Your Money or Your Life: A Practical Guide to Managing and Improving Your Financial Life - Softcover

Alvin Hall has been training and counseling a wide range of financial service companies and institutions in the United States and around the world for the last twenty years. He lives in New York City.

YOUR MONEY OR YOUR LIFE CHAPTER 1
Money and Your Mind

Understanding and Taking Charge of the Ways You Spend

The Secret Meanings of Money

The key to making better short-term and long-term choices about your money begins with understanding your own approach to earning, spending, saving, and investing. To do this, you need to uncover the secret meanings that money, risk, and reward have for you. Once you’ve done this, you can begin developing a more positive and enriching style of financial management that you can really live with through easy and difficult financial periods.

A crucial step to understanding your own attitudes toward money is to recognize how you really handle money. The bad news is that many people are subject to self-delusions about their spending habits. The good news is that there’s a simple process you can use to do away with your distorted views no matter what they are. All that’s required is effort—and the will to humble yourself and face reality.
Your Daily Spending Diary

Begin by keeping a daily diary of your income and expenses for one month. No one—and I mean no one—is really capable of accurately remembering everything he or she spends money on from one day to the next, let alone from one week to the next. So keeping the daily diary or journal of your spending is important. As the poet Robert Frost, who had serious money quarrels with his in-laws, once put it:

   Nobody was ever meant
To remember or invent
         What he did with every cent.

So if you try to write down your money habits long after the fact from memory, I promise you that the picture you paint will be inaccurate. And it will probably be flattering— deceptively so.

And why an entire month? Because anything shorter doesn’t represent a serious commitment to change and is unlikely to capture a typical cycle of a person’s earning and spending. A spending diary for a week or two isn’t long enough to provide a real picture of how you spend.

Use a page for each day and keep them in a notebook. As you list everything you spend money on, record as well how each transaction made you feel and also a brief summary of what you did that day. You will find a sample form on page 12 for such entries. Feel free to make thirty photocopies to use for an entire month. And see the sample on page 13 of what a filled-in diary page might look like.

Record credit card spending at the time you make the purchase, not the day you pay the bill. Create a checklist so you don’t overlook online, telephone, or catalog purchases. Make a note of the day you pay mortgage, utilities, insurance premiums, and other bills.

If you’re married or have commingled finances with a partner, housemate, or family member (in this book, I’ll refer to all these situations as “partnerships”), you and your partner should each keep a separate diary. Then combine the information from each diary to form a single document.

If your partner refuses to take part in the process, then so be it. Don’t let that stop you. Go ahead and create your own diary. You’ll benefit anyway, and so will your partner. When your partner sees how much more organized and improved your finances have become, he or she may be inspired to join you the next time.

Use a notebook or a journal that is easy to carry. You’ll need to bring it with you wherever you go and record the expense immediately—otherwise you’re apt to forget. If toting the diary around feels awkward, try using 3 × 5 index cards, Then, at the end of the day, fill out your diary from the note card entries.

Does this sound like “too much trouble”? Well, that feeling is your first psychological checkpoint. If you believe you don’t have fifteen to thirty minutes available to write down your daily expenses, you’re building up excuses for remaining financially disorganized and out of control.

YOUR DAILY SPENDING DIARY



YOUR DAILY SPENDING DIARY
Date: June 15, 2009Sample
What You Did: Bus to work. Lunch with Susan. After work had a quick bite at a restaurant with Geoff. Home at 8. Watched television and went to bed.

How You Felt: Had a little spat with boss at work—what a pain! But felt better after talking with Susan at lunch. Great movie on TV. Looking forward to date with Trevor tomorrow. Life’s not so bad after all!
What You Spent: What It Cost: bus fare to work $ 2.00 coffee and roll   4.00 gasoline fill-up 30.00 lunch—sandwich, salad   8.95 dinner with friends (wine) 21.35 magazine   2.95 bus fare home   2.00 jacket from dry cleaners   4.00 TOTAL SPENDING FOR THE DAY:     $ 75.25 What Your Daily Spending Diary Will Teach You

The diary exercise will make you keenly aware of the money that seems to “disappear” because we mindlessly spend it and have nothing to show for it. When I went through the exercise, I was stunned to realize how much I spent on magazines and newspapers. Whenever I had time to kill waiting for a train or on my way to an appointment, it was so easy to buy a glossy or two to pass the time. Do that three or four times a week, and twenty or thirty dollars can vanish with little trace.

