There are a lot of ways to design your budget and the vast majority of them result in you micromanaging your money by trying to categorize every little thing your money gets spent on. Some people even encourage you to go back through 1 year of bank statements. It’s no wonder most people don’t do budgets and those who do think it’s so hard. Here’s a tip: shred every bank statement you have. The money is gone, forget about it. The past doesn’t matter because you’re going to change how you spend your money.

There are exactly two categories your bills fall under: fixed and variable. The fixed expenses are the expenses that will get you angry phone calls, a ding on your credit, etc if you don’t pay them on time every month. A variable expense is everything else.

You may be thinking that your electric bill is variable because the amount changes but that’s not the definition I go by. The electric bill is a fixed expense because you must pay it every month. You can’t do without electricity. Just because a bill is fixed doesn’t mean you can’t do things to reduce the cost.

One of the gray areas is the required bills that are only paid once or a few times per year such as insurance premiums and your car registration. You can either consider those variable expenses and not budget for them or you can consider them fixed expenses and figure out the amount per month you need to save for them. I consider them variable expenses because money that doesn’t go out of my possession during the current month goes into a big pool in a high yield savings account. I’m aware of the bill but I don’t worry about it on a monthly basis. You may want to create a separate savings account for bills that are not paid monthly and put the monthly amount under your fixed expenses. It just depends on how good you are at not spending your savings and how much per month you put into savings. In my case the amount I put into savings per month is more than the amount of any non-monthly bill. So in the worst case scenario I make a smaller deposit into savings a month or few out of the year.

The other gray area is credit cards. The first step is to stop using them. If you need them then you’re spending outside of your means and you need to fix that. Either way, stop using them. Now see what the minimum payment is for each of them and add the amounts to your fixed expenses. This ensures that your credit cards are being paid each month if they have a balance.

The second step is to determine what you’re going to do about them. If you have a low interest rate on them it may be better to just leave any extra amount off the budget and increase the amount that goes into savings. Then pay off the credit card in full when you have enough in savings. The other option is to figure out how much extra you can put on them and get them paid off as quickly as possible. Your goal should be to pay your credit cards off within one year and no more than two years.

So the first step to creating your budget is figuring out what all your fixed expenses are and when they are due. Put them in order by date.

The next step is figuring out when you get paid and how much.

And finally figure out how much money is left each pay period after the bills for that period are paid.

If you don’t have enough money in a pay period to cover the bills in the same period try to adjust when the bills are due.

For example I get paid on the 1st and the 15th. So any bill from the 1st to the 14th is paid for with the first pay check. I like to pay extra on the mortgage and the mortgage is due on the 5th so it’s paid with the first pay check. However if I include the extra amount I’m not left with much money so I moved the extra payment to the 15th. So now I have an extra $100 to work with from the 1st to the 14th. The sum of the fixed expenses from the 15th to the end of the month is about half of what I get paid so the second half of the month is when money is moved into savings.

So for example I’m left with $200 from my first paycheck and $800 from my second paycheck after all the fixed expenses are taken out.

I now have $1000 to use for variable expenses. $500 of that goes into savings so now I’m left with $500 for food, gas, etc.

For most people gas is not a huge expense since they live close to where they work. For those of us who commute long distances to work it is a noticable expense. Either way figure out how far you travel to and from work. In my case the round trip is about 100 miles. Now multiply that by 5. So in a week I travel about 500 miles. Weekends we tend to travel 100 miles as well so on an average week we travel about 600 miles. At 24 miles per gallon that works out to 25 gallons of gas per week. At $2.00 per gallon that’s about $50 a week in gas. So I figure about $250 is needed for gas every month.

So the amount left for food and everything else is $250. And to make sure everything fits within that amount you have to find ways to avoid spending money. If you want to go see a movie then fine, go see a movie but remember you only have $250 that has to last for the moth.

The only trick to making a budget is making sure the things you must pay for are covered. The rest of it is just avoiding spending money and putting away most of the money in savings to keep it out of your reach.

