It seems the move has given me plenty of fodder as far as writing goes. I have more ideas flying through my head than I ever did when everything was going nice and easy for us! The move has kind of rattled me in a good way and made me experience just a bit more of life.

This morning, while talking with my wife, I caught myself saying something that is a pretty common budgeting/money management mistake. It was in response to my wife’s question about when we were going to purchase a couch. (Yesterday a magazine salesman came to our place trying to make a sale. I had to laugh at myself later when I realized how absolutely sparse our place looks at the moment. And he wanted me to subscribe to new magazines? I can barely make it through Kiplinger’s each month…) Anyway, back to the couch. She asked me when I thought we would be able to purchase the couch.

My response was meant to slow things down, pace ourselves, and evaluate, but it doesn’t really hold water:

Let’s just wait until things get settled, until we have a normal month.

At first pass that may seem reasonable. My wife thought it was (so perhaps I needn’t worry past that? But in thinking about it more this morning you can see how my response to my wife was basically saying:

We’ll never buy a couch.

Now of course I wasn’t intending that. I do want a couch. Soon actually. (Though when you don’t own a TV, the need for a couch is substantially lessened, a bit of a side note). But in waiting for a “normal month” I’m basically waiting for eternity. In life, there are no normal months. Some months may be worse than others, but none of them are ever normal.

You could be pluggin’ along great in September when your kid falls out of bed and breaks their nose on the bed post, necessitating an ER visit.

Your car could be totaled by something you ran over in the road.

You could experience flooding.

The sales commission you were expecting could be held up.

You could lose your job (though a well-funded emergency fund could curb this quite a bit).

Anyway, the list is infinitely long. And believe it or not, at least in my experience and the experiences of many people I’ve worked and spoken with, you’re statistically likely to have an unexpected event (be it large or small) every month. Period.

The whole “perfect month” idea is for sitcoms (well, the traditional old-time sitcoms, today’s sitcoms seem to be dysfunctional from the start).

Instead of always looking for something that’s never going to appear, what you can do is focus on how to deal with a normal month. And for the rest of this entry, a normal month is defined as follows:

normal month - a month where the unexpected (large or small) will happen.

Your greatest weapon against the normal month is to budget. You knew I would say that. I don’t mean you just budget by throwing down your goals for the year (how the heck can you forecast a year into the future?!) and I don’t mean just writing down what you spend (though there is plenty of merit to that). When you budget you’ll want to implement the following:

1. Live by Rule One espoused all over this site. Build up a buffer and live one month behind your income. What you make in January, you spend in February. That right there gives you knowledge about the month for which you’re budgeting that you would not have had before. And that knowledge helps you make better-informed decisions.
2. Operate on a monthly basis. Don’t attempt to forecast a year into the future. There are corporations that spend millions and millions of dollars per year trying to accurately predict manufacturing, staffing, and cash flow needs to optimally run their business. There are people employed full-time to do this. They use extremely complex models and they’re still wrong. However, attempting to forecast 30 days into the future is very manageable. I highly recommend it.

   When you’re having your budgeting meeting with your significant other, talk about the upcoming month. Try to anticipate what it is you may be facing. Be a bit of a pessimist. Be conservative. Run through various scenarios. I’m not talking about trying to do sensitivity or multi-variate analysis on your life here. I’m just saying that talking about what’s coming will be much more helpful than just blindly going into things. That exercise alone will help you mitigate the effects of a normal month.

3. Follow Rule Three. This is not an easy rule. It’s much easier said than done. But when you look to the future and just set aside money for the known fixed expenses (home owner’s insurance, property taxes, renter’s insurance, car insurance, Christmas, gym memberships, car replacement, magazine subscriptions, college tuition, etc.) the effects of a normal month will again be substantially mitigated.

   It is very tempting to dip into these Rainy Day Funds to live for today at the expense of tomorrow. Avoid that temptation!

The normal month is the month where something, many things, an unbelievable amount of unexpected things culminate and knock you financially off balance. When operating a budget without the three guidelines mentioned above, you just have a tougher time regaining that balance. Follow the guidelines and you’ll notice your normal month is not quite as tough as it used to be.

Perhaps we’ll buy a couch sooner than I thought.

Having just moved recently, we’ve travelled up the social ladder from very, very, very low, to very low. And the view is a bit better. With the CPA exam firmly under my belt (we found out on Saturday I passed all the sections) and my first “real job” starting on Tuesday, we’ve given ourselves license to move up said ladder.

Why?

I’m not really sure. It just kind of seems like the thing to do.

For instance, our new apartment is 50% larger than our last apartment. It’s still quite small (less than 1,000 square feet) but it’s large to us! We also are now a two-car family (though that wasn’t entirely on purpose). Heck, we even have cellphones now. And a Costco membership.