Eating out is another costly habit that easily gets out of control. The once-a-week dinner out easily escalates in price. One glass of wine becomes two glasses, then half a bottle; the occasional dessert becomes routine. Soon the fifteen-dollar meal costs twenty-five dollars, then thirty. And it doesn’t stop with a weekly dinner. You’re so busy that you find yourself ordering in once you get home or grabbing a take-out meal from the nearest shop rather than cooking at home—first one day a week, then two, then three. The same happens with lunch. And then there are the quick snacks, the coffee breaks with pastry, the weekend brunch. The damage to your bank account can be enormous. (And it doesn’t help your waistline, either.)

Three responses. I’ve found that most people who really pursue the diary exercise react in one of three ways.

1. Sudden surrender. Some are so shocked or disturbed about what they learn that they throw up their hands. Often they abandon the diary after just a few days. They quickly rationalize their failure to keep the diary by saying with a dismissive gesture, “Oh, it really doesn’t matter.” This reaction amounts to a refusal to take control and responsibility over your own financial life. In fact, it sometimes goes along with an attempt to blame others for your money woes: “Oh, I’d do better if it weren’t for my wife—she’s the one who really goes wild with the credit cards.” “It wouldn’t matter how much I spend at the hairdresser if only my husband made a decent salary—he’s the real problem.” “The trouble starts with the kids—they never stop begging for the latest toys they see at the mall or on television. How am I supposed to say no?” If you fall into this category, don’t expect sympathy from anyone. Whatever the causes of your money woes, they are your problems, and only you have the power to fix them. The key question is whether you have the will to act.

2. Rapid turnaround. Others find themselves learning about their money personalities and beginning to take control of their habits even during their diary exercise itself. By the end of a month, they discover—almost without trying—that they have a little more money left over, that they’ve cut back on needless or wasteful spending, and that they’re beginning to look forward to long-range saving and spending plans. These people were probably psychologically strong and well-disciplined to begin with, and simply unaware of how they related to money. Knowledge is the key to success for these people.

(Something comparable often happened among the people selected to appear on my television program. During the month or so that elapsed between the time they were chosen to appear on the show and the time we began filming their story, their financial problems miraculously started to improve. Simply paying attention to where the money goes seems to make a measurable difference. Around the production office, we called this the “Your Money or Your Life Effect.”)

3. Thoughtful analysis. The third group works through the entire diary exercise without analyzing their behavior or making any changes until the end of the month. For them, the diary process is a purely mechanical one. They jot down their spending each day without reflecting on it and forget about it until the next day. Only after a month do they sit down to add up the totals and compare what they think they’ve been doing with the reality of their spending. Then, having seen how bad their spending habits really are (whether in one or two selected areas or across the board), they make a plan for improvement. For this group, change is a matter of reflection and deliberation.

Whichever group you fall into, your reaction to the diary exercise will give you an indication of how you tend to deal with money issues. It’s a subject we’ll be returning to over and over again in this book.
Your One-Month Financial Record

After you’ve faithfully recorded your spending for a month, it’s time to take the next step: creating Your One-Month Financial Record. This is a record and analysis of how you’re actually spending your money, based on the diary entries. This record will become the basis for creating a budget you can use to improve your financial habits and money status over the next year.

To perform this analysis, you can use the forms on pages 20–24. Again, feel free to make a photocopy of the book pages for this purpose. Or, if you prefer, use any of the popular spreadsheet software programs. They can easily be adapted to this purpose, and they have the advantage of making calculations instantaneously.

