Money and You: Course Notes

Generally, when you are unable to make the 50-30-20 plan, or similar plan, work, it is because your spending habits overpower how much income you have. There are a few things you can do to help get your budget in line.

- First, making more money may be an option. Ask your boss for a raise. Look around for a better-paying comparable job. Take on a small side-gig. You don’t necessarily have to throw your arms up and accept not making enough. I know this is easier said than done, but it is a real possibility.

-Suppose you are over-spending in needs but not in other areas. This is fairly common with the current cost of housing. This scenario is tougher, and it is one reason why the 50-30-20 isn’t right for some people. It may require you to make some big changes in your life. Getting a roommate if rent is too high, carpooling to work to save on gas, re-housing a pet to a good home if pet supplies are burdensome, shopping around for better insurance rates, changing Internet providers are all examples changes that could help your needs spending down.

-Suppose you are saving more than 20% of your income. This may not be a bad thing if you are meeting your needs and feel satisfied with how many wants you’re able to fulfill. However, if you are saving so much that you are not paying for your needs or are feeling unsatisfied with what wants you’re able to have, it may be ok to allow yourself to spend more. Of course, depending on your savings goals, saving more than 20% may be a necessary part of the plan.

-If you find yourself over-spending on wants and under-saving, I highly recommend setting up automatic deposits or transfers into a long-term savings account that is separate from your spending/checking account. This effective forces you to put part of your paycheck aside for savings and giving you a smaller amount to spend each month.

-Pay-day loans. Pay-day loans are short-term, high-interest loans. For example, if you’re paychecks are usually $1,000 bi-weekly, the pay-day loan place may give you $900 now in exchange for your $1,000 coming in two weeks. Under that agreement, you are agreeing to a loan with 1448% interest. For context, a mortgage loan is currently around 6%. Here is the real evil about these places. People go to these places because they’re broke and need cash to pay bills immediately. Sacrificing a solid chunk of your paycheck often isn’t really manageable. For example, if you are unable to pay bills with your $1,000 biweekly checks, then how could you do it by giving a pay-day loan place $100 on top of your bills. Many people are able to payback their short-term loan with their paychecks. When this happens, they owe a pay-day loan company money under an extraordinarily-high interest rate that grows exponentially. What you owe becomes completely unmanageable within just a few weeks. Never take out a short-term cash loan (either from a pay-day loan place or a cash-advance on your credit card). Grab a casual job stocking shelves at a local grocer. Call your landlord and explain the situation to try to negotiate a short extension on rent. Sell something you’re not using much. Please don’t resort to a short-term cash loan.

-Gambling and lottery. Just don’t gamble. We’ll discuss the psychology of gambling in a later week, but for now, just acknowledge that gambling is not a valid way to get cash you need to pay bills. You’ll just make your situation worse.

When you need to pay for needs immediately, there are some methods some people turn to. However, these methods can be tricky to navigate and may not be worth it.

-Debt consolidation. You have likely seen commercials for debt consolidation. These are for companies you essentially take on your various debts by paying them for you in exchange for regular payments from you. Debt consolidation can be an option if you have a lot of high-interest debt. In that case, you are effectively re-financing your debt at a lower rate. The issue is that many of the companies that advertise this service have predatory tactics. One common one is that in exchange for this service, they tack on a large “fee” to what you owe (on top of the interest they get from you). Another tactic is putting you on a variable interest rate in which you start with a low rate to them, but that rate grows over time. Another tactic is to advertise low monthly payments, but extend the length of those payments drastically. If you find yourself in a great deal of high-interest debt, research ways to lower the interest rate on what you owe. If you cannot refinance a loan, debt consolidation may be a resource. However, please research options carefully. In general, try to go through a local, trustworthy bank rather than a financial institution.

Many people do not have a set salary with near-identical paychecks each week. For example, people who operate their own small business may see different amounts of income month-to-month. Not being able to predict how much you’ll make in future months makes budgeting more challenging. Here are a few ideas to consider when building a budget.

-If possible, try to determine an “average” or “typical” month in terms of income. If you can be fairly sure that, on average, you have a certain amount of money coming in, it is very possible to make a budget. The issue is that in months of higher-than-average income, you have to set the extra money aside as “income” in lower-than-average months. For example, suppose that you determined that, on average, you have $3,000 in income. Let’s say one month you earned $4,000. Then your income for the month is $3,000 that can be used for your needs, wants, and savings. The extra $1,000 is not income for that month. It is set aside, and when you have a month of lower income, say $2,200, you have that saved $1,000 to make up the shortfall. It takes more discipline, but it is definitely manageable.

-Do not consider “bonuses” as part of your regular income. Some jobs pay bonuses at the end of the year. If you start to think of an expected bonus as part of your income, you may find yourself in a tricky situation when a bonus comes in lower than expected (or not at all).

-Even with the best of planning, sometimes someone with inconsistent paychecks find themselves in a long drought of work or productivity. In a circumstance like this, you may want to consider a career change or be willing to do contract work like Uber or Task Rabbit.