What else? Instead of jimmy-rigging a kind-of-broken shower curtain, we just bought another one. We bought two matching picture frames for 8×10s of the boys (that had been waiting to be hung for several months). We have 8×10 frames — but not matching.

We’re paying an extra $10 per month for covered parking. Dallas does have the ability to heat a car quite nicely.

Why the sudden surge in spending? I’m thinking of a few reasons:

1. Our income is going to increase from internship/part-time-job-while-in-school levels to starting salary as a bean-counting staffer. (And no, I won’t be paid overtime).
2. We’re living in an area with people that are making more money than what we’re used to (we previously lived in family student housing — not your richest population for sure).

Number two is an interesting subject, whether it be keeping up with the Jones’ or just subconsciously adopting some of the lifestyle habits of those around you, it’s a very real force. Number one is what I want to hit on though.

Now granted, not all of our expenses fall under the umbrella of “well, our income is rising, so let’s buy this.” Some of them (especially onces I didn’t bother mentioning) are part of the “settling in” costs of moving. But I’ll admit, some of this is for no other reason except that our income is higher. We’re finally out of graduate school. We pinched and pinched and scrimped and scrimped (and budgeted, of course) to make sure we had what we needed and didn’t borrow any money from banks, family, or the government.

So you can imagine the type of excitement (jubilation?) I feel, my wife feels, to imagine that we’re finally maybe going to be able to start investing for retirement, buying a few Wants, going on a vacation or something, maybe having our oldest boy sign up for T-ball (okay, he’s only two, but still, I’m thinking about it).

It’s almost like there’s this pent up desire to let go a little bit. In I-just-ate-too-much-at-a-restaurant terms, to loosen the belt.

This morning we discussed this to a degree. Tonight is our own budget meeting (it’s the 30th of August, a fine time to budget for September!) and it will be crucial. I don’t think we’ll knock it out in our patented 12 minutes (while I advocate holding the budget meeting regularly, I don’t think you should spend all evening doing it, except maybe the first time). This meeting will be crucial because we have a lot of new obligations: higher rent, more utilities, higher car insurance, those cellphones, etc. We’re also having to pay for high-speed internet for the first time (the nice thing about living on campus? Free extremely fast internet). Our health insurance premiums are quite a bit more.

So it seems that this increased room we’ll have in our “belt” may be taken away from us before we even get started. A few of those things are our own doing, but a lot of them are just kind of coming to the party uninvited (but you’re obliged to let them in).

As I walked out the door this morning to get some work done, I told my wife the following:

“We just need to slow down, pace ourselves, and evaluate.”

By slowing down, I mean that when you see this increase in income, don’t automatically assume it’s all going to you. Don’t assume much of anything. And certainly don’t spend your raise, your first salaried paycheck, your anticipated bonus, before you actually get it in hand.

Pace yourself when acquiring new things — especially new month-to-month obligations. This $50 cellphone bill…can we afford it every month? Even in the months where things may be a bit tight?

And finally, evalute. Evaluate your budget. Evaluate your purchases. Ask yourself why you’re purchasing whatever it may be. Evaluate your long-term goals (if you don’t have any, get some) and make sure your actions on a daily, weekly, monthly basis are in line with those goals. When budgeting your Available money, make sure you start with the top-priority items and move down from there. Make sure you’re giving some away, giving some to yourself (retirement) and providing the necessities of life for yourself and family.

Proceed with caution when you receive the raise, the bonus, or the windfall. It seems that the longer you’ve anticipated these things, the stronger your desire may be to match your expenses to your income without too much evaluating. Proceed with caution! Enjoy your good fortune to a degree, but keep your head about you. And stick with the jimmy-rigged shower curtain for a month just to reenforce to yourself the fact that you can.

Now I’m not setting out here to write this little bit and make anyone feel dumb. Well, not really. This is really more of a confession because man did I do a bunch of dumb things during this past week. In order to save at least a little bit of face, I’ll just highlight a few. Hopefully though, my point will be driven home.

If you haven’t yet read about our recent moving drama, that can give you a sense into what exactly happened — the original bit of snow for my Dumb Snowball.

You’ve probably also heard of the debt snowball by now, where you pay only the minimums on everything but your target debt. When the target debt is paid off, you apply its minimums and any extra you were applying toward target debt number two. You repeat that “snowballing” process until all of your debts are paid off. The secret, of course, is intensity.

Well, this last week I discovered the “Dumb” Snowball. Basically, one thing happens to knock you financially off-balance, and the snowball effect kicks in where you proceed to do one dumb thing after another.

Last Monday our trusty Chevy Prizm died. And thus began my series of dumb mistakes. Being somewhat worried, having my wife and two little boys on the side of the road, I failed to remember that we have roadside service. We pay for that just in case things like this happen. Well, the tow truck cost $200. We can probably get that reimbursed through our insurance, but until we do, we’re out $200.

