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Archives for May 2011

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A New Direction: Change Your Mind About Money

Whether we like it or not, money is important.  It affects our quality of life, opportunities for our children and will decide how we spend retirement.  For most of us, money is also a constant source of stress–either we don’t have enough of it, don’t know where it goes, prefer not to think about it or some combination.

The problem isn’t a lack of information.  We can search Google for hundreds of personal finance websites.  We also know the basic rules of money: Live within your means, save for the future, reduce debt, etc.  So what’s the problem?

Think about your financial struggles.  What issues do you consistently have?  What contributes to these problems?  Maybe some of us learned bad habits growing up, maybe we let our emotions control our spending or maybe we just look the other way and hope for the best.

Whatever the issue and no matter how bad our financial trouble, we can turn things around to improve our financial situation.  To do this,  it’s important to 1) acknowledge we have issues with money, 2) decide we want to improve our money management skills and 3) commit ourselves to doing better in the future.  Our goal is progress, not perfection.

Our goal is to get our finances under control, make money management easier and develop a better understanding of our situation and how to improve it.

Posted By Mays Financial

An Expensive Wedding? How Silly. Save Money & Your Marriage

Weddings are a great opportunity for friends and family to get together.  Many people dream about them for years and they are a turning point in our lives.  Unfortunately, they’re also incredibly expensive.

It doesn’t make sense for any couple who isn’t financially stable (minimal consumer debt, car paid off, owns a home, solid income, etc.) to overspend on a wedding.  Let me tell you why.

We know the basics of money, so we can guess what’s silly and what’s smart.  If something is practical and makes sense, it’s probably smart.  If you’re embarrassed to admit something, you do it to impress others or you can’t really justify the cost…it’s probably silly.

When we make silly financial decisions, we’re likely making emotional decisions and not being honest with ourselves. We know it doesn’t make sense, but we do it anyway.  Does that sound like success to you?  It sounds like ramen noodles and an empty bank account to me.

The point isn’t to downplay a wedding’s importance. I understand that the memories last forever, but so does debt…or at least that’s what it feels like.  Debt doesn’t just go away as soon as the wedding is over.  You have to pay it all back and more in interest.

You don’t have to spend thousands of dollars to make the day important or create incredible memories.  When you get married, overspending on a wedding is not the responsible thing to do for the future of your new family.

…Which leads us to our next point:  Financial issues are one of the leading causes of divorce.  Why would you add more stress to your marriage by having an expensive wedding?  By putting wedding money instead towards a new home, paying down debt or something similar you can double your money.  Here’s an example:

Scenario 1

Decision: Spend $20,000 on a wedding.
Outcome: $20,000 in debt plus whatever ridiculous interest rate you pay. Let’s be conservative and say the debt + interest totals $25,000.

Scenario 2

Decision: Spend $20,000 on something smart and productive.
Outcome: Pay down debt (credit cards, student loans, auto loans, etc.) by $20,000 or put it towards a new house (i.e. knock $20,000 off your mortgage).  We’ll assume you save around $5,000 in interest for paying your debt off early.  This adds up to $20,000 + $5,000 = $25,000 in progress.

[note title=”Difference between Scenario 1 and Scenario 2″]In Scenario 2 not only will you avoid $25,000 in debt, but you’ll financially progress by another $25,000.  When you factor in interest and opportunity cost, the $20,000 wedding cost you around $50,000.

What I’m trying to say is…

A $20,000 wedding costs $50,000 in progress.  That’s right, your wedding will cost 250% of its price in lost opportunity.  That’s the worst way to start your marriage.

We weren’t mathematically precise in these examples, but you get the idea.  The better financial decision is obvious:  use thousands of dollars to pay down debt, towards a house or for education…not on a wedding.

As we already mentioned, financial issues are one of the leading causes of divorce.  The divorce rate is around 50%.  Why increase those chances by overspending on a wedding when you could strengthen your marriage and set yourself up for financial success?  Marriage is more than just the wedding day.

Together you can decide if that one day will be a big step forward or backward for your family’s financial independence.  Which will it be?

There’s a sensible middle ground, so just think about it before diving in.  By compromising you will not only give your family a head start but you will also increase the chances for your marriage to succeed.  Of course, if you’re wealthy and money isn’t a concern then you just wasted the last five minutes of your life when you could have been yachting.

In another article we’ll talk in more detail about alternatives to an expensive wedding.

Posted By Mays Financial

On Money & War: Defeating Bad Spending Habits

Live within your means, save for the future, reduce debt, etc.  We know the simple laws of money, so why do we have trouble following them?  Though we’re all wired differently, our brains prefer to take the path of least resistance.  We also tend to underestimate the odds of future problems while overestimating the value of current pleasures as Harvard Professor Dan Gilbert discusses here.

So where does this leave us?  Well, debt ridden, broke and spending retirement sleeping on our kid’s couch eating cat food unless we do something about it.  Here’s a high-speed, low-drag tool to help manage your spending: the OODA loop.

Aside from being a great name for a cereal, OODA loop is the name of a decision-making model developed by Colonel John Boyd, an Air Force fighter pilot.  Though the theory was originally developed as a military concept, it is now used in business and sports as well.  OODA stands for: observe, orient, decide and act–representing a recurring cycle or “loop” we use to make decisions.  Here’s a breakdown of the process:

  • Observe: Collecting information.
  • Orient: Analyze and process information.
  • Decide: Choose a course of action.
  • Act: Execute your chosen course of action.

This process is much more complex than represented by the model and the model is much more complex than I’ve explained (likely to the chagrin of military enthusiasts), but it suits our needs (learn more about the OODA loop).  The idea is to have your OODA loop, or decision-making process, tighter than your enemy’s.  The tighter your OODA loop, the faster you make decisions–or stop bad ones.  If you can make decisions faster than your enemy, you can get ‘inside their loop’ and defeat them.

So why all of this talk of war and who’s the enemy?  When trying to control your spending, the enemy is yourself.  Remember how we talked about your brain taking the past of least resistance?  Your brain has a much easier time being primitive, following poor spending habits and failing to plan for the future.   This is what it wants to do naturally, just as water runs downhill. We need to get inside our own bad spending habit OODA loop.

Some examples of this may be asking yourself why you’d want to spend the next 5 years with expensive interest paying off an over-hyped new car you’ll be tired of in three months when a more reasonable (used?) car would work.  Or maybe it’s deciding against spending $300 on that new purse/shoes/whatever.  Can you really justify the cost?  Do you need this to be happy? Are you trying to impress others?  What else could you do with that money, pay down debt?  How would you feel if you were debt free?  Where do you want to be financially in 5-10 years?  Visualize your retirement and what you want it to be–it won’t happen by itself.

Come up with reminders that mean something to you and use them in these situations–get inside your own OODA loop and stop those poor financial decisions.  Remind yourself that you can afford more after you pay off your debt–the money you save in interest adds up quickly.  Figure out how much you pay in interest annually, you’ll be surprised.  Do you work for yourself and your family or for the credit companies?  Stop giving them so much of your money!

Just as in war, the better we understand our enemy the better we can fight it.  Will this strategy solve all of your financial woes?  No, but it’s another weapon in your arsenal and another way to look at things.  As you learn more you’ll discover what strategies work best for you on your path to achieving financial independence.