Understanding and Controlling Your Finances

Gaining control

Now let's come back to Bob's one desire: pilot lessons. How in the world is he ever going to accumulate $4,000 given the facts gathered in the previous article? How are you going to achieve your goals? You have to gain control of your finances.

This is why you were asked to choose the one thing you really want right now. This one thing is something that you have to want so badly that you are willing to make a bit of a sacrifice to obtain it. You've got to want it very badly, because what you are about to be asked to do will be impossible otherwise. What you need to do is cut some of your expenses in order to save money. This is hard, I know, even though it sounds simple. It is sort of like the famous dieting advice: "If you want to lose weight, you need to eat less and exercise more." What could be simpler than that? It is hard to save money because it is so easy to spend it.

None the less, Bob is willing to give it a shot. Bob looks at his expenses (see the previous article). There is one easy option: cut that entertainment number significantly. Say he were to cut the entertainment number in half: he could save $210 each month without effort. Since Bob is actually in the hole $226 each month, he could reduce the hole to a mere $16 per month by cutting the entertainment budget in half. Here are some of Bob's other options:

Get rid of the cell phone
Get rid of the cable TV
Move into a different apartment with a room mate
Trade in the new car for a used car worth half as much (thereby lowering insurance costs as well)
Sell the computer
Sell off some furniture to raise cash
The article on frugality included in this series may give you some other interesting ideas to help you get started down this road

Let's say that out of all of those options, the only one Bob is willing to try is getting rid of the cell phone. He cannot live without ESPN. He has eight months left on his lease. He loves his car and cannot part with it. And there is no way he is selling his pit group.

So let's look at Bob's entertainment expenses and see if there is room for savings. This is going to be hard. Speaking as a person who once went out to lunch, and often dinner, every single day, I know how hard it can be to give up lunch. It makes you look like a fuddy duddy to bring a lunch to work every day. It is too much work in the morning to make a lunch. People ask you to go out and you don't want to say "no." And so on. There are two things to do here:

Keep your eye on the prize. On the inside of your front door, and on your bathroom mirror, tape an index card that states your ONE true desire. In Bob's case, he would write "Pilot License" on two index cards and tape one on his bathroom mirror and another above his door knob. He might even put a third index card in his wallet to remind him of his desire every time he spends money.
Start slowly and compromise with yourself. There is no way Bob is going to give up a two-can-a-day habit, for example, cold turkey.

We are going to rely on your desire for the ONE thing you truly want to carry you through the hard times that are to come.

Let's look at Bob's expenses again:

Rent                          700.00
Car payment                   300.00
Gas, oil change, etc.          70.47
Power bill                     76.47
Phone bill                     37.16
Groceries                     134.19
Cell phone                     42.76
Cable TV                       49.17
Computer                      122.81
Music                          25.66
Entertainment, lunches, etc.  421.94
                             -------
Total                        1980.63
Other expenses                 96.21
                             -------
Grand Total                  2076.84

If you look at it closely, the primary area for expense cuts is in this region - the junk:

Cell phone                     42.76
Cable TV                       49.17
Computer                      122.81
Music                          25.66
Entertainment, lunches, etc.  421.94
                              ------
Total                         662.34

If Bob could eliminate the cell phone, eliminate the music, cut the computer expenses in half, and cut the entertainment in half, he could save a total of about $340 per month. Two questions to ask are:

Will it help?
Can it be done?

You need to look at your own expenses, go through the same analysis, and ask the same questions.

The answer to Bob's first question, "Will it help?" is YES, of course it will. If Bob could free up $340 per month it would get him to the point where his Visa bill would stop growing, he would be able to handle unexpected monthly expenses, and he could put about $120 in the bank each month toward his goal.

The answer to the second question, "Can it be done?" is less clear. Can Bob (and you) really change his lifestyle and save $340 per month? The answer is YES, and the sub-answer is it will work a lot better for some people if they start slowly. Some people are able to make rapid strides, once they clearly see their true desire. But a majority of people have to make the change over time. So what can Bob do to change his habits slowly?