You savings is something you dip into when you want to make a large purchase (more than you have available in your extra monthly spending money) and have considered whether or not it’s worth dipping into your savings for. It’s also there for when you run out of spending money and have to buy food or gas. It is entirely possible that even after doing everything possible to save money you find that you can’t really afford to put as much as you did into savings. If you put $500 in and find you needed an extra $50 for gas then put $450 in next month and try again. Or see if you spent money you didn’t need to then put $550 in savings next month to make up for the withdrawl.

The whole point of not micromanaging your money is changing your attitude from “I need to see a movie every month, I need new clothes every month, etc so I have to budget for movies and clothes” to “I have $X to spend and I’m going to spend as little as possible and only on the things I need.” If I friend is in town and you want to take them to see a movie then do it. If you need a new pair of pants then get them.

A budget should include normal monthly expenses. Don’t budget for things you don’t need because you shouldn’t make a habit of buying things you don’t need. You don’t need to budget for seeing movies or going out to eat. When you want to do it just ask yourself “is this worth dipping into savings for?” and learn to say “no” a lot more.

Recently the government announced that they are out of money for the Digital Converter Box coupon program. Well, it’s not that they’re out of money it’s that they havn’t decided yet to allocate some more money from the billions they got from private companies when they sold off the soon to be available bandwidth. Unless of course Obama gets his way and they delay the transition yet again. Now that somebody has paid billions of dollars for something they will get after the transition I think it’s pretty unlikely to be delayed much if at all.

Although I have cable I decided to request a coupon last month and use some extra money I’ve earned to get a converter box. I’m currently paying for cable through the HOA at a cost of $8 a month which I’m sure won’t last forever. I have a TV that isn’t digital and a TV tuner on my PC that isn’t digital. So I figured that for $10 I’d give it a whirl.

When I picked up my converter today I realized why they aren’t just free with a coupon: because the state gets the tax on the full value of the converter. The converter I bought cost $50 and tax is 8.8% so I paid $4.40 in tax and THEN the $40 was taken off. I was taxed 8.8% on $50 not $10. So the state gets a cut of this deal as well. The reason that the government is just having private companies build these things is because it’s creating a new market which is a good thing in this economy. Companies can then charge a reasonable amount over the value of the coupon and make a profit without pissing off consumers (too much). That box is not worth $50-60 but it is worth $10-20.

A day or two ago Slashdot had a discussion going on this coupon shortage story and somebody posted a sob story about a poor friend who couldn’t afford the $10-15 for a converter box. Maybe it’s not absurd that there exist some people who seriously can’t find $20 in their budget in any reasonable amount of time (less than 6 months) to shift from some other non-essential to a converter box so they can continue watching TV which they claim is so important to them and I was tempted to feel sorry for such a person until I plugged my brand new antenna into my TV. An antenna which happened to cost $13.

So let’s pretend I’m so strapped for cash I can’t afford a digital converter box and all I have is a cheap pair of rabbit ears. The channels, I mean, *channel* that comes in is channel 8. PBS.

In the posted sob story this friend couldn’t afford $10-15 for a digital converter box and expected the government to bail him out in some way so he could watch TV.

Meanwhile I’m forced to pay $8 a month for cable or all I get is a very fuzzy version of PBS. Should the government mandate that over the air channels be accessible for free everywhere in the US? Of course not. Whether you can’t afford a $10 converter box or can’t afford $45 a month for unsubsidized cable, or can’t afford a rooftop antenna it’s all your responsibility to find the money or do without broadcast/cable TV.

It’s not up to the government to make sure every home in America can get TV stations. It’s up to people to adjust their financial priorities so they can afford to have it if they want. If that means doing without something else for a few months so you can get the converter box or a better antenna then that’s what you have to do.

People need to stop whining and do what needs to be done. Some people should feel lucky that it’s only going to cost them a one time expense of $10-25 to get a converter box. For many people they have to subscribe to cable and pay a monthy fee indefinitely or they get nothing.

