David On Finance

Well, my wife and I just got the exciting news that we are going to have a baby this August! While we have a healthy fear about this, as the person responsible for our budget, I have a very real fear about how much this will cost. Put simply, babies are expensive! From the moment you conceive, plan on spending some major bucks the rest of your life. In my research and planning, I’ve arrived at some conclusions, and figured I would share them with others who may be fretting.

1. Talk It Out

The first thing you really need to do is sit down with your spouse and make sure you’re on the same page about taking care of a baby. While you envision a two income household and childcare, she may envision being a homemaker. While you may want your children to earn scholarships to college, your spouse may want to save money for them. Hopefully you discussed these topics before marriage, but if not, definitely spend the time to do it well in advance of the due date. On a non-financial note, it’s also time to make general plans of how you feel about punishment, babysitting, names, religion, nursery decor, etc.

2. Plan Healthcare

The fact is a baby can cost you a lot before you even see it’s pink cheeks for the first time. Monthly prenatal visits, vitamins, maternity clothing, healthier foods, and the delivery costs add up tremendously. Now would be a good time to make sure you have health insurance, and be aware of your deductible and covered expenses. Depending on your level of insurance, plan on spending anywhere from $1000-9000 on your entire pre-birth experience. Also, be aware that you will need to add your baby to your health insurance almost immediately, which can increase prices significantly per month. If both spouses have access to insurance, you may choose to hold two separate policies to save costs. Also, you should now consider increasing your life insurance benefits; if you or your spouse were to die, how would the remaining spouse be able to care for the child?

3. Budget, Budget, Budget!

It may go without saying, but you seriously need to go ahead and plan what it’s going to cost per month and find where that money is coming from. For us, we just finished off paying my old debt, which means we now have that $400 extra to spend. We were going to put it toward a house, but it looks like that will have to wait now! You may need to find ways to cut other categories down. Maybe less entertainment, or less eating out (especially since you will likely not be going out much anyway). But plan now so you will know what to expect! If you are totally clueless to the expenses of a baby, don’t worry; I was too. As a general rundown, I will give some basic monthly costs for you to consider:

1. Disposable Diapers (200-300/month) – $100
2. Wipes (4 boxes/month) – $15
3. Formula (30 cans/month) – $110
4. Childcare ($125 per week) – $500

Obviously, you may be able to cut costs in these categories, but do your research. You can save money by breastfeeding and cloth diapering, but those have very big drawbacks, especially for working couples. You may also be able to work from home, and save on childcare for awhile (while they don’t demand 100% attention) Also, this does not include the larger purchases such as equipment, nursery items, clothes, bottles, etc. that will be needed. And you may want to work on increasing that emergency fund! Now, you have one other member of the household that may need something unplanned!

4. Get Family & Friends Involved

You may have one untapped resource right nearby, and that is your friends and family. Maybe they will throw you an amazing baby shower that provides all your needs for the next year. Maybe someone is planning to have permanent birth control soon, and is getting rid of all their baby stuff. Maybe they will offer childcare. The point is, now is not the time to be proud. It does take a village to raise a child, and you do not have to do it completely alone. Allow them to help you out, and you will not be sorry! Even in a bad economy, family and friends will come through for you. As an example, my dad is going to build a cradle that will be both useful and become an heirloom of sorts. Our church will throw a shower, and one family member has offered up lots of gadgets, clothes, and equipment (car seats, swing) from her previous babies.

5. Cut Corners

This is where you decide what you really need. Does a baby need a a whole new changing table, or would an existing bed or dresser suffice? Do you need 3 strollers, or would one good one work? Do you need brand-name diapers, or would more generic brands work? Do you really need to outfit a whole new nursery, or would the baby be just as happy with the basics? Let’s face it – babies only use half of this stuff for a few months of their life and then it is worthless. And I’m not here to judge you if a decked-out nursery is what you want to do; it’s all about discovering what you believe is most important, and cutting corners on the rest. But at least explore your options – go to a baby consignment shop, or visit some garage sales in nicer neighborhoods. Research how to select quality, sturdy equipment.

6. Start now!

I use the toilet paper analogy – it is very expensive when you wait to buy until you need it. But if you use sales and coupons and stock up ahead of time, you can spend much less! Diaper coupons are common, but do not run all the time. Start saving coupons now, and you will appreciate it later. Even better than that, start buying them! Go ahead and start stocking up when they are on sale and you have a coupon. Look for free samples of baby products online. If you start deal-hunting now, you can be well stocked up when the time comes, and spend much less per month on the essentials. It’s also ok to start buying clothes on sale; post-Christmas we found several outfits for just a few dollars each! Be clever and wise, and you may get away without much budget increase at all!

