Money
Matters: Be Honest With Yourself
by Suze Orman
A major
step toward financial freedom is about getting back
in touch with your money and understanding that
you have the power to decide how to use it. And
it's about being honest with yourself. Have you
ever taken a big wad of bills from an ATM machine,
then found yourself, a day or two later, nearly
out of cash and unable to reconstruct exactly where
you spent it? And even when you retrace all your
steps, you still come up $20, $40 or $60 short?
It's upsetting, but most of us feel that way most
of the time: a little short, a little panicky, wondering
exactly where our money is going.
Where Do You Think You Stand Today?
What
does it cost you to live each month? If you are
married or living with someone with whom you share
expenses, please ask him or her to write down the
answer to the same question. Most of us believe
we need about $1,000 to $1,500 a month less than
we actually do need to go on living the exact same
way we live right now. Surprisingly, this figure
seems to vary only a little bit regardless of income
levels. Where does this month-to-month self-deception
lead us? Into financial chaos. Often, our planned
spending doesn't cover expenses that don't occur
every month or expenses that just crop up.
For example:
- Do you consider the cost of your gym membership per month
even if you pay to renew just once a year?
- Do you pay your insurance premiums twice or four times a
year? Do you calculate the cost of insurance in your monthly bills?
- Where did you go on vacation last year? What did that
one-time expense cost average over twelve months?
These big expenses hit once or twice a year,
probably surprising you every time. And then there are seasonal expenses:
- Come summer, do you forget about how much higher the gas
bills run in the fall?
- Do you have your windows washed once or twice a year?
- Did you send your children to summer camp last summer
- Do you get your hair cut and maybe colored every couple of
months? How much, then, does it cost every single month?
Books and Videos by Suze Orman
Here's another surprise: If you make some
sort of payment every week—child care, a cleaning woman, a mortgage payment withdrawn
automatically every two weeks—the extra weekly payments will take place in four
months of the year. Plus the smallest expenses add up fast—the ones too small, you
might think, to be worth figuring into your budget at all. For instance, do you go to the
movies once a week? When you do, do you buy the tickets for yourself and your partner,
have popcorn and sodas, go for a simple dinner afterward, as simple as pizza or a burger
and fries? That's not so much, is it? No, it isn't, not on any given Friday night. Maybe
$16 for the tickets, $4 for the popcorn and sodas and $20 for a simple meal. But once a
week over a year, that's $2,080. And too many of us forget to include expenses so
"small."
Other "small" expenses add up just
as much. Magazine subscriptions, cosmetics, supplies for the yard, oil changes for the
car, batteries for the flashlight, charcoal for the grill: Do you know what it really
costs you to keep your life running smoothly over a year's time? How about special
occasions? How many birthday parties, house warmings and baby showers did you attend last
year? Didn't you bring a present to each one? Might you have done that twenty times or
more last year? Finally, you need to allocate $50 to $100 each month for miscellaneous
unpredictable expenses: dental work that's not covered in your insurance, travel to your
brother's wedding. Most of my clients are shocked to discover by how much they have
underestimated—and that's when they've guessed as honestly as they can. It's a scary
realization, but there's a wonderful flip side to that fear. Once you take this step, you
will feel better for knowing the truth. And you will begin to gain power over the money
that's controlled you for so long.
How Much Is Going Out?
Get out your canceled checks, ATM
statements, credit card bills, whatever will tell you how you spent your money over the
last two years. These papers are more revealing than a diary; they contain the key to how
you live your life. Yes, it will take you some time to do this, but think how much time it
will give back to you in the future. You work 40 hours a week or more to earn your money.
Take a few hours to take your money out of the darkness, to see it in the light of
reality, to see where you stand. Don't just read these pages—pick up a pen and take
action.
- Go through your checkbook, canceled checks, computerized
statements, all your records for the past two years. Not one year, but two years. Maybe
this year was an extraordinary time - you remodeled the house, bought a new car—but
looking at a two-year period, you'll get a good idea of what it costs you to live the way
you are living. All your checks, cash withdrawals, money spent every month, money spent
once a year, money spent once a season, holiday expenses, everything.