In my case if cable stops being subsidized heavily by the HOA it’s going to go and when that time comes I’ll either have to fork over money for a better antenna or just do without broadcast TV. Sometimes the problem isn’t financial, it’s location.

The other reason I don’t feel sorry for the guy who wanted it but “couldn’t afford it” is because I couldn’t afford it either and yet I got it. I find ways to make extra money so all the money from my day job goes to things we need and the extra money is used for toys. It doens’t matter how much or how little you make, sometimes you need to be resourceful and find ways to earn extra money if you want something.

When it comes to phones you have a number of options. You can go with a landline, a cellphone or internet phone. If you have a high speed internet connection you can go with a company like Vonage and pay only $24.99 per month for unlimited local and long distance. Because it’s VoIP you don’t get billed all sorts of taxes and fees that you find on a traditional land line phone. If a phone company advertises $24.99 the final bill will be closer to $40. When Vonage says $24.99 the finall bill will be close to $24.99. There may be sales tax but that’s about it. Also, Vonage lets you keep your same phone number.

The only problem with a VoIP phone like Vonage provides is that it may not be an option if you have a home security system. Home security systems can sometimes require a traditional landline. We ran into that issue and ended up getting the barebones phone plan from Qwest which starts at $14.99 and after all the fees and taxes is more like $25. It has far fewer features than Vonage such as no long distance but costs the same.

Another option is the cell phone. With plans typically started at $40 a month you can see that you’re quickly paying far more than any type of home phone you could get. We used to be paying $80 a month for two cell phones. That works out to nearly $1000 a year. Once the contracts were up we ditched the monthly plan and went with a prepaid Tracfone. Other companies have pay as you go plans but they’re all far more expensive than Tracfone. With Tracfone you can get a phone for $15-20 and you only pay for minutes. There are no connection fees or daily fees that companies like AT&T charge.

The fact of the matter is that you are near a phone almost all the time. I remember years ago when all I had was a pager. It cost something like $8 a month. I’d get a page and somehow I managed to always be somewhere where I could use a phone. I don’t remember ever having to use a payphone. Many places of business will let you use their phone as long as it’s local and you keep it short.

With a prepaid cell phone you can use the phone anywhere and you just keep it short.

The issue is that people think they need a cellphone. They think they need to be available 100% of the time. You don’t. If your friends want to hang out they can call you at work and let you know. Or they can leave a message on your answering machine at home. Instead of talking to people in person now people substitute face to face interaction with cellphones. It’s so much easier to have unlimited talk time on a cell than to take time out to meet in person or wait until the evening when you’re at home to sit down and talk to your friends.

The only things that are so important you must tell someone now are emergencies. Prepaid cell phones are sufficient for that. If it’s not worth 20 cents a minute to tell someone then it can wait until you can call them on a land line or send an e-mail.

Believe it or not, cellphones have only been a “must have” item for about 10 years. Before then people managed to survive using beepers and home phones. People have forgotten that cell phones are a convienence not a necessity.

So next time your cell phone contract is up, let it expire. Get a prepaid Tracfone and see how it works out. Use it for 2 months and see if you really need that subscription based cellphone. It’s amazing how much money people throw away on cellphones because they think they need it.

And once you finally cure yourself of your cellphone addiction, take the $100 a month you’re saving on cellphone bills and do something useful with it like save it. Or invest it. Or save it for Christmas presents instead of using credit cards.

Census.gov has a PDF with all the average and median home values from 1963 to October of 2008.

There’s news coming out that home prices are dropping rather quickly. Well, if you look at the chart you can see that the drop is a market correction. Much like what happened in the 80′s. The house prices shot up unreasonably high and now they’re dropping back down. Current prices are looking more like they should had the bubble not happened.

I’m providing the Excel workbook with all the numbers from the PDF and the chart.

house-prices

Infoworld has an article debunking some PC power myths.

The article claims that the average PC uses 89 watts per hour. Divide 89 by 1000 to get the number of kilowatts. If the PC were left on for 24 hours it would consume about 2.1 kilowatts. For my power plan it costs about 5 cents per kw off peak and 17 cents per kw on peak. On peak is 8 hours in the day. So the total cost per day is about 21 cents. At that rate the cost per month is about $6.30.