Having a baby almost guarantees you will be spending more than you anticipated, but with some advanced planning it does not have to be a bad thing! Some smart budgeting and deal-hunting may make the transition almost effortless. The main point is to start talking about it with your spouse, and the two of you getting creative to find ways to give your baby a great childhood without ruining you financially! The more you plan now, the easier it will be when the time comes.

UPDATE: Evan from My Journey to Millions has featured this post in the 241st Carnival of Personal Finance. Be sure to check it out; there are several great articles in the carnival this week!

One of the misconceptions I’ve had in this journey to becoming debt free is that I had to tighten my belt and not do the things I’ve wanted. To an extent, it is a wise idea for sure; I carefully budget for movies, eating out, and going out with friends. Having a set limit means I can’t just go out all the time and spend, and I’ve resorted to many not-so-fun nights at home. I think that while my debt is so massive, this is actually a healthy thing.

However, I’ve also neglected doing big, extravagant things in the name of saving money, such as relaxing vacations, or random adventures. I’ve had neither vacation nor adventure in the past two years, really. While that is a good idea finance-wise, it’s a horrible plan for a person’s psychology. The fact is that as Americans, we are far too busy, overworked, and underpaid to neglect setting apart time to take care of ourselves, to rejuvenate and get perspective. I’m a guy in my mid-twenties; I am supposed to be going on adventures and exploring right now. Since I haven’t, my vigor has atrophied. I feel blah and mediocre, and my conclusion is that I must take a vacation.

However, how is one to take a vacation where there is no money? Furthermore, how does one not feel so guilty about spending money on a vacation when there is plenty of debt to be repaid?

The answer to the latter is simple; I don’t feel guilty because if I keep neglecting myself, I’ll burn out at work, I’ll burn out in life, and there will be no energy left to keep up with everything life throws at me. I’ll try to fill life up with things again, which will sink me back into debt even more. The principle of interest works both ways; while sacrificing money in debt payments results in more payments down the road, sacrificing a vacation right now might result in a complete catastrophe.

The answer to the first is not as simple. Vacations are, simply put, expensive. While relaxing in the bahamas for two weeks would be awesome, I can’t afford several thousand dollars either! After using all the logic God gave me, I concluded that a trip to Washington D.C. was the perfect vacation. I’ll share some of my tips here, so someone hopefully benefits.

