budgeting

Should You Pay an Allowance to Your Children?

Don’t most children just get what they want nowadays so there is no need for an allowance? Maybe for some, but I am sure that has always been said. Here are the pros, cons, and a blended approach of an allowance:

Pros:

Value of money: An allowance can help children to realize the value of money and that they need to delay gratification for things that they want and need. However, the allowance should be reasonable and age appropriate.

Reward: It can also be a reward for helping out with household chores.

Cons:

Poor perception of hard work: If an allowance is not tied to any sort of responsibility it can be thought of as a “right” to receive money for doing nothing. Think of capitalism vs. socialism.

Responsibility to family: Why should you get paid to do the dishes or make your bed? Isn’t this a part of being a family and being responsible? There is an expression that charity begins at home.

Blended Approach:

Set chores, reasonable allowance: An allowance can be tied to completing a set amount of chores that are age appropriate for a small allowance. The allowance should not be too small, but not too large.

Reward for extras: A reward can be given for going above and beyond with helping out, but it doesn’t always have to be monetary. I know that I work harder with simple words of recognition, but ice-cream and Italian pastries are very effective also.

If you like what you just read, then don’t hesitate to forward/share with your friends and/or click like!

Make sure to subscribe to our weekly emails to receive practical business, financial and tax strategies! Sign Up Now!

You’re Not Too Sophisticated for Cash

It seems as though nobody uses cash anymore, but why should you? Smart people use credit cards and pay the bill at the end of the month so they can earn points, build credit, and have additional time to pay for their purchases, also known as “float.” But is it really that smart to use a credit card or check card to make all of your purchases, such as groceries, gas, dining, etc.?

What exactly are the benefits of using old-fashioned cash? I’ll give you a few:

  1. Easier Budgeting: No one likes to budget, which is why almost no one does this. But with cash, you can easily set aside a certain amount that you need each week for variable expenses, such as groceries. Once you start using cash you will become more aware of how you spend your money as it’s more tangible than swiping a card.
  2. You Will Spend Less: It’s easy to whip out your card a make purchases without even realizing how much you are spending. I’ve heard statistics that say that you tend to spend between 10% to 50% more on purchases when using a credit card or check card versus using cash. If your variable expenses are $50,000, then a 10% savings would equal $5,000, which is greater than any credit card rewards or possible float.

Watching your spending is one of the ways of becoming wealthy or at least financially stronger. I have witnessed this habit over the years, although it would be considered a small sample size and not an actual study, but there is a great book that espouses frugality called “The Millionaire Next Door” by Thomas J. Stanley.

As a caveat, I do not recommend using cash for business expenses as it creates an accounting nightmare.

The Envelope Method Revisited

A while back I wrote about using the envelope method to help manage expenses and cash flow. Because I believe in simplicity, there may be a simpler way to use this powerful method.

First, a background on the envelope method: I started using this method when I was a teenager through the guidance of my father, and later read about it in one of Dave Ramsey’s books. Basically, the envelope method requires that you set aside a portion of your income in cash between multiple envelopes for your expenses. This helps you to budget for your expenses, decrease wasteful spending and debt, and even out the ups and downs of your cash flow. Do not scoff at this method, as it applies regardless of your income.

Although you can set aside cash for all of your expenses, the most practical way is to set aside cash for your variable expenses that you can easily pay cash for. This includes expenses such as groceries, gas, clothing, dining, and spending/miscellaneous expenses. Other items can be automatically deducted from your paycheck or checking account, such as saving for Christmas gifts and vacations, and automatically be deposited into a separate savings account.

Also, to make the envelope method easier to follow, you should try to keep the number of envelopes to around five. I actually recommend writing the date, amount contributed or spent, and the balance on each envelope. For a sample envelope, you can email me and I will send you a sample as a Word document.

Are You Overwhelmed By Debt?

Why or how do so many people get into trouble with debt? When does it become a problem? There are so many reasons, such as job loss or, health problems, but overall it is a disconnect between income and spending, and not enough focus on financial management.

I’d like to share a few simple ways to reduce your debt and help to minimize its use in the future. If you keep it simple, you are more likely to be successful.

Stop incurring more debt: You can’t get out of debt if you are still using your credit cards. Do not increase your debt or you will never get out.

Emergency fund: By building up an emergency fund, you are less likely to take upon more debt for something unexpected. For now, it can be around $1,000 to start. Ideally, you will want to work towards 3 to 6 months worth of expenses, but it doesn’t make sense at this point to save $10,000 and simultaneously have a $10,000 credit card balance.

Budget: If you are serious about reducing your debt and improving your financial situation, you need to take the time to make a budget. You can use software, such as Excel or Quicken, but a very simple and effective way is to use envelopes. For example, if you are paid weekly by your employer and spend an average of $200 a week on groceries, then place $200 in an envelope labeled groceries. When you go food shopping, bring this envelope so that you can only spend$200 or less. This can be done with all other expenses. It is simplistic, but if it is done right it is extremely effective. My father taught me this one.

Know what you owe and prioritize: Make a list of all of the debts you owe, including credit cards, auto loans, equity loans, mortgages, student loans, etc. Now you need to work at chipping away those debts. The rational place to start is with the highest interest debt, but I don’t recommend this. You should actually try to pay off the smallest balances first because it will give a sense of accomplishment. Once the smallest is paid off, then use that payment toward the next balance. Finances are extremely psychological, as most of our financial decisions are emotional-based.

These few steps are a good place to start to manage and reduce your debt. If you are serious about debt elimination, you will not look for shortcuts, but rather ways to increase your income to pay off your debt sooner and take control. Focus and simplicity are the keys. If you need more help you can contact my office. Additionally, there is an excellent book on this topic that parallels my thoughts on debt, entitled “The Total Money Makeover” by Dave Ramsey.

Budgets are Boring

Ever wonder where all of the money went and you just don’t know what you spent it on? You’re not alone, but it’s still not a good thing. Here are a few simple ways to help you to keep track of your money on an individual level. We’ll address businesses in another article.

Quicken: You need to develop a budget and keep track of your money. A good software program Is Quicken, where you can create a budget and compare it to your actual income and expenses.

Envelope Method: Another old-fashioned, but yet effective budgeting method is to use the envelope system for your expenses. You would use an envelope for each of your expenses, such as gas, groceries, and dining, and then contribute a set amount of cash to each envelope each time you get paid. Once the envelope is empty then you wouldn’t be able to spend more for that category. This takes some practice though, because you need to make sure that you contribute enough and don’t “steal” from other envelopes.

Automatic: This method calls for automatic withdrawals and payments from your checking account and/or paycheck. For example, you can have a portion of your paycheck directly sent to a savings account or have investments withdrawn each month from your checking account. Expenses and even donations to your Church can also be made automatically.

Each method has its pros and cons, which is why you need to choose the one that fits you. I believe that one reason why people do not like to budget is because they view budgeting as a way of restricting themselves, similar to a diet.  The opposite is actually true because a budget will ensure that you are spending your money on the things that matter the most to you.