Remember The Big Picture! Missing The Financial Forest For The Trees
Frugality is a virtue worth cultivating, but there are those of us whose desire to put money away means doing things that result in them missing the bigger picture when it comes to budgeting and savings.
Hoarders Unlimited
On the face of it, ensuring you have emergency funds is sensible. However, it’s time to take a step back and reevaluate your goals when it hampers your quality of life. Signs of stinginess include having few or no friends resulting from a reluctance to go out, or opting to wait 3 hours before eating (though you’re starving) so you can take advantage of a $2 discount at the local diner. It goes penny-pinching and is a sign you’ve gone completely overboard.
If you recognize yourself, or someone you know in this description, you might want to have a chat with a financial planner to put the fears to rest. At the very least, establish a budget (http://www.mint.com/personal-budget-planner/) in order to keep expenditures in check.
Financial Rigidity
Let’s say you have a nifty budgeting tool that allows you to create an expense budget (http://www.choicenerd.com/MoneyMatters.aspx?ThePage=32&TheSub=5) for every single month for the rest of your working life (and probably beyond that). The savings accumulated will stand you in good stead in the years to come, right? Right, yet it can also go horribly wrong if it dictates your life.
Follow your budget, but not to the extent it decreases your value of life. Yes, savings are important, but it’s just to ensure you have money when you don’t earn anymore; not allow the cash to pile up while you try not to pay for anything deemed “non-essential”!
Say you’ve established the following categories for expenses – food, car, entertainment and bills (utilities/credit cards). You have $100 remaining in both “car” and “entertainment” in the last week of the month. A friend asks you to dinner; you refuse because you’ve spent your food budget, but offer to watch a movie with them instead.
Does it make sense deprive yourself to “stick to the budget” when you actually have $200 to spend? Chances are, you might feel so virtuous that you’ll budget to spend twice as much the following month, which doesn’t work very well for the long term.
Accruing Debt to Maintain Savings
One thing that stands out each year is that there are always people who have enough money to pay off debts, but don’t. It’s mind-boggling when savings accounts draw less than 2 percent annually, whereas credit card debts can accumulate interest exceeding 14 percent annually (http://www.principal.com/calculators/ccards.htm)!
There is a tendency for people to separate their money into distinct “piles” that should never “mix”. For instance, Sue may owe $2000 on her credit cards and have $8000 in savings but doesn’t want to “compromise” the latter. It’d make more sense for Sue to pay off the $2000 with her savings and allow the remainder to earn its $120. The amount may seem paltry, but it’s preferable to paying an extra $280 on debt.
It’s advisable to save for up to six months’ worth of living expenses for emergency funds, but clear debt if you can afford it. It’s better to have a month’s worth of living expenses on hand and zero-balance credit cards (for emergency use only) than substantial savings and hefty bills.
Budgeting for Expenses Instead of Savings
People tend to create a budget their paycheck has to live up to, instead of vice versa. Budgeting to save means you can able establish a budget that allows you to live within your means.
Rather than stating “I will spend $200 on food this month”, try “I will save X percent of my pay this month” or “I will contribute Y percent to my 401(k)”.
This means you pay yourself first; you won’t have to worry about money in the bank because it’s already there! It also allows you to worry less about whether you’ll make it to your next paycheck. Whether you save 15 or 50 per cent, it’s fine as long as you’re happy.
Money is not an end in itself; it’s enough if you have enough to live on, afford the occasional treats, and not worry about your retirement.
Related posts:
Excellent information your article applies to Canadians too.