In my case electricity is so cheap that there’s little financial incentive to turn my computer off when not in use. And since it’s a server, that’s not really an option anyway. You should do your own calculations to see what it costs to have your PC on 24 hours a day. If your computer isn’t being used 24 hours a day then it shouldn’t be on 24 hours a day anyway. Turn it on when you get home from work or school and turn it off when you go to bed.

Monitors, printers, scanners, etc are what start to add to that bill. Screen savers prevent burn in. They don’t save electricity. As such you should have your monitor go into power saving mode automatically when not in use. I have my screen saver set so that it goes on after 10 minutes of inactivity and after about 20 minutes the monitors go into power saving mode.

The reason screen savers can actually cost you more money is because some of them require your graphics card to do some work which requires more power. The best screen saver is just a blank black screen or a simple static image moving around.

The biggest obstacle to powering off a computer is the boot up time. I have a dual core 2.4ghz system that runs Windows XP Pro and boots in under 30 seconds. If your computer takes a very long time to boot you may want to review the software that is installed on your system and remove some of it.

One of the easiest ways to save money is to keep your car properly tuned up. The EPA estimate that every car has is about the best MPG you can expect out of your car driving like a normal person. Hypermiling is a variety of driving methods that can boost your MPG above the EPA estimate. But, most people can’t safetly use those methods. So instead, focus on the EPA estimate.

Let’s say you car’s EPA estimate is 28 miles per gallon. You can reasonably expect to get around 24. If you’re getting between 24 and 28 miles per gallon then inflating your tires, putting additives in your gas, changing your oil, changing your air filter, etc aren’t going to do much for you. You might be able to get an extra MPG out of your engine.

But, let’s say you notice that you’re getting 22 MPG or less. Well that’s an indication you need an oil change, a new air filter and you should check your tires. The idea is to not have unrealistic expectations of your car and waste a lot of money “maintaining” it by giving it new oil every week. It’s to figure out what a realistic expectation is and maintaining it.

All shops will suggest an oil change every 3000 miles. Read your manual. Newer cars may only need an oil change every 5000 or 7500 miles. You can ignore the sticker. But pay attention to the mileage your car is getting. Calculate the MPG you’re getting and reset the trip counter every fill up. It’s an easy way to track the performance of your car so not only can you save money on gas but also save money on major repairs that can result from not doing the routine maintenance.

When you don’t have credit all you can get is a low limit, high interest credit card. This is fine. Get the credit card, use it and pay it off every month. This process is called “credit building.” You need credit. Some people make the mistake of avoiding credit cards in their youth because they worry about mismanaging them. Then they become adults and want a car or a house and they find that the bank thinks they same thing about them and denies them a loan. If you think you can’t handle having access to a few thousand what makes you think the banks are going to have any more confidence in you?

Get a credit card. Be responsible with it. After you’ve used your card enough to get higher limits and lower interest rates and have a real job making a good salary you can start considering making bigger purchases like a new(er) car and a home. Interestingly enough by the time you have a real job you should have a real credit history. You should be in a salaried position by your mid twenties which means you should also have 7-10 years of credit history built up. Perfect history. No missed payments. No maxing out cards. Always paying more than the minimum to pay them off quickly. It’s okay to take a month or few to pay off a larger amount of credit card debt.

And now that you have a real job and real credit it’s time to stop playing the credit card game. You should have your car and your house. Those are enough to float your credit boat. Congratulations, you got your house you won the credit game. Now STOP PLAYING. I have over $50,000 in available credit with credit cards. That’s 1/3 of my mortgage. It’s time to start getting all the credit cards down to a zero balance and never using them again.