We rented our car from the airport where they have huge fees. There was one rental company that would let me do a long-distance drive with a car not from the airport but they were a few dollars more expensive. I chose the airport location at a rate of $80 a day. That wasn’t so bad. The mistake came when we failed to switch that car for a cheaper one for several days. That mistake alone probably cost us $150.

I forgot to fill up the $80/day rental before returning it. That cost us $40.

To add insult to injury, there is a gas station literally 30 seconds from the rental drop-off location.

Because I chose to save a few dollars and went with an airport rental I (1) had a harder time getting to the DFW airport to make the switch to a cheaper car and (2) still had to rent from the airport again (with their huge taxes) once I did get the cheaper car. That meant I was paying more and had to drive back to the airport to finally drop it off.

I guess this is more than just a few of my mistakes (but certainly not all of them). These all took place in less than a week.

There are two things that really scare me about the position we were in. I wasn’t worried about us financially because of our emergency fund (for just these types of situations) but I was worried about these two other things:

1. First, it seems that spending breeds spending. Once we forked over the $200 for towing, I noticed a change in my thinking about money. It seems that being in “Emergency Fund” mode gave me a license to spend (case in point, we went to Applebee’s that night instead of to Wal-mart for some food. And we don’t even like Applebee’s.) Being in the eye of an Emergency storm does not give you license to throw all well-groomed spending habits out the window. It was happening though. My wife and I could both feel it.
2. Second, and this is actually much scarier (and more expensive) is the Dumb Snowball. I don’t know what it is, but it seems that these crises seem to keep us from remembering even the easy things (fill up the rental before returning it, don’t forget the gate opener for the apartment complex in the rental that will require a $60 fee if you lose it — we’re trying to get it back). This snowball effect is costly! What was even more worrisome for me was that we were needing to purchase two cars in just this type of mode. We came to grips with the fact that we were paying through the nose daily for our rental, and took our time getting what we feel was a good deal on the cars.

Being in these situations is scary though! Psychologically, you feel as if your financial house is tumbling down around you. Little do you realize that the large bulk of that feeling is purely a figment of your imagination, that things will work out, and that you’ll come out smarter and more savvy. A bit more ready for the next crises.

In the thick of an emergency event? Take a few deep breaths. Go for a run. Lift a few weights. And above all, don’t succumb to the Dumb Snowball. It’s a costly ride!

Well, we found a public library relatively close to our new location, I got a library card and we should be good to go. The apartment manager said it takes three to four weeks to get internet setup. I have no idea why. If that really is the case then this library is going to come in handy. It looks like I’ll be on “maintenance mode” until then with a few improvements I’ve been wanting to make.

(I would try and make them on the computers here, but they’re running the rather old Excel 97.)

So, I should be back to checking and responding to email daily. Thanks for your patience everyone!

Shortest version: we’re right in the middle of moving from Utah to Texas, approximately 1,200 miles.

Shorter version: the hotel last night, it was a Days Inn in El Paso, TX on Yarbrough Rd — don’t go there — claimed to have high-speed wireless. It was so slow it was unusable. If it did load a page, it didn’t load the next one. I was dying being cutoff from everything.

Short version: 60 miles out of El Paso our trusty car’s engine started making strange clanking noises. About 30 seconds later smoke started coming from the engine. I thought we had run out of oil (though we had the oil changed right before our trip, had no reason to believe it would be low). I dumped in three more quarts and turned the engine. It sounded very close to starting, but then I noticed oil gushing from the engine.

Long version: We had it towed back to El Paso. A cursory look revealed a large hole in the oil pan, which means we ran over something. Other possibly serious damage may (and probably did) occur. El Paso just experienced flooding, so engine work there is very crowded. They can’t even begin to diagnose (which will probably cost $600) until Thursday. We left our car there and rented something to take us the rest of the way to Dallas. After taking a few wrong turns, we’re finally here in another hotel with actually-functioning internet. A pizza is on the way. Tomorrow we’re actually moving our stuff into our new place. Here’s hoping everything goes smoothly. I am tired. Our plan is to have the car fixed if it’s not a total loss (it’s an inexpensive car) and I’ll probably fly back to El Paso to pick it up in a few weeks. In the meantime, we need to do faster what we were already planning on doing — find a “family” car — so we don’t have to keep paying through the nose for the one we’re renting. There’s nothing I hate worse than being in a bargaining position where I need a car. Luckily the new job doesn’t start for a few weeks yet. And luckily there wasn’t an accident.

My apologies to everyone who hasn’t received YNAB on time. It seemed yesterday was particularly unreliable (that just figures). I won’t be available tomorrow until the evening (if at that). Thanks for your patience with me until then! This is one time where I am certainly not glad I’m a one-man show.