1. Think About Proximity – A good vacation spot has to be far enough away to keep you from getting sucked back in to life, but close enough to keep travel costs down. D.C. is less than $200 airfare from Atlanta, which is great! Another thing keeping travel costs down is that it’s easy to walk once there, or take public transit. Either way, a perfect place location-wise.
2. Find Cheap Lodging – I have a friend that just moved to the D.C. suburbs. Furthermore, he’s been wanting me to come up for a long weekend quite awhile now. Lodging costs will be zero. While it may be more difficult for a family to do this, there is also no harm in asking. I remember a time when I was a kid, we went to visit family and my parents stayed in one family member’s house while we kids stayed in our favorite aunt’s house. We both got a break from each other, and a family of four had free lodging. Win-Win.
3. Consolidate Dining Costs – Most people ruin their food budget by eating out all the time. Since I’m staying with a friend, we can cook several nights. This means we can use our money to eat very nice meals strategically. What’s better, 5 decent meals out, or 2 really nice meals out and eating at home the rest of the time? Breakfasts are cheap this way, and I may even get stuff to pack quick lunches a few days, keeping total food costs around $100.
4. Consider the Attractions – D.C. is a hotbed for things to do for free. Almost all the museums are free or cheap, and there are a plethora of them. I know two of my interests are politics and the arts, and D.C. is a great place for both. The only thing I’ll be really spending money on is if I see a show at the Kennedy Center, which I probably will. You can’t beat a city with enough free things to keep you busy for a full month if you wanted.
5. Share Your Trip – Talk to people about your trip! They may suggest places to go or things to do. Or, like my roommate, they may know someone who can get you an exclusive tour of something. In this case, it is possible I can get a White House tour through this contact (rather than the 3-4 month waiting period through Congressional offices). Others may advise you on things to ignore, and some may even want to make it into a road trip! I found 3 friends who may want to go with me (and possibly do different things while there), but this keeps down travel costs, and those friends may tell other people who can help us out with the trip too!
6. Time it Perfectly – In my case, I wanted it to be soon, but still have plenty of time to save up for it. I chose mid-April for many reasons. First, summer has not yet begun, and summer is peak season. Spring breaks should be pretty much over by that point. The weather is still somewhat cool at that time. It overlaps two paycheck periods, so I can work straight until I leave, and then work straight when I come back, meaning I don’t sacrifice any time off work even though it’s a whole week (and in my case, time off means I don’t get paid). Plus, it centers around the weekend, which means that my friend can take two days off and still hang with me pretty much the entire time. It’s two months away, which is plenty of time to save for it, yet two months is not a long time to wait for a vacation. All said, it is the perfect time to take the trip!
7. Know Your Limits – The total cost for my trip is around $600, even assuming I go over in some categories. That is NOT a lot of money, and I can easily save that in three paychecks. Furthermore, I will receive a fifth paycheck while there, which means that if something bad happens and I need extra money, it won’t hurt me so much. Plus, the structure of the trip means that each paycheck can go toward something different. I’ll purchase the airline tickets this paycheck, other tickets and car reservation on the next, and then save for food on the last. The fourth will go toward “extras” on the trip, like possibly a new lens for my camera.
8. Know Thyself - I know my personal physical limits, and planned days around light walking accordingly. There’s nothing worse than a vacation when you come home tired each day, so while I want to do a lot of things, I consolidate it in a way to where I’m not ever exerting myself. Plus, I’ll not be afraid to simply just not do something if I’m not feeling it. While I want to observe a Supreme Court session while there, maybe the better option is to just take their quick tour. Also, I just finished saving up for a nice camera (a Canon Rebel XTi), and D.C. is the perfect place to shoot the type of photography I like. While some people would choose different things to do there, I know my likes and dislikes and choose accordingly. That said, don’t fall into the “prepackaged tour” trap. Spend time planning out your vacation. Trust me, the planning alone is already making me feel energetic and ready to take on life. Don’t sacrifice that for a bit of convenience, especially when it means you might not fully enjoy everything on your trip.

So, all in all an exciting trip I have planned. A full week, no sacrifice with work time, cost is less than $600, everything is perfectly tuned to my interests, and a few friends might even join me (but not join me on EVERY thing). That sounds like a perfect trip to me. Plus, with properly saving the money beforehand, I won’t be regretting it 4 months down the road when I’m still paying on it. Putting vacations on plastic is a sure way to keep yourself home forever, and it will feel good to come back from it and STILL have less debt than when I left, thanks to the magic of automatic payments.

So the lesson here is to not neglect yourself when on the journey to financial freedom. Don’t feel bad about taking a vacation, just plan it so well that nothing is wrong about it. Then save the money (and extra money) ahead of time, and you are all set. It doesn’t have to be the Bahamas to have a great time and relaxing trip, but with a few basic tips like these you can maximize your Vacation ROI and make it even better than a plain old island adventure.

In the article Money Myths for Young Graduates, one of the myths I wrote about was the misconception towards long, detailed budgets. However, I have found that micromanaging every little transaction literally sucks life out of my soul. As I mentioned, I use Wesabe to view my spending, instead of Quicken (as a software developer, I’d rather shoot my eyeballs out than look at Quicken more than a minute). Now, Wesabe is nice because you simply “tag” a transaction. That is, instead of putting a trip to McDonalds into a Food category, you could tag it as “food, fastfood, warning, fat”. At the end of the month, you can then view the Fat category to see how much you pay to gain weight. This really does a great job of eliminating the need to find a tiny category for every expense.

However, despite the agile way Wesabe allows you to view your expenditures, I really needed to find a way to control my spending. Strict categories are good for learning how to spend, because you can easily see “oh, I spent $39 on fast food, when I only budgeted $25″. However, when you create a category list, you can easily get to 30-40 categories without blinking.  My solution was to knock it down to 4, one of them having 2 subcategories. Then, I use Wesabe to view exactly where extra money is going, or where I have done well. Admittedly, these categories may not be appropriate for older married people, because it ignores things you might need to track such as tax-deductable home expenses or such. However, I find it a great tool for those starting out. It keeps things simple, and makes the end-of-the-month sorting process so much quicker. For those of us who are not Type A, it keeps us on our game.