Let's start with the soda-and-cookie habit, which costs about $60 per month. This one is easy to change. If Bob were to buy his supply of soda and cookies at a grocery store or Wal-Mart rather than from the vending machine, he could save about $40 per month and still consume the same amount.
Next tackle the lunch problem. It is costing Bob about $130 per month to eat out. By bringing lunch just twice a week it would save $50 per month.
Cutting back on the weekly movies with Jenny could save $16 per week, or $64 per month. Replace them with a video at home, a walk in the park, a night at the art gallery, etc. Or keep the movie and replace dinner out with dinner in.
And so on…

The other problem most people have, and this explains the random music and computer expenditures seen in Bob's expense summary, is the credit card. It is too easy to whip out a credit card to buy something whenever the mood strikes you. This is fine if you are living a random lifestyle, but to get what you REALLY want this sort of behavior has to end. You can take several steps:

For those with a lot of control, simply discipline yourself.
For those with less control, wrap your card in a sheet of paper and write your one true desire on the paper. Bob would write "Pilot Lessons" on the paper. That way you are reminded of your goal every time you buy something frivolous. If you find that does not control you enough, wrap the card in paper and then in lots of tape, so it is incredibly annoying to use it except in emergencies.
For those with no control, cut up your credit cards and eliminate them completely.

You have to do something to break the bad habit of random spending and replace it with consistent saving toward your goals.

Let's say Bob does this. The first month is kind of rough, but by the second month he is in a groove and accomplishes the following:

At the beginning of the month he deposits, just like it were any other bill he had to pay, the $100 monthly average fee for "regularly but unnerving expenses like car insurance" into his savings account. It is important that you actually do this, and treat it exactly like a bill every month, to get it under control.
During the month he actually cuts his expenses through a combination of buying his soda at the grocery, eating out less, eliminating the cell phone, not purchasing random "junk," etc.
Even though he charged nothing new on his visa card for a month, he has to pay $30 in interest on the outstanding balance and $20 more to meet the minimum monthly payment.
He actually puts $50 into his savings account at the end of the month. For the first time in an incredibly long time, Bob spent less than he earned, and actually saved a little (although not the $120 he had hoped for).

Now, $50 is not a lot of money. In fact, at that rate it will take Bob something like 80 months, or almost 7 years, to get his pilot's license. It is really hard to get excited about a seven year wait. Really really hard. In fact, nearly impossible. So he can do one of four things:

Give up and go back to his old ways. This would be a mistake, because if nothing else this exercise has gotten him to the point where he is living a life where expenses now balance with income and he is able to handle ALL of his expenses rationally.
Do nothing and wait 7 years. There is certainly nothing wrong with that.
Wait for a raise, a bonus, "found money" or a tax refund and capture the entire amount into the savings program rather than blowing it on junk. For example, if Bob gets a 5% raise this July as expected, he will have about $100 extra income after taxes. If he deposits that money directly into a savings account rather than spending it, it reduces the wait to just over two years.
Look for other ways to save money. For many people, the first step is the hardest one. Once they taste their ONE TRUE DESIRE and start saving for it, other ways of saving are easier to find. For example, if Bob REALLY wants his pilot's license, then a roommate might look a lot more palatable. That could save him $300 per month or more, and let him get his license in less than a year. Or he may find he doesn't mind brown-bagging it every day. Or maybe he can cut the cable TV service agreement and read more. A lot of things will change their value once you discover that they stand in the way of more important things, like a pilot's license.
Find other ways to earn money. Maybe you can take on a part time or weekend job, have a garage sale, etc., to raise extra cash. I once knew a guy in college who wanted to learn to fly a helicopter so badly that he signed up for the nuclear Navy program. This program paid him $1,000 per month in cash while he was in school, and he used that money to get the helicopter lessons. A true story. Of course the other side of this deal with the devil was that he had to also spend four years underwater for six months at a time once he graduated.

Bob does have other options. It turns out he also has other responsibilities he is not considering. We will examine these in the next article.

10 action items for you to try

If you want to try following in Bob's foot steps, here is a set of action items for you to try:

Identify ONE thing you truly desire, and that you will be willing to make sacrifices for to achieve. See the previous article for how to arrive at this item.
Tape a note card on your bathroom mirror and on your front door to remind you of this item. Maybe put a piece of paper in your wallet as well. Imagine yourself owning or having this ONE thing.
Create an exact record of expenses over the next 30 days as shown in the previous article.
Categorize your expenses, as shown. You may be amazed at how much money simply slips through your fingers right now.
Determine your "hidden" monthly expenses: car insurance, taxes, dues, membership fees, gifts, etc. and figure out how much you spend on average per month for these expenses. See the hidden expense calculator in the previous article for details.
Look for expenses that you can cut and plan on how you will cut them. It may be helpful to start slowly. Determine how much you will be able to put into savings each month given these cuts.
Open a savings account. Each month, when you are paying your other monthly bills, write another check to cover your hidden expenses and put it into savings. When you get a bill in this category, pay it from savings.
Conceal or cut up your credit cards to help eliminate random purchases
Deposit your excess money each month in savings
Whenever you get unexpected money - a raise, a bonus, a refund, a present - put it directly into savings to apply toward your financial goals.

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