Beating Broke

Personal Finance from the Broke Perspective

Are You Suffering from Optimistic Financial Denial?

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Some people suffer from a certain form of optimistic financial denial.  They look at part of someone else’s circumstances and use that to justify their own way of life, without considering the entire picture.  Take, for example, a relative I have that I will call Stacey (not her real name).  Stacey is nearing retirement, and she doesn’t have quite as much socked away for retirement as she would like because finances were very tight when she was young and she and her husband just didn’t have the extra to put away.  Her husband died young, and she entered the full-time work force in her early 40s, which is when she began putting away for retirement in earnest.

denialStacey isn’t one to worry.  She tells herself that she should be able to get by just fine with the money she will have in retirement and uses the rationale first, that you never know how long you will live, and second, that her parents did just fine on a limited retirement.  She is firm about retiring at 62 and cannot be persuaded otherwise; she is not interested in working part-time early in her retirement.

Regarding Stacey’s first point, it is true that you never know how long you will live.  I have, unfortunately, known plenty of people who retired and died within a year or two.  Others died before they were even able to retire.  However, Stacey’s parents lived to be 88 and 90, respectively, so if she takes care of herself, there is a good chance she will live well into old age.

Second, her parents did retire on a relatively small retirement savings, but they made some serious adjustments to their lifestyle.  Here are some of the smart financial moves they made to make sure their retirement nest egg stretched:

  • they immediately sold their paid for house, freeing themselves from the expense of upkeep, property taxes, and heating and cooling a large home
  • they took some of the money from the house to buy a fifth wheel trailer, and they lived there during the summer months on their children’s property
  • they took some of the money and bought a trailer in a retirement trailer park in Florida.  They were then only responsible for monthly trailer park fees and heating and cooling
  • they took the rest of the money and invested it
  • they only went out to eat occasionally, usually when their children were visiting them in Florida
  • they sent each of their 38 grandchild a crisp dollar bill for their birthday and at Christmas

On the other hand, here is where Stacey is:

  • she still owes $70,000 on her 1,600 square foot home
  • she has no immediate plans to sell, which means she is paying thousands of dollars a year on property tax, maintenance, and heating and cooling costs
  • she goes out to eat several times a week and plans to continue doing so when she retires as that is her main way to socialize
  • she only has 3 grand-kids, but she spends $100 to $125 per child per year for Christmas and birthday presents
  • she would like to travel, including traveling internationally, when she retires

While Stacey is right that her parents did not have a large, comfortable retirement, she is only looking at part of their financial picture.  Her parents were willing to make significant changes to downsize their expenses so they could live comfortably on the retirement they did have.  In fact, when her last parent died at 90, there was still enough left over to give a small inheritance to each of their 9 children.  To have a comfortable retirement of her own, Stacey should also downsize her lifestyle.  It is the only way to make the money stretch as her parents did.

When it comes to your own retirement, or financial planning in general, it does little good to compare your finances to others.  Ultimately, it can lead to a form of optimistic denial that can lead to considerable financial stress in the future.

Do you know anyone who suffers from financial optimistic denial? 

photo credit: robynejay

Evaluate the True Price of Dining Out to Save Money

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Our culture seems to be one that is centered around dining out.  When you are younger, you meet friends at a restaurant for a night out and to chat.  As you get older and have a family, you may go out to eat because time is short between working, raising a family, helping with homework, and doing housework, among other things.  Some people are extreme and eat out for every meal because they do not like to cook or have not learned to cook.  This is so commonplace in the American culture, that we don’t often question these expenses.  Instead of just assuming that going out to eat or grabbing take out is a necessity, evaluate the cost of your restaurant purchase.

It has been a stressful day, and you would like nothing more than a night off from the kitchen.  You decide to buy take out for your family of 4 and spend $25.  True, you did buy yourself a night out of the kitchen by avoiding cooking and washing the dishes that you would use.  Yet, ask yourself, would you have paid $25 to hire someone to come to your kitchen for an hour that night, make a meal and do the few dishes that you used?  No?  Well, that is essentially what you did by picking up take out.

Riced out.

