Five Rules to Get Your Spending Under Control

Does your money simply disappear without you fully knowing what happened to it? It can be really frustrating, when you’re trying to save money, if you never seem to have anything left over at the end of the month.

When you don’t have a recollection of how you spent your money, you are spending it mindlessly. Essentially you have a habit, and when you have a habit you can do something without thinking about it.

It’s like when you drive home from work, but you can’t recall any of the details of your trip. You make all the right turns, avoid obstacles and securely arrive in your driveway without having to engage the decision making part of your brain.

Mindless spending can be a big road block to saving money. It can keep you living paycheck to paycheck even if you have a decent income. You pay your bills, go about your life and at the end of the month there isn’t anything left. You don’t really have anything to show for it. You just don’t have any money.

If this sounds like your life, you can change your spending habits by imposing a few rules on yourself. Rules are low barriers to spending, but they can be very effective. After following your rules consistently, you can change your spending habits.

Only you can decide what rules will work for you. But here are five that have worked well for others.

  1. Set your savings aside first. Put your savings goal in savings before you pay any bills, buy any groceries, go out to eat or do anything else. Use automatic deposits to savings to take the decision making off your plate.
  2. Give yourself an allowance. Aside from the bills you must pay, in other words, those you’ve agreed to pay by contract, allow yourself a specific amount of money to pay for everything else. Your groceries, gas, entertainment, essentially everything else must be paid from the allowance. The amount you choose should leave room in your monthly income to meet your savings goals.
  3. Only carry cash. Studies have shown that you are more conscious of your spending when you physically experience the cash leaving your hand than when you swipe a card to pay for your purchases. If any cash you carry disappears, carry only enough for purchases you plan ahead of time. If you don’t plan to buy something on a given day, don’t carry any cash or your cards. If you need to put gas in your car, only carry enough cash to fill the tank.
  4. Only go out if it’s an event. Skip the $10 sandwiches scarfed at your desk. Not only will you not remember you spent your money on them, you won’t remember eating them. Save your restaurant trips for experiences you’ll remember, like a date night, a celebration or catching up with a friend.
  5. Give yourself a cooling off period. If you are tempted to buy something that wasn’t in your plan, give yourself 24 hours to think it over. Chances are it won’t be quite as appealing once you’ve turned your back on it. If the day goes by, and you really think the object of your desire is your priority, you’ll have had time to figure out how to rearrange your spending plan.

Find something that works for you. If you are ready to prioritize saving over spending, giving yourself some rules can help you change your spending patterns. Once you get the hang of it, you won’t be able to stop being conscientious with your money. You will know too much.

 

 

Don’t Gloss Over the Cost of College

If you have a high school junior at home, you may have spent the week of spring break touring a few college campuses. It’s the perfect time to kick off the college selection process with your prospective college student.

You want the world to be your child’s oyster, and no one wants to talk about expenses when dreaming about the future. However, as you reflect upon the tours, it is a good time to bring a dose of reality into the equation.

College is expensive no matter where your child chooses to go, but some choices will set you back farther than others. The following chart shows the average cost of college for the 2017-2018 school year from the College Board.

Average Cost of College

While most parents want to send there children to college, only about 57 percent of them save for it. The average household savings for college was only $16,380, according to Sallie Mae. That means the money must come from somewhere else. The following chart shows how America pays for college, also from Sallie Mae.

How America Pays for College

A full 28 percent of the cost of college will be paid for with loans. The average student loan debt per borrower from the class of 2016 was $27,975. At the current Federal Direct student loan interest rate of 4.45% for undergraduates, over the standard 10 year repayment period, payments on loans of that amount will be about $289 per month.

That can be a significant piece of a new graduate’s entry level job income. It’s no wonder that 30 percent of college graduates with student debt move back in with their parents. With money like this on the line, it is important to sit down with your future college student and cover the facts.

Here are five things to discuss with your child before she chooses a school.