And think about this, if you need credit cards then you’re living outside your means. That means you need to cut back spending. If you don’t need your credit cards then why are you using them? Statistically people who use credit cards spend more money. That’s why every store is trying to get you one. If you want to go shopping take out cash and leave the plastic at home. You’ll spend less and also be more aware of deals allowing you to save more. If you only have $100 to spend and you want a new outfit you’re going to shop around. With credit you know you can fudge. You can ignore tax. You can go over by “just a little bit.” Because you know that your credit card will flex to cover it. Cash doesn’t flex. You only can spend what is in your hand.

You don’t have to work to make it fit on credit. You have to work to make it fit within your cash budget.

A liability is something that costs you money. An investment is something that makes you money and an asset is something that helps you.

If you believe your car is a liability, a money pit, then you’re probably going to buy the cheapest car you can find that runs. You assume that the $3000 piece of junk you found is going to be cheaper than paying for a new car even after all the repairs you end up doing. That may end up being true if you happen to find a used car that isn’t a lemon. The biggest monthly savings on a cheap used car are paying it off and not having comprehensive coverage on your insurance. When you’re a teenager that may force your hand to go with a cheap car. When you’re an adult, you have other options.

If you believe a car is an investment then you’re going to look for a classic car that’s not in particularly good shape and fix it up. In the end you’re hoping that the cost to purchase the car plus the cost of repairs is less than the amount you will be able to sell it for. If you have a good eye for cars and the time for that sort of thing it may be worth the effort.

However, if you see a car as an asset; Something to make your life easier, then you should probably go with a new car. By new I mean less than 5 years old with 0 to 20,000 miles. You’re paying $200 a month to know that every morning you will be able to go to work so you can bring home $150 – $300 a work day. A car does not directly make you money. It indirectly makes you money by getting you to work and making it possible for you to work any hours the job requires. In that sense, your car is actually an investment. As long as your job pays more than the cost of owning and maintaining the car then you’re ahead.

So when it comes to cars it’s more about minimizing costs. Not about eliminating them. You could go with a used car and eliminate a monthly payment (at least temporarily) at the expense of piece of mind and possibly safety. How much are those things worth to you?

When deciding on what car to buy you need to consider many things:

1. This is what will get you to work
2. In the event of an accident, how important is it that you survive?
3. Are you willing to put the time, effort and money into fixing major problems?
4. What is the optimal miles per gallon the car gets?
5. How many miles can I reasonably expect it to last?
6. What’s the most car I can get for 10% of my income per year?

Your car is an investment no matter what it is. The key to minimizing the cost of paying for a car is recognizing needs vs wants. You may want to get to work in a Bentley but you could probably get away with a brand new $9,990 Nissan Versa and have just as much reliability and safety.

People who want to be smart go to college. Or at least educate themselves. Some people think that they can just read books and they’ll know something. That’s not actually true. You can’t just read books or just observe others doing things. You need to apply your knowledge to really learn things. You have to read the book and apply what’s in the book to really learn. Otherwise all you have is a bunch of theories about how things are but you don’t really know. Many times the theories are nice but they aren’t entirely accurate when it comes to practical application. Also, if you don’t apply your knowledge to practical applications you won’t learn when it is appropriate to apply certain ideas to various situations. Knowledge that cannot be properly applied is useless.

You also will never be smarter than a book if you only do strictly what the book tells you to do. You have to color outside the lines or you will stifle your ability to learn and grow. By applying the book to the real world you will see that how the book tells you to do it may not be entirely accurate. Now you know more than the book is telling you.

When it comes to finances there is probably a book that will tell you anything you want to hear. If you want to believe that you can get rich flipping houses, a book exists that will be more than happy to take your money in exchange for telling you that. If you want to believe you can get rid trading on the foreign exchange (aka forex) there are books and programs that will take your money in exchange for telling you how you can get rich doing just that.

There are also books that will explain why you can’t get rich on the Forex markets or by flipping houses.

The fact of the matter is; they’re both right. The forex market contains a huge amount of risk. You can get rich and you can fail. Same with flipping houses. The key factor is you. The amount of effort you put into doing those things. You can’t just throw money at a problem and expect more money to come back.