I use this way of thinking frequently now to save myself from spending money eating out.  My family ate out by habit until I started evaluating the true cost.  I recently quit my job and have been doing freelance work from home.  Several of my smaller jobs each pay $20 a month.  Recently, I wanted to go out for sushi, which is a weakness not only of mine, but of my husband and kids.  When our family of 5 goes out for sushi, it typically runs us $55 to $60.  I asked myself if one meal of sushi was worth doing 3 additional small jobs to recoup the $60?  Although the jobs do not take much time weekly, I would have to do the three jobs for a month to recoup the money spent on sushi.  Was it worth it?  No.  We did not go out that night.

The idea of evaluating life energy for consumption is not new.  It was the subject of the book, Your Money or Your Life by Joe Dominguez and Vicki Robins.  The overall principal is to look at the amount of time and money it would take to recoup an expense.  I try to use this in my life normally, but I find it especially effective when considering the often inflated price of dining out.  Take the sushi dinner for $60—my family’s weekly grocery budget is $100.  Is that one meal worth half a week’s groceries?  Definitely not.

I am not saying we shouldn’t go out.  My family still enjoys going out, but I am suggesting we should stop thinking of dining out as something routine and to be done daily or several times a week.  Instead, think of dining out as a treat and something to be planned and enjoyed.

photo credit: dslrninja

5 Creative Ways to Save

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Piggy BankCommon financial advice is to pay yourself first; set aside your own savings before you pay any bills.  Yet, what happens if you don’t have enough money to pay yourself first?  What if you can’t set aside $100 or more each month?  How can you continue to save for your goals whether they are establishing a $1,000 emergency fund as Dave Ramsey recommends, saving for a replacement car so you can avoid a car loan, saving for a down payment on a home or simply saving for a vacation?

My husband and I are temporarily in a tight financial situation; he is finishing his Ph.D. and I am staying home to take care of our three children while doing freelance work at night.  While I expect our financial situation to improve in a few months when my husband graduates, we are now in the situation where we have little to save, yet we would like to begin to save for a down payment for a house.  We have found unusual, creative ways to save.  Utilizing these methods won’t get us to our 20% home down payment, but they offer a great way to start saving, and we will add to the savings when our income increases.  If you are trying to save more, try some of these strategies:

  1. Save all of the $5 bills that you get.  You are at the grocery store and you buy $33.22 worth of groceries; for your two twenties you give the cashier, you get back one single and one $5 bill.  Put that $5 bill into savings.  My husband and I have been doing this since June 1, and already, in less than three months, we have saved $175.  That is a savings rate of approximately $60 a month.  More importantly, that is $60 we didn’t think we had to save.  Sometimes it is painful to put that money aside, but in the long term, it is worth it.  Of course, this method works best if you routinely pay in cash.
  2. Save all of your change.  This is a similar strategy to the $5 bill strategy, but it is a little less painful because you will be saving less overall.  However, your savings will still add up quickly.  My husband and I used this method a few years ago to save for a weekend vacation.  We saved $300 in a year’s time.
  3. Save one dollar a day.  Another blogger I read was told at her wedding that she and her husband should save one dollar a day.  She and her husband did just that, and at their 10 year wedding anniversary, they had $3,650 saved, which they used on a 4 day second honeymoon.  Talk about a painless way to save, but what a great reward at the end.
  4. Save the money you would have spent on an impulse purchase.  Do you really want a pop when you are checking out at the grocery store, but you resist the urge?  If so, take the $1.59 you would have spent and put it in your savings account.  You would have wasted it on an unhealthy, impulse purchase; why not instead use it to your benefit and put it in your savings account?
  5. Have $5 or 10 automatically withdrawn from your pay check.  Even if money is very tight, you can probably sacrifice $5 a week.  If that is the case, arrange to have the equivalent of $5 a week automatically withdrawn from your paycheck and placed in your savings account.  Over the course of a year, you will have saved between $260 and $520.

Of course, there are many ways to save when on a tight budget; you just need to get creative with how you do it.  Also, don’t worry that the saving method you choose is not adding up quickly enough.  Saving something is much better than saving nothing, and once you become disciplined to save money regularly, as your income increases, you can save more.

photo credit: Carly Jane1