1. Static Expenses. I quickly noticed that if something was going to cost the same amount every month, then why did I need to track it separately? I know my rent is $875, I know my car payment is $250, I know my insurance payment is $100. Why should I track those individually? I found about 7-8 “categories” that fell under this description: required expenses that do not adjust from month to month. Put them all in the Static category.

2. Dynamic Expenses. These are the expenditures that can change from month to month. There are two types of dynamic expenses I saw, Required and Flexible. Required includes the expenses that may differ each month, but you are stuck paying them, such as electricity, gasoline, etc. Flexible includes the expenses that may differ each month, that you can exert some self control to decrease, such as food, entertainment, bank fees, etc. The reason these two go into the same “main category” is to contain in one category the fluid part of your budget, or the part of your budget that has the most activity. For example, if you micro-budget $100/month for gasoline and wind up spending $120, you must “borrow” that money from your Flexible budget. In this way, you can set a main budget for all Dynamic expenses, and if you have to get a second haircut in a month it’s ok; just use money from another sub-category, always prioritizing the Required category. Again, I’m single, so it’s very easy for me to borrow money from my food allowance, I simply eat cheap. This may not work for a family, in which case you can always make food into a Required or Static expense. The whole point is to not follow my format but create your own.

3. Savings. Obviously, this includes any money you put towards any type of savings account. Right now, I am collecting an emergency fund, and have a relatively high Savings budget. When I begin shifting money to debt repayment this may drop to nothing. However, I also use this to track money I use for my retirement account and any money I make in interest or dividends on previous investments.

4. Debt Repayment.  This is the category that takes into account any debts you are actively engaged in paying off. You may keep your mortgage, student loans, or cars under the Static category, since they are stable monthly expenses. However, if you begin paying extra in hopes of being out of debt sooner, you may wish to shift it to this category. My endgame is to eliminate this category entirely.

As a software developer, I pay a lot of attention to design, even reading about architecture and typography. A common theme is that the key to any good design is workable simplicity; that is, the least amount of overhead that allows the same accomplishment. In software, this translates to the fewest clicks it takes to accomplish an action (even if I have to add super advanced logic into the code to “think for the user”). In architecture and photography, this may be the concept of empty space or geometric patterns to gain a desired effect.

In the same way, in order to have a well-designed budget, it should not be any bigger than necessary. You  may find that you still need 30 categories to effectively manage your spending. However, some of you maybe fine with 2-3 categories. I have found that the 4 category system works well for my expenses. However, everyone is different.

My point here is that it’s your responsibility to design a budget, rather than using someone else’s. Take a deep look at what your are spending, and what your common pitfalls were. Design a way to manage things where you will minimize setbacks. Design a budget that allows you to quickly categorize things at the end of the month. If you crack open Quicken, the first thing I recommend is to delete every category and start from scratch. Otherwise, it will always be too complex and unworkable, and the result might be that you give up again. By designing your own budget, you eliminate the chances of failure, because you know yourself better than Quicken knows you. And, like me, if you still wish to track expenses in micro-categories (if you want to know how much you spend to gain weight), try out a tool like Wesabe to help you out. In addition to a small categorized budget, a more flexible tool may work wonders toward your personal financial goals!

Today I had a close call. Historically, I have had 2-3 overdrafts in that period between my first and second paychecks each month. It has always bothered me because looking at a whole month my budget always added up. I’ve always had a budget, but these fees have pretty much rendered it useless over the past year or so.

The root cause was that a few things are debited that I did not know about. I own about 23 domain names total, for various people and purposes, and when one expires, I get renewal fees debited. I reactivated my World of Warcraft account a few months ago, and that one gets debited the 10th as well. There were a few miscellaneous fees also debited that I was not expecting. The total cost wound up dropping my bank balance to $230, which is only bad because my car payment of $249 is debited the 12th of each month. Looking at my accounts over the weekend, I knew it would overdraft yet again. Even after my post on the joy in frugality, I was getting pretty down; it was a small failure.

I was saved by Quicken, and not the way you may think. I bought Quicken 2007 for Mac a few weeks ago, but hated it. It wasn’t as functional as the Windows version, nor did it have the “Mac Experience” UI. So, I asked for a refund, which luckily was applied this morning before my car payment! No overdraft, even though my balance is cutting it close.

I’ve noticed that in the first two weeks of each month, I bring home $1100 and expenses are around $1300. The second two weeks, my income is the same, but expenses drop to $600 or so. Basically, I am going to have to either change due dates to later in the month, or try to keep $200-300 at the end of each month to float the first two weeks.