  • Tell your student how much you will be able to pay. This includes what you have saved and what you are willing to commit to out of your income. The converse of this is how much should she expect to pay. Only 70 percent of parents of teenagers have discussed their expectations with their child.
  • Outline options for raising the extra money. In addition to student loans and scholarships, your student may be able to raise some money through part-time or full-time work. Taking a gap year to work and save up for school is a reasonable approach.
  • Help your student understand the implications of their choices. Student loans may be hard to avoid, but they can certainly be minimized if you understand your trade-offs. You can calculate the monthly payments given different loan amounts on the Federal Student Aid web site.
  • Provide context for the information. Estimate the kind of monthly salary your student might earn given her career interests. Payscale’s College Salary Report is a good place to start. It wouldn’t hurt to also talk about average living expenses. Career Trends has a cost of living calculator. Don’t forget to show the impact of taxes. How much of her take home pay will be left after student loan payments?
  • Consider starting school at a community college. The average cost per year at public two year colleges is only $3,570 assuming your student can stay at home while she attends.

If you don’t have enough saved to pay for college, think carefully about the impact of paying for school out of your current income. If you are behind in saving for your own retirement, paying for college should not be your top priority. Your child has time to recover from the expenses of school. You do not.

A college education can substantially improve your child’s ability to earn a living. But taking on a lot of debt to pay for it can weaken her financial stability. Help her understand that her choices have implications for her lifestyle after school. Before she makes her final decision, she should know what she’s in for.

 

New vs Used: A Different Angle on Car Buying Advice

In the market for a car? There isn’t much debate when it comes to the question of whether you should buy a new or used one. Most advice you can find says go used. But that is too broad. There is little reference to the cost of the remaining life of the car when discussing the merits of used cars over new ones. This can be a critical miss.

New cars depreciate the moment they are driven off the lot. In the first year the value of the car drops by nearly 30 percent, according to Edmunds. By the time the car is five years old it will have lost half its value. But does that necessarily make buying a car after it has depreciated a better deal?

Even with the depreciated value, used cars valued on a price per remaining mile may not compare well. In a very unscientific survey of local used cars, most actually did not.

The following chart shows 4 cylinder Honda Accords, model years 2014 to 2017, available in the Portland Metro area and listed on UsedCars.com.  These are compared to a brand new 4 cylinder Honda Accord based on an on-line quote from a local dealer.

used cars 200000

Of the used cars currently on the market 70 percent were priced at a higher per remaining mile level than the new car. If you want to own your car for fewer miles, the comparison is even worse. The following chart shows the price per mile if you assume you only want to drive the car until it hits 100,000 miles. Only one of the used cars was a better deal than the new car on this basis.

used cars 100000

Cars have become very reliable. Most can be expected to last for 200,000 miles or more with recommended maintenance. The average driver could easily own a car for 15 years. Whether you plan to own your car until it dies, or you tend to sell your cars when they hit a mileage milestone, what you are paying for the remaining life is an important consideration.

The conventional wisdom to buy a used car instead of a new one may not always be good advice. While you will pay less in absolute dollars, you may not get a better value. Comparing the value given the miles you will be able to drive the car may very well lead you to buy new instead.

Image courtesy of Gualberto107 at FreeDigitalPhotos.net

The 12 Days of Financial Security for Christmas

 

Forget the birds and performing artists. These are the 12 gifts of financial security!

On the first day of Christmas my true love gave to me a fund for emergencies

On the second day of Christmas my true love gave to me a budget for expenses and a fund for emergencies

On the third day of Christmas my true love gave to me a maxed out retirement, a budget for expenses and a fund for emergencies

On the fourth day of Christmas my true love gave to me a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the fifth day of Christmas my true love gave to me a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the sixth day of Christmas my true love gave to me full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the seventh day of Christmas my true love gave to me insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the eighth day of Christmas my true love gave to me a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the ninth day of Christmas my true love gave to me a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the tenth day of Christmas my true love gave to me a sound investment strategy, a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies.

On the eleventh day of Christmas my true love gave to me a long-term care policy, a sound investment strategy, a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies.

On the twelfth day of Christmas my true love gave to me, a pledge to be mortgage free, a long-term care policy, a sound investment strategy, a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies.

Merry Christmas everyone!

