4 month emergency fund. I prefer to see 9 months ($29,700) as that is how long it takes the average person to find a new job (including me). Check out out my post How to build an emergency fund.
A car at that price of $43,305 will cost $676 per month at a 3.9% interest rate over six years. That will bring your monthly expenses up to $3,976 and decrease your net saving from a respectable $850 to $174. That is too close to the financial edge.
I want you to start putting more money toward retirement such as $200 more per month or whatever gets you to 20%. A car is not going to feed or house you it will only get you from Point A to B. You should also consider setting aside enough for a 20% down payment on a home as I know you are not going to want to rent forever.
Setting aside 4% of the purchase price of a home for 5 years will net you the 20% down payment. If you can beef up the 401k by $200 per month, pay off the $10,000 in student loans, start setting aside 4% for a home down payment, and get a 9 month emergency fund then you can get your car, but not before. Until then, keep taking Lyft.
Next follower. Thank you for tweeting Greenbacks Magnet (GBM for short). What do you want to buy?
FOLLOWER: I would like to buy a Sony PlayStation 4 at $300. I am 20 years old and currently a college student, but I am working part-time. I have a game system, but the PS4 has more of the games I want to play and is cheaper than a new Xbox One X.
GBM: Ok. Show me the money.
FOLLOWER: I have $1,200 in savings, no student loans as I go to college online which is cheaper than traditional and stay at home, no credit cards, no 401(k) and a car note of $150 per month. My after-tax income is $600 monthly and my expenses are $350 per month.
GBM tweet: It’s awesome that your expenses are lower than your income by $250 so that you are able to save, always a plus, but I would like to see you open a Roth IRA. You are so young that this money could compound for like 40 years! Your future self will thank you.
GBM 2nd tweet: You can contribute $50 per month just to start in a Roth IRA. I do prefer to see a 9 month rainy day savings ($3,150). Since you have so few expenses, and live at home with virtually no debt other than a car note you could simply take the money from savings. Have fun!
Next follower. Thank you for tweeting Greenbacks Magnet (GBM for short). What do you want to buy?
FOLLOWER: My name is Lucy and I am 13 years old. I would like to buy an Apple watch for $219. I like it because it’s so cool and fun. A lot of my friends have it and I want one of my own.
GBM: Ok. Show me the money.
FOLLOWER: I have no debt. I have savings of $5oo from birthday money and saving my allowance. I get an allowance of $80 a month. I have no expenses.
GBM: Well, it is nice to see you saving. You could just take the money from savings as you have no expenses. I just want you to continue the habit of saving. You can afford it.
Less stress with a budget
You can see from the examples above that saving makes all the difference.
The more control you have over your money; the more control you have over your life.
Hope you enjoyed this walk down memory lane with me.
Now remember this: People first, then money, then things – Suze Orman
My motto is this: Always remember that cash is the best option. Cash is king. – Miriam Joy, author of financial freedom blog Greenbacks Magnet