- Make categories for each month—such as telephone,
gasoline, food, utilities, vet bills, golf fees, baby-sitting.
- After all the categories are complete, total each
category. Divide each category by 24. This will give you how much you spend per month on
average for each category.
- Now add together all the averages in each category. This
will tell you what it costs you to live each month. Remember, these are averages. If your
average is $3,000, most months you'll spend less—say, $1,800 or $2,000. But in some
months you'll spend $5,000 or $6,000. To meet your expenses, you need to bring in that
average number each month.
How Much Is Coming In?
Now write down now all the income from every
source that you have coming in. Only calculate an amount you are fairly certain will
continue coming in for at least one more year.
- Monthly paychecks after taxes
- Predictable bonuses
- Social Security income
- Disability, rental and retirement income
- Gifts from your parents or children, if you can really
count on them year in, year out
- Loan repayments, if they will continue for more than a
year
Take this total and divide it by 12, so you
can see what you have coming in after taxes on a monthly basis. If you're like many of us,
you've just confirmed that you spend more than you thought. Quite possibly you also spend
more than you earn. What can you do? You can do one or both of two things: Make more money
and/or decide to spend less. Look at each of your categories again, and decide how much in
each category you want to spend. If you're spending more than you're earning, this
solution is not about creating limitations. It's about making decisions—determining
what you most want to spend your money on. If you can make more money realistically, then
you're in a position where you may be able to earn what you spend and go on living the way
you do right now. If you're like most of us, however, more likely you need to decide to
spend your money differently. This does not mean that you have to take one drastic action
that crimps your pleasures and quality of life, such as getting by with one car when you
family needs two. Consider, instead, making the decision to spend $25 to $30 less per
month from 15 or 20 of your spending categories. Some categories are fixed.
There will be other categories—in fact,
the majority of categories—where you can actually decide what the total spent per
year will be. Is there one magazine subscription you can do without? Can you have three
Friday movie nights a month instead of four? Keep deciding to trim a little here, a little
there, until what comes in matches what goes out. With each decision you make, you are
gaining power over your money. Put down in writing the yearly total you decided on for
each category. Now keep track of what you spend in each category, month by month. Create a
chart or system that will work for you. Each month when you pay your bills, check your
spending by category. If you use up any allocation early and want to spend more in that
category, you'll have to make new decisions about what, if anything, you want to do by
seeing where you stand with the other categories.
As a reminder, post the categories you're
trimming in your planner or on the fridge. You may find—as have many of my
clients—that you can come up with wonderfully creative ways to trim your spending so
that you hardly notice. One family (both parents work and their teenage kids aren't home
much) now has the garbage picked up every two weeks instead of every week, trimming a
painless $200 a year. A single mother now goes to the grocery store every eight days
instead of every single Saturday, simply paying more attention to the food she already has
in the house. Last year she trimmed nearly $400 from what she allocated for food. Another
client, who described himself as a "compulsive spender on CDs," now weeds out
the CDs he doesn't listen to much anymore and trades them with friends. Last year he
trimmed $600 and had just as many fresh CDs to listen to. That same client also now does
his taxes himself with a computer program, rather than going to his accountant. Savings:
$600. Bur only when you see in front of you how you spend your money now will you be able
to decide how you would rather be spending your money. This is the hardest step toward
financial freedom. With this step you have been honest with yourself. Now you know exactly
where you stand. Rather than being dictated by a restriction, your actions—and your
money—are dictated by the choices you make.
Suze Orman is a best-selling finance
author. She has appeared on Oprah, two PBS specials, QVC, CNN, CNNfn, CNBC,
Good Morning America and is a columnist for Self magazine and a regular
contributor on NBC's Today show.
© 1999 Priorities: The
Journal of Personal and Professional Success and
Franklin Covey. All rights reserved
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