We’ve mentioned “rainy-day” funds, but we haven’t really talked about them. A “rainy-day fund” is an easily-accessible pot of money that is used for unexpected expenses. Needing to pay for an unexpected large medical insurance deductible, a veterinary bill, or a car-repair bill are all examples of infrequent, unexpected costs that you don’t include explicitly in a monthly budget. A rainy-day fund is a fund to pay for these expenses. Some people refer to their rainy-day fund as a “cushion.”

If you do not have funds available to pay for unexpected bills, you may end up going into debt, which will increase how much you spend each month in bills. It is not recommended to withdraw funds from long-term accounts like retirement accounts for unexpected bills. It is best if you have a separate account for a rainy-day fund.

Generally, it is recommended that a rainy-day fund has about six months worth of necessary expenses. For example, if you determine that a normal month requires around $2,000 in “needs” like rent and food, then you should aim to have rainy-day fund of $12,000. The reasons for this high amount are many. If you lose your job, it can take months to find another one. Veterinary and car bills can range in the thousands of dollars. A lot of life can happen, and it can happen all at once.

It is usually recommended that you start building a rainy-day fund before other kinds of savings. Certainly focus on a rainy-day fund over saving for a vacation. Of course, it is appropriate to put aside money in both a rainy-day fund and a long-term investment fund simultaneously.

One important note is that many people think of a “rainy-day” fund and an “emergency” fund as separate. That is fine. They have the same function - they are both to pay for unexpected bills or costs. The main difference is the amounts in each. I just think of these as one “rainy-day” fund.

I was going to include this as a way to help balance your budget, but it is so important that it gets its own little subsection.

Did you know you can negotiate some of your monthly bills?

First, a little background on business in the US. If you ask your parents or grandparents about how much TV cable subscriptions used to be, you’ll find that the costs of these services has grown far more than any other cost in the US, including housing. Most of this rise in cost in nothing but pure profit to the companies. Have you ever wondered why Time-Warner and Comcost never provide service in the same area. (If you live in an area service by Comcast, have you even heard of Time-Warner? Or vice-versa?) That is because they have a back-door agreement not to compete with each other. By not competing, they do not need to compete for your business by offering competitive prices. If you’re thinking that this is a monopoly and shouldn’t be allowed, you’re half right. It’s called an “oligopoly,” which is perfectly legal in the US and forms the foundation of many industries like cable, phone providers, airlines, baby formula, and music. It’s all rather depressing. However, it means that for services like these, companies can offer you their services for much cheaper and still make a hefty profit.

Here is a rule of life. If a company is willing to offer you a product of service at a certain price for a month or year, they can do so again for the next month/year. (Free-trials are not included.) If your cable company offers you an “introductory rate” for a year, they will be willing to offer it again the next year. Yes, there are exceptions, but it is a good rule to live by. A company would rather make some profit off of your rather than no profit.

Here is how you do it. Simple call or text with a customer service representative and ask to renegotiate your service plan or you will cancel your service. Here are some basic tips.

-If they refuse, continue with canceling. Even if it is something you know you really need/want to keep, continue with canceling. Often, if they see you’re not bluffing, you’ll get an offer for a lower rate. At worst, you actually do cancel your service. If so, learn to live without the service or simply restart the service. All that would be wasted is a few minutes of your life. (Note that there are some old “grandfathered” plans people have. You may hear some people talk about “YouTube Red” that they’ll never get rid of. I have an old grandfathered plan with T-Mobile that is much better than any other plan I could possibly get these days. Don’t give those up unless you actually want to get rid of the service.)

-Never take the first offer unless its better than what you have. I just recently negotiated my XM radio subscription. It started at $21.99 per month. First offer was $17.99. Second was $7.09. Last was $4.09, which was my “introductory offer.” They won’t take an offer away once they’ve offered it to you.

-Sometimes you can ask to be “treated as a new customer.” That is, ask to have access to introductory rate offered to non-existing customers.

-You can sometimes negotiate a better interest rate on your credit cards, which lowers how much you need to pay each month on them (if you carry a balance). Keep in mind that this sometimes requires a hard credit check, which will lower your credit score. We’ll talk about credit in a later week.

-Rent can be negotiated, to an extent. It never hurts to ask your landlord to negotiate rent. However, in a market such as this one, you’re unlikely to be successful as there will be someone willing and able to pay what you’re paying. On the other hand, you do not always need to put up with large rent hikes. If you find yourself in a situation in which your rent is suddenly increased massively, you may be able to fight it in housing court. (Not civil court.)

Keep in mind that not all bills can be negotiated. Cable, phone, entertainment subscriptions, magazines, are examples of services that can be negotiated. Utilities, groceries, and other consumable products are generally not negotiable.

In preparation for this course, I’ve been scouring Reddit for questions and comments regarding budgeting. Below are some common questions or comments from people. For each, give some suggestions that could be of use to the person.