Tips for Dealing With the High Cost of Healthcare

Healthcare plans are changing. As insurers seek to limit the increases in their premiums and employers seek to lower their costs for providing this important benefit, those who need healthcare are left holding more of the bag. There are a few things you can do to prepare and limit your costs.

Thanks to the Affordable Care Act, many typical medical expenses are required to be covered by both individual and group healthcare plans. And the summary of benefits has been standardized so you can more easily understand your coverage, copayments, deductibles and out-of-pocket maximum costs.

Unfortunately these seem to be on an unending march upward. Regardless of the plan, your share of the cost of healthcare, on top of your premiums, is growing. The increasing use of Consumer Driven Healthcare Plans (CDHPs), also known as high deductible plans, and the elimination of out-of-network coverage in many cases are two developments that can lower your premium but still drive up what you pay for healthcare.

CDHPs

The number of companies offering CDHPs, or high deductible plans, has grown sharply in the last ten years. An annual survey by the National Business Group on Health found that 90 percent of large employers are offering at least one CDHP, and 40 percent will offer only a CDHP in 2018. Almost one third of all covered employees are now enrolled in a CDHP according to a Mercer study.

While wellness exams are fully covered under all healthcare plans now, in CDHPs you must pay for services beyond wellness exams out of your pocket until the high deductible is met. Often the savings on the premium can at least partially offset the expenses, making the lower coverage worthwhile. But there are a couple of things you can do to further limit your costs.

Take advantage of the Health Savings Account (HSA). The HSA is a tax advantaged way to save for your out-of-pocket medical expenses. Your contributions to the HSA are pre-tax, saving you the equivalent of your tax rate on medical expenses paid out of the account. Your contributions to your HSA are yours to keep, with no requirement to spend them by the end of the year. Your goal should be to accumulate at least enough to cover your deductible in the HSA.

Shop around for your prescription medications. Before you spend your deductible you will pay the cash price for your medications. There can be a shocking difference among the cash prices charged by different pharmacies. So it pays to shop around.

Try goodrx.com to see where your prescriptions are cheapest. One prescription I checked ranged in price from $38 at Costco to $341 at Rite Aid.

There can be substantial savings for name brand, non-narcotic drugs purchased through Canadian pharmacies. One name brand prescription can be bought for $78 for a three months supply vs $497 at the lowest cost U.S. pharmacy.  Check out eDrugSearch.com to find the lowest prices for your medications. If the pharmacy is certified, you can be assured they get the medications from the same manufacturers as U.S. pharmacies.

These pharmacies will be out-of-network, so the cost of your medication may not apply to your deductible or out of pocket maximum, but the savings can make that sacrifice well worth while.

Finally, many pharmaceutical companies offer coupons on your name brand medications to make them more affordable. Check your medication’s manufacturer’s web site for offers.

Loss of Out-of-Network Coverage

Whether your plan is a CDHP or not, increasingly, health insurers are cutting out-of-network coverage. Out-of-network coverage pays providers even if they haven’t negotiated pricing with the insurer. Your share of the cost is higher, but your out-of-pocket costs are still limited by the plan maximums. If there is no out-of-network coverage, you will fully pay for services, and the expenses will not go toward your annual maximum out-of-pocket expenses.

This is a big issue with emergency room services. The ACA requires insurers to cover “reasonable” expenses for emergency care regardless of the hospital you use. However the hospital and the service providers working there, are free to bill you for their fees above what the insurer pays them if they are out-of-network.

Even if you seek care at an in-network hospital, the doctor who attends you may not be an in-network doctor. Hospitals often contract their emergency room physicians from outside doctor groups. If you are attended by an out-of-network doctor in the ER, you could be billed for their service separately, and your insurance would not cover the cost. The practice is called balance billing.

The Commonwealth Fund, a private foundation funding healthcare research, reported that 14 percent of those who had visited the ER received an unexpected bill from an out-of-network doctor. Of those who were subsequently admitted to the hospital, 20 percent received an unexpected balance bill. Seven in ten who had unaffordable healthcare bills did not know their provider was out-of-network, according to the Kaiser Family Foundation.

