Running With Scissors

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Last week we talked about living below your means and why people can have problems doing so. This week we'll look at some things that may help provide some motivation to embrace the concept. Testimonial: several years ago I did the exercises outlined below, and they were real eye-openers. They really speak to those who feel as though they're working their lives away and who are looking for a better way.

The Fine Print

The articles in this series do not offer specific financial advice. Instead they will present financial tips, with occasional smart-aleck observations and commentary, that may or may not be useful in the reader's particular situation. You should always seek advice from a professional who is familiar with your specific circumstances before acting on any of the information presented in this series.

How Much Do You Really Spend?

Here is an exercise that will get your attention. Think about all of the jobs you've had in your lifetime and then add up the total amount you've earned. Many people are surprised to find just how much money has passed through their hands over the years. Now take a look at how much you have to show for it. Do you own a house, or do you rent? Do you own a car and, if so, is it in good shape or is it a real junker? What about savings? If you're like most who do this exercise, you'll be unhappy to see just how little your years of working add up to.

If you're satisfied with the results of this exercise, good for you. If not, you're probably feeling like your paycheques have vanished into thin air, leaving little evidence they'd ever existed (a feeling that evaporates when you sit down each year to do your income taxes and find out that you have, in fact, earned enough that the government wants a cut of it). If you're feeling depressed at this point, do one more thing: forgive yourself. The point of the exercise is not to give you a reason to beat yourself up or feel guilty; it's to help you realise that things can get better. Most of us blow through a lot of money when we're young. Things like serious illnesses or retirement aren't big concerns yet, we're not earning a whole lot when we're starting our careers and a lot of what we are earning goes toward setting up our own households, getting married, having children and so on. In short, there are plenty of good reasons that you may have very little to show for years of working.

On the other hand, if you're like many, you've probably also done your share of spending money unwisely. The good news is that getting a handle on indiscriminate spending isn't too difficult.

Here's a second exercise that will help you find out just where your money is going. For one month, keep a record of everything you spend. When you stop for your morning coffee on your way to work, write down the cost of the coffee. If you drop a few coins into the candy machine in the afternoon, write it down. Meals out. A movie or DVD rental. Your monthly cell phone charges or fees for Internet access. The point is to write it all down (or keep your receipts), every last penny.

Now at the end of the month, pull out all those little bits of paper and add up the numbers. Nearly everyone gets an unpleasant surprise when they finish. Most of us are vaguely aware of how much goes each month toward our regular expenses (rent, car loans and the like). The real shock comes with seeing just how much we spend without being aware of it: the morning latte, the afternoon snack, the magazine we pick up at the store, the stop at a fast food place while we're out running errands. It's this unconscious spending that undermines many a budget.

Affording It

Not convinced yet? Here is one last exercise to help motivate you to spend more wisely. We all know that we've got just so many years to live (at least those of us over the age of 30 or so realise this!). The older we get, the fewer years we have left and the less inclined we feel to waste our remaining time doing pointless things. In this exercise we're going to figure out just how much of your life it takes to afford various items that you want.

First, compute your hourly wage. Ha, you may be thinking, I already know that; I make £10 per hour. Not so fast. Let's say you're earning £400 per week by working a 40-hour week earning that £10 per hour. However, you also spend time getting to and from work; eating meals out or preparing food so that you can bring your lunch to work; shopping for work clothes and other items you need for work; maybe even going to school for extra training. Let's say you're lucky and it takes you only half an hour to get to work. This is an hour a day spent commuting, or five hours per week for a typical work week. You have an hour-long lunch break, so that's another five hours per week. Including just these two extra items, you can see that your work week is actually 50 hours, not 40. This means that your hourly wage is actually £8, not £10 (£400 divided by 50 hours).

And we shouldn't stop there, because a working person incurs additional work-related expenses such as special clothing, transportation costs, more wear and tear on the car, perhaps additional personal care items like hair cuts, and eating out. These additional expenses add up and the total should be subtracted from the amount earned. Let's say our worker spends an additional £10 per week on these extra items. This means he actually nets £390 per week, which drops his 'real' hourly wage to £7.8, well short of what he thought he was earning.

As a final step, let's say that our worker has decided that he just has to have a new plasma screen TV. Let's say that the TV he wants is selling for £2000. This means that it takes over 256 hours of his life to pay for it (the cost of the TV divided by his real hourly wage). Unfortunately consumer goods are priced in pounds or dollars, not in 'hours of life'. Thinking about our spending habits in terms of 'hours of life' allows us to evaluate what items are truly important to us. And note that everyone will get a different answer to this exercise. Our worker may conclude that the plasma screen TV is really not worth 256 hours of his life and buy a cheaper one. Or he may decide to moonlight to earn some extra money to afford the TV he really wants. The important thing to remember is that there is no 'right' answer to this exercise; the correct answer is the one that reflects an individual's personal needs and values. And becoming aware of your needs and values is an important step toward financial security.

Next week: distinguishing 'needs' from 'wants' and how to afford both.

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