Needs vs. Wants

One of the best financial lessons we can ever learn is the difference between needs and wants. The agreed upon needs of humanity our simple: food, clothing, and shelter. Does that mean caviar, high-fashion one-of-a-kind outfits, and million dollar penthouses? Of course the answer is no. Most of us can easily see past that exaggerated example. But when it comes to less obvious questions, although in theory we may know the answer, in practice we all too often rationalize unsound choices.

Do we really need the non-generic brand of peanut butter and the bottled water with the prettier picture on it? Maybe, I don’t know. But those are questions that should be taken very seriously before purchases. Do we really need what we’re buying? Some items we obviously don’t need but we still will purchase, and that’s fine up until a point. Maybe we don’t “need” apples, but that shouldn’t necessarily eliminate them from our shopping carts if we are willing to purchase them in moderation according to our financial circumstances.

Review your shopping habits. Take a look at your recent receipts and identify what you can go without and what you can’t. Alter your budget accordingly and develop the discipline needed to stick to your budget. Find non-monetary ways to reward your good behavior and continue making wise financial decisions.

Developing Discipline in Spending

We know we should cut expenses, we know we should save--we know, we know…blah, blah, blah. But do we do it? Maybe yes, maybe no. For those of us who answered no, I think what largely dictates our spending is our psychological relationships with money. Perhaps we subconsciously think that buying more will bring happiness by filling some void we have. Perhaps we value being able to keep up with the Jones’, whether we financially can or not. Maybe we despise money and are unwilling to let it rule our lives so we consequently do little planning ahead and end up even spending more. Or maybe we’re just lazy. Although knowing why you have trouble limiting spending is helpful in eliminating the problem, the end result is the same regardless of what particular element you’re ailing from: undisciplined spending leads to financial uncertainty and bleak futures.

Often we think the answer is just earning more. We just need that second job or a few more hours of work a week, and then our budgets will be fine. Then our spending won’t matter. Right? No! Whether you start out with $20 or $20 million, it doesn’t matter. With uncontrollable spending habits, you will never make enough. There is always something else that seems to be a necessity and always something else that just can’t wait until the next paycheck. This fundamental rule explains how it is that millionaires end up filing bankruptcy. No amount of money will ever be enough for undisciplined spenders. The answer is not in earning more, but in spending less.

Why Use a Budget?

Financial planners might disagree when it comes to certain topics, but I know of no one that will tell you to go without a budget. A solid budget, when adhered to, is the foundation of a successful financial household. Budgets are what make and break individuals and businesses alike. If you have a good one and stick to it, everything feels just fine. If you have a bad one, or you don’t have one, or even if you have one but don’t use it, everything can come crashing down faster than you can say, well I don’t know, maybe supercalifragilisticexpialidocious.

When implemented correctly, a budget is the framework that directs all spending, saving, and other financially related activities. Living without a budget is like aimlessly wandering around with no direction—you don’t know where you’re coming from, where you’re at, or where you’re going. Budgets give direction and stability to otherwise lost financial lives.

When you begin analyzing expenditures and isolating where your money is going, it becomes much easier to see where you can cut costs and minimize waste. More often than not, we don’t realize how much we are spending until we studiously record and monitor all the financial activities we have going on in our busy and hectic lives. Whether we are wealthy or not, wasting money—obviously—isn’t in our best interest. Proper budgeting is what gives us the ability to minimize costs and optimize our financial circumstances.

What’s In a Budget

A budget is made up of three major sections: income, expenses, and savings. All sources of income should be added and totaled making sure to subtract applicable taxes. Expenses should then be listed as line items, generally divided into two categories: fixed and variable. Fixed expenses include housing, credit card payments, medical insurance and all those monthly bills that no matter how much we don’t want to pay we have to.

Variable expenses also might include payments we don’t want to make, but the amounts designated to those categories are more in our control, hence the title “variable.” Food’s a must, but how much we spend each month is more up to us than how much we spend on rent, in the short run, so food goes under variable expenses. In the long run, the division between fixed and variable expenses isn’t so clear, but for a monthly budget this rationale works just fine. After expenses are totaled, the value of income minus expenses should be allocated to some form of savings.

Happy Holidays!

I hope whatever holidays you're celebrating this season are fantastic!

Glitterfy.com - Glitter Graphics

Mortgage Resource

I just received an email from a Mortgage Banker contact of mine--Ben Edgson. I thought I'd pass it along for those interested.

"I want to make you aware that you have a Mortgage Resource in me during this time of incredible change in the Mortgage Industry. Because of recent announcements and actions by the Fed, the past few days have seen unprecedented changes to mortgage rates, and they are currently at all-time lows. If you, or anyone you know, are looking to capitalize on this opportunity to lower your interest rate and monthly mortgage payments, I am happy to offer my expertise.

Since graduating from the University of Denver with my MBA in the Spring of 2004, I have been actively involved in the Mortgage Industry. My company, By the Brooke Mortgage, currently lends in Colorado, Montana, Wyoming, Texas, Arizona, New Mexico, Nebraska, Kansas, Oklahoma, Minnesota, Iowa, Missouri, Arkansas, Indiana and Michigan. I encourage you to read my work history and the recommendations left on my LinkedIn.com page at http://www.linkedin.com/in/benedgson.

If you have any questions about your current mortgage situation, or would like to refinance your home, please contact me by e-mail at Ben@bythebrookemortgage.com or by phone at 720.280.0441. You can also fill out a loan application on my secure website at https://homeloans.securesites.com/page1.html?custid=5416.

I am a referral based business, so if you are networked with anyone else who is looking to refinance, I would appreciate you passing along my information."

A Personal Balance Sheet

Everything you own equals everything you owe plus your net worth. Total assets on the left. Total liabilities on the right. The difference between assets and liabilities is net worth. If you own everything on credit, you're going to have a small net worth. If you have no debt and a lot of property and possessions, you're going to have a high net worth. Minimizing debt and wisely increasing assets lead to a healthy financial future.

Personal Finance Software: Quicken

I use the software Quicken to manage my personal finances. Before I had Quicken, I just used Excel. The software isn't as important as your personal commitment in being a disciplined financial manager. No software in the world will take care of everything on its own. Even if you have online bill pay, automatic account downloads, and any other frill and thrill you can imagine, if you aren't ever going to open the program, you're still going to have a mess on your hands. Start small, then work up. Build some discipline with free or low-cost programs instead of thinking that a high priced software program will take care of itself. Maybe try Quicken's free and simple online version before shelling out $60 for the Deluxe edition. Find out more at http://quicken.com/.

What Makes Up Your Credit Score

Although the three major credit bureaus of the United States won't divulge specific information on what makes up a credit score, the following general factors have been released. By optimizing these indicators, your credit score will surely increase.

1. Payment History
2. Ratio of Credit Limit to Actual Debt
3. Length of Credit History
4. Types of Credit Used
5. Past Credit Applications

Checking Your Credit Report

Credit reports contain your credit history as recorded by credit bureaus. In the United States, you are entitled to a free credit report from each of the three major bureaus every 12 months. That means every four months, you should be checking your report with one of the agencies to make sure your history is being reported accurately. Credit reports are what determine your credit score. Checking your report, consequently, is a free way to keep on top of how lenders see you.

Go to https://www.annualcreditreport.com/ to retrieve your credit reports from the three major bureaus: Experian, TransUnion, and Equifax.