If you use the forms we provide, you’ll see that the first page is for listing your sources of income. Most people have just a few income items each month. They’re usually easy to remember and keep track of. Enter income items for the same month as your spending diary on page 12. Only enter money you actually received during the month. And use actual take-home (a.k.a. net) amounts rather than “gross” or “pretax” amounts. (If you’re self-employed, estimate the amount you’ll owe in taxes and deduct that. Enter the remainder as your income.)

Next, fill in the expenses pages. To do this, go through your monthly diary entries line by line. Sort your expenses into categories as shown in the form on pages 20–24. Read through the whole form before you get started. Notice that the various expense categories are numbered 1 through 58. (Don’t be frightened. Not all categories will apply to your situation.) This is designed to make it easier for you to match up your diary entries with budget categories. You can flip through the pages of your diary and label each entry with a number for the corresponding budget category. For example, when you find a diary entry for mortgage payment or rent, label that with the number 1. Then use a calculator or spreadsheet to total the amounts you spent in each category.

Alvin says ...
Never count cash advances from credit cards, bank overdrafts, home equity loans, or unused balances on credit cards as “income.” These are not forms of income, as we’ll discuss in more detail in chapter 2. You’ll seriously distort your financial picture if you think of them that way.

Filling in the spending record form will be a fair amount of work, but most people get it done in an hour or less. (If your spending diary is orderly, that will make it much easier and faster.) Once the form is complete, you’ll be ready to study it to get a better handle on your real money habits.

Tweak the numbers ... but with care. If you know that this month is not typical in some way, you may want to adjust your figures in particular categories. For example, if you stayed at home for a week because you had the flu (and therefore ate at home all week, spent nothing on entertainment, etc.), take that into account by increasing your spending in those categories to represent a typical month. By the same token, if this month’s spending includes a few hundred dollars on car repairs (something that happens only once or twice a year or so), reduce your spending accordingly. But beware! Don’t fall into the trap of convincing yourself that the bad habits uncovered by your diary are just a one-month aberration. We all tend to do this—like the golfer who’s convinced that the round of 85 he shoots once a year is his “real” game, while the 100 he shoots every other Saturday is due to bad luck. If you fool yourself in this way, you’ll miss the chance to really learn something from your diary exercise.

Analyzing your spending. Your end-of-the-month analysis should focus on these questions:

· What percent of your total income are you spending on housing, food, transportation, clothing, entertainment, and each of the other categories?

· What percentage of your total income do you spend on essential (nondiscretionary) items? What percentage do you spend on discretionary or impulse purchases?

· How does this breakdown represent your personal priorities?

· Can you make the changes that will enable you to accumulate money in savings and build the financial security you need to achieve your long-term goals?

Naturally, if you’re spending more money in a month than you bring in, red warning flags should be hoisted immediately. But there may be other signs of trouble as well. If you’re spending more than you ever realized on categories like entertainment, drinks, toys, and hobbies ... if spending on luxury items is making it hard for you to find the money for necessities ... if unplanned spending (“impulse purchases”) eats up a significant portion of your monthly income—then it’s time to take better control of your money. As it is, the gremlins are in charge, which means that your long-term needs and goals can only suffer.

Day-to-day patterns. Look for time patterns to your spending, earning, and saving. On Fridays, do you have a habit of buying four or five CDs or spending twenty-five dollars on cocktails? When you shop for groceries, do you buy a lot of food that looks good but ends up sitting in the refrigerator until it goes bad and must be tossed? Do you routinely buy a new item of clothing on payday because you feel you deserve it (although in truth you’ve done nothing special during the week)? Do you take your kids shopping or buy them gifts the Saturday after payday to compensate for your feeling guilty about being away at work? How is your spending affected by your moods? Are you more reckless in the middle of the week? Where are your money vulnerabilities?

Mental patterns. Also look for psychological patterns to your spending, especially your excessive spending in particular categories. When do you get out of control? Perhaps it’s when you get paid. Perhaps it’s when you have an argument with your spouse, your partner, your parents, or your kids. Perhaps it’s when you have a “bad day” at work or school or home (and feel you “deserve” a treat). Perhaps it’s when you’ve accomplished something—finished a project at work, or received a superior evaluation from your supervisor—and want to “celebra...