Money Management: How NOT to Spend Your Money

May 18, 2011

I’ve been arguing that if the government cannot control spending there are some serious implications that you and I need to prepare for.  In my last blog I outlined precautionary steps to take if the government continues on this path.  In this blog I’ll discuss what NOT to do so that you can avoid a similar fate.

#1 Do NOT spend more than you make

The good news is most Americans have already figured this one out.  According to our latest research, 72 percent of employees have a handle on cash flow, but that means 28 percent do not.  It’s obvious why this is a problem, and yet there are still too many of us that seem to ignore it.  Consider this: according to the Federal Reserve’s February 2011 report on consumer credit, an estimated 54 million households carry credit card debt.  If there is a silver lining, it’s that consumer credit card debt fell from $973.6 billion in August 2008 to $794 billion in February 2011.  While still an astronomical number, it pales in comparison to the $14 trillion national debt.

#2 Do NOT spend money today based on FUTURE income

Again, it seems obvious, but I’m probably as guilty of this as anyone.  When I moved from Chicago to San Francisco, my income did not change much, but the cost of housing did.  Even though the house I was looking to purchase cost over twice as much as the house I sold, amazingly the bank was still willing to loan me enough money to buy it.  So I did what any good financial planner would do: I took out 80 percent on a first mortgage, 10 percent on a second, made a 10 percent down payment and justified the whole thing by telling myself “in a few years I’ll be making so much money that I’ll be able to afford this.”  Needless to say things did not go quite as expected.

How many times have you spent money based on an anticipated bonus, or tax refund?  Just recently I took a romantic vacation with my wife (BTW, once every ten years is not often enough) knowing that my annual review would be coming up.  But here’s the problem: how many more purchases will I make based on this upcoming review?  I think you get the idea.

#3 Do NOT spend money on things you don’t need

I’m starting to sound like a broken record, but how many of you just thought to yourself, “Duh?”  Do you think the government has ever done this?  Senator Tom Coburn (R – Oklahoma) seems to think so.  He wrote a guidebook on government waste called “Wastebook 2010.”  Here are just a few of the gems he cites:

  • The Department of Agriculture awards the University of New Hampshire $700,000 to study methane gas emissions from dairy cows.
  • One million dollars has been allocated for the purpose of beautifying our zoos with poetry.
  • A Stanford University professor receives nearly a quarter million dollars from the National Science Foundation to study how Americans use the Internet to find love.
  • The National Science Foundation (NSF) has provided $216,884 in funding to the University of California Berkeley and Stanford University to study candidate ambiguity and voter choice.

I don’t care what political party you belong to (if any), but is this something you are guilty of?  How many times do you spend money on things you don’t need?  Maybe it’s an impulse buy at the checkout counter, supersizing your extra value meal, or buying a lottery ticket (hey, somebody’s got to win the lotto – might as well be you).  Maybe it’s paying too much interest on debt, paying late fees, or paying retail for new items when slightly used would work just as well.  We’ve all done it.

You’re probably not making huge spending decisions like the government, but it’s the small, everyday things we do that can hurt us. 🙂