A few years ago I wrote about some of the practical aspects of living within your means. The gist of the article: if you want to successfully live within your means over the long term, you need to have some sort of system in place to record, track, monitor, and evaluate your spending. With whichever system you choose, consistency in the execution is paramount to your success.

Being a budgeting aficionado, it’s no wonder I think a system is necessary to live within your means. But today my focus is not going to be on the how, but on the why. I hope to open your eyes to a benefit of living within your means that is sometimes overshadowed by the ‘How’ of the principle. It’s a huge benefit. Perhaps infinitely huge.

Forgive the shallow talk of getting rich for the next few minutes, but that is basically going to be the benefit I’ll be talking about. We’re just going to get at it from a different angle.

No — I’m not going to talk about how living within your means enables you to invest the difference in well-selected mutual funds and how, over time, the compounding of those investments will make you a millionaire (perhaps a few times over). We’re going to talk about risk. Risk is a rich man’s best friend, and the enemy of anyone living paycheck to paycheck

Why the Rich Stay Rich (and Get Richer)
I’m sure you’ve heard it often enough. The rich are privy to secret investments, inside networks of private businesses needing equity infusions, IPOs for only the accredited, sweet real estate deals, lucrative side partnerships, yada yada, etc. and blah blah.

Some people are bitter about the opportunities that apparently present themselves to the rich, other people only envious. I don’t want to take any position here except the position that opportunities to earn more money do indeed present themselves.

Consider the well-to-do person that is presented with an opportunity to invest $10,000 in a very small, private startup company. The person could very well lose their $10,000. They could also turn that $10,000 into $200,000 in a matter of five years. The person takes the plunge, writes the check, and invests the $10,000. Do they lose sleep at night because they have $10,000 of equity in some shaky startup? Not hardly. Why? Because they can afford the risk.

Consider the person that is not living within their means. $10,000 to invest is a dream to them and nothing more. If they did have the $10,000 they certainly could not afford to risk it on something as shaky as a startup company.

However, if this second person cinched up the belt, got a budget, and gave him or herself a bit of breathing room, would a $1,000 investment in something seem so unbearable? Probably not. Could they afford a $1,000 loss if worse came to worse? Probably so.

I Can’t Afford That
A few years ago in my corporate finance class we talked about risk. Actually, we talked about it pretty much every day. The rule is that the return you require on your money invested should be equal to the risk you’re taking when you invest. While there are a few people that are risk-seekers, others risk-avoiders, the core principle is the same. Where there is low risk, there is low reward. Where there is high risk, there is high reward.

The rich can afford to take on higher-risk projects, which gives them the opportunity for higher reward. Those living above their means, with no (or even negative) disposable income, cannot afford high-risk investments. As a result, they’re immediately disqualified from high returns (we’re talking about the norm here, not the exceptions to this rule). And if you can never “afford” to invest, you’ll never be rich.

The trick is to get to that disposable income I’ve mentioned a few times. And begin investing.

While I’m not a Rich Dad, Poor Dad diehard, I did appreciate Kiyosaki’s push to begin thinking a little bit differently about money. This is one of those ways.

I’m not saying you’re going to suddenly become privy to new investment opportunities just because you now have some disposable income. What I am saying is that without disposable income, you cannot take advantage of any opportunities that may roll your way. And that would be a shame.

It’s the Famous Debt Snowball…in Reverse
Perhaps it will take a few years before something comes up in which you feel you could invest your disposable income. Perhaps you’ll keep things simple and invest purely in index funds until another erm, more flavorful, opportunity comes along. But you can rest assured that the opportunity will come.

And maybe I’ve been indoctrinated by optimistics (the class was called “Entrepreneurial Perspective” and every week a different “normal” speaker would come and tell the class how they made it big. The opportunities ranged from hair salons, to time organizers, to multi-family apartment buildings), but is there really any healthier way to be?

What will happen once you seize the opportunity to invest in a local hair salon? You’ll probably need tax advice. You’ll hire an accountant. A few years later your accountant gives you a call because he has a client that’s looking to market an invention and needs some equity partners. You’ve grown to trust your accountant, so you take a look at the opportunity. One of the other investors in this invention does a lot of residential real estate development and is wondering if you want to invest in a new duplex he’s looking to build…

Of course I’m making this up, but the principle I’m trying to illustrate is this reverse snowball effect. Opportunities beget even more opportunities and after several years of waiting, saving, evaluating, and networking, you’ll have more than you can even possibly look at.

The rich stay rich because they consistently find opportunities to invest their (large amounts of) disposable income. And I am saying that you can become rich by creating disposable income and searching for opportunities in which to invest it.

That is the benefit of living within your means. If you don’t do it, your opportunities are severely limited.