Lump sum or monthly payments?

Many insurance providers give you the option of paying off a policy term all at once, or in installments.  Paying off all at once is called a lump sum payment.  The case can be made for both making lump-sum payments, and for paying in monthly installments.

For example, let’s say that a homeowner’s insurance policy is $600 for the year.  The insurer would typically give the homeowner one of the following options:

  • Pay $600 in full, or pay $50 twelve times, with a $4 check processing fee each time.  In this case, the monthly payment plan would result in an extra $48 worth of fees.
  • Pay $50 twelve times, or get a 5% discount for paying in full.  Paying in full would save the homeowner $30 (5% of $600).

In each case, paying over time is more expensive than paying up front.

However, let’s say that the homeowner is trying to build an emergency fund.  Paying over time, even though it’s more expensive, would alleviate a cash flow crunch at the beginning.  Rather than drain $600 all at once, only $54 would be drained the first month.  This would allow the homeowner to build up an emergency fund faster.

Lump sum vs. monthly payments involves a cost-benefit analysis.  Do you need the money now, or can you wait until later?  Are you willing to do without money now in order to save more money later?  Whether this is a good deal or not depends on the amount of the lump sum, and how much it costs to pay over time.  $48 may be an acceptable cost, but $150 wouldn’t be.  $4 might be a no-brainer.

A hack to keeping track of expenses

One of the first tasks to successful budgeting and money management is to keep track of expenses.  You may be able to guess where money is going, but until the numbers are in front of you, that’s all it will be: a guess.  Only the very rich can afford to guess with their finances; everyone else needs to be keeping track of expenses.

I’ve been trying (unsuccessfully) for years to track my expenses.  To me, tracking my expenses involves a careful enough categorization that I can target the hot spots.  I always get so far behind that I do just what it takes to get my taxes in order, but little beyond that.  After the receipts have piled up too high, it’s just demoralizing to look at.

Some receipts are easy!

I’ve been using Quicken as my expense tracker.  There is a lot of capability in Quicken to download transactions automatically from my banks, credit card providers, etc.  This saves a lot of fat-fingering.  However, all I get are the total amounts of each transaction.  So, if I go to Walmart, for example, and buy groceries and clothing, all of that will show up on one receipt when I check out.

Each transaction in Quicken allows for a split categorization; this is the place where I can divide a single transaction into, say, food, clothing, home and garden, etc.  Of course, that involves fat-fingering in the amounts from the receipts, which sometimes have cryptic descriptions on them.  Further, you need the receipt, of course.

Yesterday I went to Sweet Frog with my family.  When the cashier asked my wife if she wanted a receipt, she said no.  I told her that I would have liked the receipt so that I could keep track of the expense.

What she told me next was the hack.  She told me, “Well, it will show up as a charge to Sweet Frog.”  Sweet Frog is a frozen yogurt shop, and that’s all we buy there.  So I know how to categorize that entire transaction, even if I don’t have the receipt.

For some receipts, it’s easy to categorize the whole amount.  That makes it easier to keep track of expenses.

Not having gas money to get to work is serious

This reader story over at Girls Just Wanna Have Funds is sad.  The last days of the month arrive without enough money left to pay for basic expenses — including gas to get to work (emphasis mine):

” … Right now I have a full time job where I’m paid monthly.  However, my problem is that I run out of money by the last 10 days of the month.  I’m in some hot water at work because I often have to call out because I can’t get to work.  This week I was written up because I wasn’t able to come in to work because I had no money for gas. …” ~Jennifer, a reader of Girls Just Wanna Have Funds

This is serious business.  This is a huge downward spiral just waiting to happen.  If money is tight now, it will be really tight if this reader gets fired because she’s not showing up.

Her first priority should be making whatever arrangements necessary to be able to get to work when she needs to.  She needs to keep the money coming in.  If the money stops coming in, she’ll quickly be in default on her debts, and will be delinquent on whatever she’s paying for shelter.

Once she can get to work reliably (but maybe inconveniently) then it’s time to work on the other areas.

Here are some options for lower-cost methods of getting to work:

  • Public transportation.  This may be inconvenient and may take longer, but it’s likely cheaper.
  • Friends and family.  Maybe some work nearby, or are available to take her there as a favor.
  • Ride sharing websites. Depending on her geographic area there may be websites that can match her up with someone who’s passing by where she lives on the way to her workplace.
  • Church and other community organizations.  Some people may offer free rides to work as a ministry or a community service.

Finding a cheaper way to get to work can also be part of her overall debt reduction plan.  If she can get by without a car, then she could sell her car, save on the insurance and upkeep, and use the difference to pay down her debt.

If this isn’t quite enough, then finding a second job or cutting all but the most basic of expenses is the next step.

But first and foremost:  Keep the job and keep the money flowing!

The toughest part about tracking your spending

The standard procedure for getting a handle on your spending is to track it for a month — track where every penny goes, and categorize the expenditures.

Getting past a month is the toughest part.  It’s not too bad for the first few days of the month, but after a week, remembering to go through the freakin’ receipts is a drag.

I know this.  I’ve run across this psychological barrier many times and it’s tough to crack.

Fortunately, if you use a credit card for most of your purchases, you already have a record of what you buy — or, at least, the stores that you bought at.  This record, coupled with your receipts — which you can just shove in a box, honestly — are enough to give a decent picture of where your money went for the month.

Once you’get this 80% – 90% picture of where your money has gone, then you can tackle the last little bit — the cash purchases at the vending machine, paying out an allowance, yard sale purchases, etc.  But that becomes much easier to do if it’s only a small part of what you buy.

Did your team get kicked out of March Madness? Time to budget!

Fellow personal finance blogger Jeremy Vohwinkle of Generation X Finance was lamenting over at the Wise Bread forums the recent drop in traffic due (allegedly) to the ongoing basketball tourney.  To quote Jeremy: “These people need to turn off the TV and get back to reading about the exciting world of personal finance.”

Hear, hear!  Especially if your team has been kicked out already.  Why are you still watching?  It’s over for your inferior team.  Why add insult to injury by spending your valuable time and adoration on the team that ousted your favorite?  No good reason I can think of.

A great way to ease your sorrow is to replace the time with some self-investment, like making or revamping a budget.  (Or at the very least, if you’re in a bad mood already, why not do something unpleasant and get it over with? 🙂 )  Finding time to invest in yourself is a constant re-evaluation of priorities, and merciless replacement of low-payoff activities with higher-payoff ones.

I don’t really care much at all about college basketball, but I won’t fault you for caring about it if you do.  We all have different ways to recharge.  If you find yourself wondering where all of the time goes, though, then you might consider looking at how you spend your time, and whether some of the ways you spend your time are really that enjoyable.

Keep your emergency funds to emergencies

Fresh brains emergencyThis post over at Money Talks discusses what an emergency is, specifically as it pertains to when to dip into your emergency fund.

The examples that she brings up are (a) job loss and (b) medical emergency.  These are valid emergencies to me as well.  They’re the very reason that one sets up an emergency fund.

Some expenses that don’t qualify as being emergencies:

  • Vacation.  These should be planned for and budgeted for separately.
  • Regular home maintenance.  Maintaining a home requires regular budgeting for lawn care, gutter cleaning, painting, HVAC maintenance, etc.
  • Insurance and other periodic payments.  These can be amortized over each month.  They’re not a surprise.
  • Vehicle repair and replacement.  Cars don’t last forever.  Their replacement can be planned for.
  • Christmas.  Gift giving can be planned for and budgeted for.

Keep your emergency fund only for emergencies, and it will be there when you have a real need for it.

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