Consumer Reports offers some advice to help you protect yourself. If a family member or friend accompanies you to the hospital, during registration, they should request you be treated only by an in-network doctor if you arrive at an in-network hospital. At discharge, your companion should request a print-out of all charges in case you must fight the bill later.

Carefully validate your bills against the list of charges. If you receive an out-of-network balance bill, check with your insurer to see if you can get them to pay it as part of the emergency coverage. If not, negotiate with the doctor. If that doesn’t get your bill within reach, file an appeal with your insurer. The Patient Advocate Foundation can provide advice on filing an appeal for free. If all else fails, file an appeal with your state insurance commissioner.

Healthcare has become a consumer nightmare. To avoid bills beyond what you can afford make sure you have savings to cover your share of the costs. Take charge of your medical bills by shopping around for the best prices on medications, and be willing to go to bat for yourself if necessary.

Image courtesy of Serge Bertasius Photography at FreeDigitalPhotos.net

How Much Mortgage Loan Can You Afford?

When my husband, Jeff, and I were in the market for our current home, we took the steps you usually do to make sure we could jump on our dream home should we find it. The biggest part of that was getting pre-approved for a mortgage loan. After submitting all our information to the bank, we got back an approved loan amount that was frankly shocking. There was no way we could afford a mortgage payment that high. What were they thinking?

The amount of loan that you qualify for and the amount of loan you can afford are two different things. In expensive housing markets, like Portland, Seattle, San Francisco and others it’s tempting to spend as much on a home as the bank is willing to lend you, because your dollar just doesn’t go very far in these cities. But that can take away all your financial flexibility and ultimately your financial security.

You may be thinking if a bank is willing to lend you the money, you must be able to afford it. But the bank doesn’t really care about your other goals or even your financial security. They only care that you can make the payment, and they have a formula that gives them confidence you can. The formula is the debt to income ratio, and it is the biggest factor in determining how much money the bank is willing to lend you.

The debt to income ratio is your monthly debt payments divided by your gross monthly income (your income before taxes). Banks generally cap your debt to income ratio including the mortgage payment at 43 percent. Other factors like your credit score and down payment will influence whether they will lend the full 43 percent. But if you have a good credit score and can put at least 10 percent down, you will likely be eligible for the maximum loan amount.

Suppose that you and your partner make $108,000 per year between the two of you. You also pay $1,000 per month in student and car loans. Here is what your current debt to income ratio would be:

Debt to Income

How much mortgage will your bank lend you? Your current debt to income ratio is 11 percent. Assuming that you have good credit and a 10 percent down payment, your debt to income ratio could increase by 32 percent.  That allows for a total monthly mortgage payment, including taxes and insurance, of about $2,850. The bank will likely lend you around $450,000, using today’s interest rates on a thirty year mortgage of 3.63 percent and average property taxes and insurance rates in Portland, Oregon.  The value of the home would be $500,000.

Can you afford that? Let’s see. The following table estimates your monthly take home pay and how much you’ll have left to live on after all your debt payments.

mortgage paymentYour total debt payments take up almost 70 percent of your take home pay. The money remaining after just making your debt payments is less than $2,000. That puts you in a precarious position. If either you or your partner loses your job, you won’t be able to cover all your payments.

The size of your debt payments drive the size of the emergency savings you need to set aside. You won’t be able to reduce your expenses if you lose one of your incomes with payments like these. If both you and your partner make about the same amount of money, you will need to have at least $8,500 in emergency savings. You’ll need even more, if one of you makes more than the other. You should also have enough additional savings to cover your health care plan deductible.

But even if you have emergency savings, the payment is more than you can afford. You will inevitably have maintenance and repair expenses on the home you just bought. The more expensive the home, the larger those bills will be. Some of your remaining income will need to be set aside for that.

A good rule of thumb for maintenance and repair is $1 per square foot. In Portland, a house in this price range will be about 2,500 square feet, so you would want to set aside $2,500 per year or $208 per month and hope nothing needs fixing right away.

