Purchases

You’ve set up your account for paying bills. But what about day-to-day and variable purchases?

Each person that spends money in your household should have his or her own purchase account. To avoid overdraft fees, I highly recommend that this account be prepaid debit cards. But you can use cash, ATM or check cards, or a credit card. (It’s riskier with a credit card. Avoid late fees or interest by not carrying a balance.)

Because you’ve leveled out your bills to make your weekly payments as consistent as possible, you know how much money you have available for your purchase account(s) each week. Here’s a scenario using our weekly income statement for a retired gentleman (household of one), that lets him consider his purchase patterns and push each week’s leftover cash into an emergency account.

Finding Your Patterns

You don’t have to live on an “allowance,” but you do need to be aware of your spending habits.

For example, my 47-year-old brother, a construction worker, has an almost habitual spending pattern. On a daily basis, he spends about $10 from his purchase account, paying for lunch, gas, etc., Monday through Friday. Friday nights, though, he probably spends $30-$40 when he goes out with his friends for a couple of beers. On Saturday, he needs about $110 to go grocery shopping. Here’s a picture of how he needs to load his purchases account each week:

$10 x 5 = $50 (M-F expenses)
+$40 (Friday expenses)
+ $110 (groceries)

$200 goes into Purchases Account each week.

Why Individual Accounts?

“When my husband and I started using debit cards, we started having fights, because I knew exactly how much money I had, but then $40 or $80 would come out …”

— An anonymous client

Multiple-purchase accounts allow each spender to track personal spending habits. Each purchase account should be tied to only one person. NO ONE ELSE should have access to that account. Because a husband may have a different spending trend from his wife, the money becomes easier to manage—and a less volatile issue. Purchase accounts work wonderfully for children receiving allowances and students away at college. The rule is: If they purchase, they need an account.

I know one person that has applied this philosophy to separate purchases. He wants an account for groceries, an account for entertainment, etc. I don’t recommend structuring separate cards for each type of purchase; it becomes too difficult to manage. But a couple that shares grocery duty could try keeping track of a grocery card together.

Purchase Methodologies

The key to making good purchasing decisions is having the right frame of reference. When you have a clear picture of your weekly financial situation, you aren’t as tempted to overspend and you can adjust your spending habits to your means—all because you recognize the impact of your actions. You understand how tight things are, and why.

With this understanding, you can make an informed decision on whether or not to incur bank fees. For instance, you go to the store and see a sweater marked down from $100 to $20, it’s your size and you like it. You know that this week is tight moneywise, because your mortgage payment comes out of your account on the second Wednesday of the month. You now know that if you buy the sweater you’re going to incur a fee when your overdraft protection transfers money to cover this purchase (at my bank these range between $5-$10 every time you draw on the overdraft protection). You’ve just added an extra cost of $5-$10 onto your bargain sweater. You’ll still be saving $70+, so you may decide to make the purchase. But if the bargain sweater was on sale for $20 from an original $28 and you determine you’ll have to use a $10 overdraft to buy it

Economic Stability

In football, someone always has hope that they are going to win. Economic stability, however, is not a place you strive to reach; it’s not a matter of making a dramatic last-minute touchdown or kicking the tie-breaking field goal.

We create economic stability by creating financial hope. People who are economically stable look at their circumstances and make changes based on that knowledge.

As you make decisions about your major purchases, all you need is an accurate frame of reference:

• Know your weekly income.
• Know your weekly bills.
• Adjust your purchasing pattern to meet your net balance each week.

Car Buying

For many people, their first big financial decision is whether to purchase or lease a car. Here’s a little math to help you compare as you shop:

• If you can lease a car for $0 down and $250/month for 27 months, you’ve spent $250 x 27 months. That’s $6,750 at the end of the lease.
• If you negotiate a purchase price of $16,000 at the end of your lease, your total cost would be $6,750 (during the 27-month lease) + $16,000 (purchase price at the end of the lease). That’s $22,750.
• Compare this to the price you can negotiate for a purchase, and you can make an informed decision.

The Right Timing

Use your weekly income statement to time your major purchases.

For instance, for a car payment of $325/month, if you have a week with a net balance of $275, see if you can shift the remaining $50 from another week and still be able to meet your bills.

If you can’t take on the extra payment and stay current on your existing bills, you can:

• Look for ways to cut back on your bills (cell phone or cable packages are my first targets); or
• Keep shopping until you can find an option that fits within your comfort zone…

Home Ownership

Many factors play into the decisions that people make about whether to buy a house.

• Economic stability
  • Can you comfortably work a payment into your weekly income statement?
  • Can you meet bank ratios for loan qualification?
• Life Stage
  • What size of home best meets your household’s needs?
  • What amenities do you want/need?
• Regional Implications
  • How does the location impact your decisions? In the Midwest you may be more apt to purchase a house, while in Manhattan you may be more apt to rent.
  • Are the options that best fit your needs available in your area? (An apartment shortage could tip you into a purchasing situation sooner than you planned.)

Vacations

Remember your first road trip? When everyone piled into the car with $20 in their pockets, and when that money was spent you had to come home? The beauty of it was that you stayed within your means. There were no credit cards or overdraft protections to encourage you to overspend.

Depending on your life stage, the road trip scenario may still be appealing to you, or you may want to plan a little more, taking into account a few of these types of purchase decisions:

• Will you pay for your vacation from your bill-pay account or your purchases account?
• Will you drive or fly?
• How will you eat? Will you need lodging with a kitchenette or do you plan on dining out?
• Motel, hotel, resort, condo, family/friends’ home or other?
• How long can you stay?
• Will this affect your income? How long can you miss work?
• Don’t forget to budget for souvenirs and incidentals.

Eyes on the Road Ahead

Most people take a rear-view mirror approach to life. They’re driving forward but looking behind them, watching the devastation left by their decisions.

We want to get to a point where we can look forward and project.

When you need to buy a car, project what your weekly income statement will look like with an extra $200 (or however much the payment is) spent each month. How will this impact your cash flow?

Use this same projecting technique for your major purchasing decisions. Buying a house? Having a baby? Projecting ahead is the key to making better decisions.

Now you no longer have to look behind you.

Starting a Business

Strangely, more people consider starting their own business when the economy is doing poorly than when it is booming. This is particularly true of people who’ve been laid off, as they prioritize security and independence. Here, again, life stages take the forefront in this decision. If this is your ambition, I encourage you to investigate the hundreds of resources available on starting your own business. In the meantime, here’s an overview of some of the decisions you can look forward to.

• Where will you get the money for start-up costs? Do you have savings to live on? Will you need investors?
• What personnel will you need? Do your interests and skills align with the business?
• What will you need for insurance, taxes and legal issues?
• What is the best location? Will you need to relocate?
• What are your long-term needs? Have you weighed the risks?