So, it was indeed a close call, as a $35 overdraft is $35 I don’t get to put toward my debt at the end of the month. This time, a little bit of good luck and timing kept it from happening, but I have to be more proactive in the future to keep it from happening again.

Now that I know where I am as far as financial matters go, I have to find out where I can trim down my budget to pay more towards my debt. As I said before, 28% of my income was wrapped in fees. Luckily, I know Excel very well from my day job, and was able to break down my fees and see when they were occurring. I normally get paid on the 15th, and have a cell phone bill that is automatically debited that day. My bank, Wachovia, tends to make the debit before they make the deposit, on a very consistent basis. This means that if I only have $40 left, I overdraft, and then the subway I get for lunch overdrafts, and now we’re at $70, unless a few more charges get through. Now, my bad experience with Wachovia is a story for another time, as this is just one example of the way I think they tend to make extra money (debits before deposits). Granted, I shouldn’t be living paycheck-to-paycheck, and a $60 charge shouldn’t hurt me, but I’m fixing that now.

To fix that particular issue, I had T-Mobile change my billing date forward to the 25th, receiving some of the best customer service I’ve had with a cellular provider. While on the phone, I had them review my current plan and see if I would be better served with a smaller plan. Originally, I had 1000 minutes, with an addition of a 400 text messages package. At one time, I was using both of those to capacity. However, my recent history has seen around 400 minutes per month, and 30 text messages. I was able to cut my plan down almost in half! That’s an extra $25 per month I’ll have.

I also noticed that my entertainment budget was out of whack. It was difficult to notice, because most of it is subscription based. I subscribe to Blockbuster Online and the Rhapsody music service, as well as to 2-3 magazines,  go to the movies 1-2 times per month, and regularly buy music from iTunes. I’m going to keep Rhapsody since it keeps me sane at work, but I’m going to drop the magazines since I have no time to read them anyway. My Blockbuster subscription is awesome, but it’s for 3 movies out at a time, and it’s become hard to find things I haven’t seen but want to. I changed my plan to having 1 movie out at a time, and I think it will work much better. I save quite a bit this way, and I make better use of it. I’ll likely cut down theater-going to once per month. I don’t even enjoy most movies out these days anyway. As far as iTunes, it’s time to chill on that until my debt is gone. I can always listen through Rhapsody for now and then buy the music later, or wait for good CD sales.

Also, along the line of monthly fees, I am late on almost everything. This is because I’m both phlegmatic and love to procrastinate, and I wind up being late. Bam, a $30 charge here, a $5 charge there. It adds up, and gets compounded with interest. I put all my payments on auto-pay for this month. I would use Wachovia’s bill pay, but that’s another way they’ve messed up in the past. By eliminating late fees and overdrafts, I will save hundreds of dollars.

In addition, I can save money by making better choices with food. I need to be cooking more often, and when I do eat out, I need to make better decisions (both financially and calorie-wise). I also am a sucker for credit card activation sales pitches, because I’m non-confrontational. Thus, I have a few of those “credit protection” or “identity monitoring” services, and such. I need to get rid of those; I have no credit to monitor. When I get my debt under control, I’ll likely sign up with one not associated with my credit card. I know they are going to be a pain in my rear to quit them, but it will save me about $20 each month.

I’m also Craigslisting old junk I need to get rid of. Not only is it taking up valuable space in my apartment, but I don’t use it anyway, its value is decreasing by the day, and if I have to move, it’s going to be that much more of a pain. I’ve already made about $300 doing this, and expect to make about $1000 more, if my computer sells. (I’m on a Mac now, so I have no desire to keep a PC around)

The last thing I have left to do is change checking accounts. My current account both sucks and charges me for it, so it’s time to leave for something better, like the Schwab One account with Checking. That experience will likely be its own post, as it will be a big logistical move, and will actually earn me interest on the dollars I save.

Mostly, I can find extra money by changing the way I think; that’s what it comes down to. Instead of seeing a balance of $250 as something I can spend, I have to view it as something I can’t allow to be debited. Instead of just thinking problems will sort themselves out, I have to become proactive about every dollar I spend and owe. I can no longer say “Oh, it’s just $20, it won’t matter”. When I do that 5 times, it’s $100 extra per month I could be putting towards debt owed. This really is going to be as much a mental exercise as it is a logistical one.