This example assumes you are saving 5 percent of your pay for retirement, which isn’t nearly enough. The longer you wait to save more the greater the portion of your income that will need to go to savings. If you’re still in your twenties, you can get away with saving 10 to 15 percent of your pay (around $1,000 per month). But if you are in your thirties, and don’t have current retirement savings, you should be saving 20 to 30 percent of your pay (more than you have left).

And what about your other financial goals? There is no room for them, whatever they may be. With this mortgage, about all you’ll be able to do is make the payments.

Instead of letting your bank tell you how much you can borrow, you need to figure out how much you can afford while still working toward your other financial goals. To keep your monthly obligations at a more comfortable level, your total debt payments should be no higher than 25 percent of your income.

With the income in the example, that allows for total debt payments of $2,250, and a mortgage payment (including taxes and insurance) of $1,250. That translates to a mortgage of $206,000 and a home value of $229,000 with 10 percent down. That’s just a bit more than half what the mortgage company was willing to lend you.

To estimate how much loan you can get away with given the payment you can afford, try this loan calculator. This calculator only provides the loan amount, and doesn’t include taxes and insurance, so you’ll want to leave room for those. However, it’s a good place to start.

Houses are expensive. Their true cost is much more than the monthly mortgage payment, and you have other goals beyond owning a home. Controlling your housing costs is one of the best ways to ensure you can meet those other goals. Base the house you buy on what you can afford, not what your bank is willing to lend you.

Image courtesy of dfrsce at FreeDigitalPhotos.net

 

How to Figure Out How Much You Spend

Try this. Figure out how much you spend in a year off the top of your head. Some things will be easy. You know your mortgage or rent payment. You probably have a good idea about what your utilities and other monthly bills run. Groceries might be more of guess. Eating out, gas, car/home repairs, vet bills and other things all also might be harder to come up with, but stick a number on them. Go ahead. I’ll wait.

ID-100504188

Now, let’s see what you actually spend. Use the following worksheet to calculate your spending from your paycheck.

spending worksheet

This is your spending, because it must be. If you didn’t save it or pay it out in taxes, you must have spent it.

Now this might not take into account all your spending. For example, if you usually get a tax refund, and you spend it rather than save it, you can add that to your spending. If you get a bonus that isn’t reflected in your most recent pay, and spend that instead of save it, add that as well.

Are you surprised by how much you spend? Most people that I’ve done this with are. In my small sample of experience, the difference between how much people think they spend and how much they actually spend can be as much as 30 to 40 percent.

Several years ago, my husband, Jeff, and I did this exercise. He couldn’t believe how much we were spending. He was so surprised he committed to tracking all our expenses transaction by transaction for six months. Guess what? Yes, we were spending that much.

Why should you do this? Well to understand how much you will need to save for retirement, you need to know how much you will be spending every year. Therefore it’s important that you have a good estimate. If your estimate is 30 to 40 percent off, you could be in for a surprise. Even if you don’t have a specific plan for how you want to live when you stop working, chances are you don’t want to give up a lot of how you live now, other than the work part, that is.

You can legitimately expect to spend less than you do now in some areas. For example, if you have mortgage or other debt you’ll pay off before you stop working, you can subtract that from your annual spending. If you’re currently paying for college for your children, you can subtract that as well.

But before you go shaving off expenses, you should consider that some of your current costs could be higher when you stop working. You might spend more on travel or hobbies. You could also wind up spending more on health care.

One way to assure that you spend less in retirement is to spend less now, by saving more. If you’re actually spending a surprising amount more than you thought you were, there is a good chance that you are spending your money in ways that aren’t making you happier. The only way to figure that out is by tracking every expense to see where your money is going.

Just gaining the awareness of where you’re spending your money can motivate you to change it. Any expense where you find yourself thinking “I can’t believe I spend that much on…” is a good candidate for a spending cut. You can also force an expense reduction by having more savings automatically contributed to your retirement account. You’re paycheck will get smaller, forcing you to spend less.

Being aware of how much you spend now will help you prepare for your future. Gaining that awareness will also help get your spending under your own control and put you on a path to meeting your financial goals.

Title image courtesy of Stuart Miles and hour glass image courtesy of Sira Anamwong at FreeDigitalPhotos.net