Tuesday, December 2, 2014

Starving Your Wallet

Keep your wallet thin by starving it.

In a diet plan, starving yourself is never a good idea, as you will end up binge eating.   But in personal finances, starving your checkbook or wallet might be a good idea.

We are trying to sell an estate house in Florida, and the expenses are racking up.   The executor sent us a bill for our share of the property taxes, insurance, utilities, and lawn & pool care.   It comes to over $2700.  I hope that place sells soon!

I told him that we would have to sell some stock and send him a check, as I am waiting to get paid from a client.   I generally don't keep thousands of dollars laying around in my checking account.   His sister, on the other hand, just cut him a check on the spot.  She has a regular job, and apparently that kind of cash in the bank.

It always amazes me, but a lot of "poor" and "middle class" people keep $5,000 or even $10,000 in their checking accounts, just to cover monthly expenses (which usually are only a few thousand).   When I ask them why they keep so much cash on hand, they say, "for emergencies".

The problem for me, anyway, is that if I have that kind of cash laying around in my checking account, I tend to think I am doing OK and don't need to cut back on spending.   Why bother worrying about a $100 cable bill or a $5 coffee-drink when I have ten grand to spend?

And psychologically, that is the issue.   When people feel wealthy they spend.  This is this stupid "consumer confidence" index the financial channels love to talk about.   And the term "confidence" is appropriate - as in a "confidence game" or scam.   But we all do it - I've done it - you feel "wealthy" because you just got paid, or got a small inheritance, or paid off a credit card, or just got a raise, and you end up spending more, without realizing it.

And it is not that you went out and bought a new Cadillac, only that you bought a lot of little things instead.   Maybe you start buying lunch instead of bringing it.   You decide you need the next level of smart phone service or more cable channels.   Little things, particularly small recurring expenses, add up over time.

The best way I have found to avoid this trap is to starve your wallet.   When a big chunk of money comes in (which happens, when you are self-employed) you should tuck the money away into various ratholes, rather than leave it in your checking account.  These ratholes could be accounts which are not easily accessible (by debit card, checkbook, or the like) but may take a few days to a week to access.  That's the way I do it, anyway.

Of course first, we pay Uncle Sugar.  No sense spending that money until you know it is actually yours.   Next, pay off any debts, including credit card debts.   With the money left over, set aside enough to pay all your bills for the next month and then hide the rest.   Put it in an after-tax savings account, a before-tax savings account (IRA, 401(k)) or wherever you can find (not under a mattress, of course!).

Of course, this plan can backfire, if you are not careful.   You have to make sure you have enough money in your checking account to cover your month's expenses - and not starve yourself too much.   But beyond that, consider parking money somewhere else where you can't get to it easily.   The temptation to spend will be a lot less, and since you will have a lower bank balance, the psychological effect will be to train your brain not to think rich.

The opposite approach, at least for me, ends up in a starved wallet - and a lot of squandered money.