So you need to educate yourself. If you’re not willing to learn and educate yourself then you really should stick to just reducing spending and putting your money in safe places like high yield savings accounts and bonds.

Your biggest financial investment is you. Educating yourself. Spending the money to learn. Get the information and get the tools to apply it. Don’t be the idiot that risks their life savings on their first time out playing poker. Be the smart player that finds ways to play for free and then goes in with some beer money to see how they can do once real money is involved.

There’s not a day that goes by that there isn’t a great opportunity. Smart people don’t bet on the “once in a lifetime opportunity” they learn how to find opportunities every day. And once you realize that, you don’t mind taking your time to learn because you know you’re not missing out on anything you can’t get when you’re really ready.

http://www.savingsbonds.gov/indiv/products/prod_eebonds_glance.htm is the government web-site where you can learn all about Savings Bonds. Savings Bonds are a government backed investment with a reasonable guarenteed return on investment.

You can purchase a paper bond at half of the face value. So for a $1000 bond it will cost you $500. These bonds are guarenteed to be worth their face value in 20 years regardless of the interest rate. After the bond has reached its face value it will continue to earn interest at the fixed rate when it was purchased. Currently the rate is 1.3%. For those 20 years you will be earning 1.3% each year for $1000 compounded every 6 months.

So we earn $295.84 in interest over 20 years.

Let’s calculate the effective interest rate assuming that a $1000.00 bond matures (reaches face value) in 20 years. The interest on Treasury Bonds is compounded every 6 months so in 20 years there will be 40 periods.

We multiply the result by 2 since there are two periods per year making the effective interest rate about 4.8%. If we were to compound interest monthly it would be an effective interest rate of about 4.77%.

About a year ago ING was paying about 4.0% for their savings accounts. Now they are paying 2.75%. You can see that a Savings Bond provides a stable long term investment. However, because you can only purchase up to $5,000 per year (investment value) of these savings bonds you are limited in the amount you can invest.

An advantage of savings bonds is that the interest you earn is only taxed federally. They are also tax free if used to pay for an education. This makes them great gifts for babies. By the time they are ready to pay off student loans their bonds will have matured.

With a savings account the interest is counted as income and both the state and federal government take a piece of it.

A savings bond can allow you to make more and keep more of the return that you earn on your investment. The trade off is that it is very long term and you have very restricted access to the money until it matures.
href=”http://www.savingsbonds.gov/indiv/products/prod_eebonds_glance.htm”>http://www.savingsbonds.gov/indiv/products/prod_eebonds_glance.htm is the government web-site where you can learn all about Savings Bonds. Savings Bonds are a government backed investment with a reasonable guarenteed return on investment.

You can purchase a paper bond at half of the face value. So for a $1000 bond it will cost you $500. These bonds are guarenteed to be worth their face value in 20 years regardless of the interest rate. After the bond has reached its face value it will continue to earn interest at the fixed rate when it was purchased. Currently the rate is 1.3%. For those 20 years you will be earning 1.3% each year for $1000 compounded every 6 months.

So we earn $295.84 in interest over 20 years.

Let’s calculate the effective interest rate assuming that a $1000.00 bond matures (reaches face value) in 20 years. The interest on Treasury Bonds is compounded every 6 months so in 20 years there will be 40 periods.

We multiply the result by 2 since there are two periods per year making the effective interest rate about 4.8%. If we were to compound interest monthly it would be an effective interest rate of about 4.77%.

About a year ago ING was paying about 4.0% for their savings accounts. Now they are paying 2.75%. You can see that a Savings Bond provides a stable long term investment. However, because you can only purchase up to $5,000 per year (investment value) of these savings bonds you are limited in the amount you can invest.

An advantage of savings bonds is that the interest you earn is only taxed federally. They are also tax free if used to pay for an education. This makes them great gifts for babies. By the time they are ready to pay off student loans their bonds will have matured.

With a savings account the interest is counted as income and both the state and federal government take a piece of it.

A savings bond can allow you to make more and keep more of the return that you earn on your investment. The trade off is that it is very long term and you have very restricted access to the money until it matures.