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suzi
orman, susan orman, susy orman, susie orman, susy
orman
Money
Matters: Be Honest With Yourself
by Suze Orman
A
major step toward financial freedom is about getting
back in touch with your money and understanding that
you have the power to decide how to use it. And it's
about being honest with yourself. Have you ever taken
a big wad of bills from an ATM machine, then found
yourself, a day or two later, nearly out of cash and
unable to reconstruct exactly where you spent it?
And even when you retrace all your steps, you still
come up $20, $40 or $60 short? It's upsetting, but
most of us feel that way most of the time: a little
short, a little panicky, wondering exactly where our
money is going.
Where
Do You Think You Stand Today?
What
does it cost you to live each month? If you are married
or living with someone with whom you share expenses,
please ask him or her to write down the answer to
the same question. Most of us believe we need about
$1,000 to $1,500 a month less than we actually do
need to go on living the exact same way we live right
now. Surprisingly, this figure seems to vary only
a little bit regardless of income levels. Where does
this month-to-month self-deception lead us? Into financial
chaos. Often, our planned spending doesn't cover expenses
that don't occur every month or expenses that just
crop up.
For
example:
- Do
you consider the cost of your gym membership per
month even if you pay to renew just once a year?
- Do
you pay your insurance premiums twice or four times
a year? Do you calculate the cost of insurance in
your monthly bills?
- Where
did you go on vacation last year? What did that
one-time expense cost average over twelve months?
These
big expenses hit once or twice a year, probably surprising
you every time. And then there are seasonal expenses:
- Come
summer, do you forget about how much higher the
gas bills run in the fall?
- Do
you have your windows washed once or twice a year?
- Did
you send your children to summer camp last summer
- Do
you get your hair cut and maybe colored every couple
of months? How much, then, does it cost every single
month?
Here's
another surprise: If you make some sort of payment every
week—child care, a cleaning woman, a mortgage payment
withdrawn automatically every two weeks—the extra
weekly payments will take place in four months of the
year. Plus the smallest expenses add up fast—the
ones too small, you might think, to be worth figuring
into your budget at all. For instance, do you go to
the movies once a week? When you do, do you buy the
tickets for yourself and your partner, have popcorn
and sodas, go for a simple dinner afterward, as simple
as pizza or a burger and fries? That's not so much,
is it? No, it isn't, not on any given Friday night.
Maybe $16 for the tickets, $4 for the popcorn and sodas
and $20 for a simple meal. But once a week over a year,
that's $2,080. And too many of us forget to include
expenses so "small." Other
"small" expenses add up just as much. Magazine
subscriptions, cosmetics, supplies for the yard, oil
changes for the car, batteries for the flashlight, charcoal
for the grill: Do you know what it really costs you
to keep your life running smoothly over a year's time?
How about special occasions? How many birthday parties,
house warmings and baby showers did you attend last
year? Didn't you bring a present to each one? Might
you have done that twenty times or more last year? Finally,
you need to allocate $50 to $100 each month for miscellaneous
unpredictable expenses: dental work that's not covered
in your insurance, travel to your brother's wedding.
Most of my clients are shocked to discover by how much
they have underestimated—and that's when they've
guessed as honestly as they can. It's a scary realization,
but there's a wonderful flip side to that fear. Once
you take this step, you will feel better for knowing
the truth. And you will begin to gain power over the
money that's controlled you for so long.
How
Much Is Going Out?
Get
out your canceled checks, ATM statements, credit card
bills, whatever will tell you how you spent your money
over the last two years. These papers are more revealing
than a diary; they contain the key to how you live your
life. Yes, it will take you some time to do this, but
think how much time it will give back to you in the
future. You work 40 hours a week or more to earn your
money. Take a few hours to take your money out of the
darkness, to see it in the light of reality, to see
where you stand. Don't just read these pages—pick
up a pen and take action.
- Go
through your checkbook, canceled checks, computerized
statements, all your records for the past two years.
Not one year, but two years. Maybe this year was
an extraordinary time - you remodeled the house,
bought a new car—but looking at a two-year
period, you'll get a good idea of what it costs
you to live the way you are living. All your checks,
cash withdrawals, money spent every month, money
spent once a year, money spent once a season, holiday
expenses, everything.
- Make
categories for each month—such as telephone,
gasoline, food, utilities, vet bills, golf fees,
baby-sitting.
- After
all the categories are complete, total each category.
Divide each category by 24. This will give you how
much you spend per month on average for each category.
- Now
add together all the averages in each category.
This will tell you what it costs you to live each
month. Remember, these are averages. If your average
is $3,000, most months you'll spend less—say,
$1,800 or $2,000. But in some months you'll spend
$5,000 or $6,000. To meet your expenses, you need
to bring in that average number each month.
How
Much Is Coming In?
Now
write down now all the income from every source that
you have coming in. Only calculate an amount you are
fairly certain will continue coming in for at least
one more year.
- Monthly
paychecks after taxes
- Predictable
bonuses
- Social
Security income
- Disability,
rental and retirement income
- Gifts
from your parents or children, if you can really
count on them year in, year out
- Loan
repayments, if they will continue for more than
a year
Take
this total and divide it by 12, so you can see what
you have coming in after taxes on a monthly basis. If
you're like many of us, you've just confirmed that you
spend more than you thought. Quite possibly you also
spend more than you earn. What can you do? You can do
one or both of two things: Make more money and/or decide
to spend less. Look at each of your categories again,
and decide how much in each category you want to spend.
If you're spending more than you're earning, this solution
is not about creating limitations. It's about making
decisions—determining what you most want to spend
your money on. If you can make more money realistically,
then you're in a position where you may be able to earn
what you spend and go on living the way you do right
now. If you're like most of us, however, more likely
you need to decide to spend your money differently.
This does not mean that you have to take one drastic
action that crimps your pleasures and quality of life,
such as getting by with one car when you family needs
two. Consider, instead, making the decision to spend
$25 to $30 less per month from 15 or 20 of your spending
categories. Some categories are fixed.There
will be other categories—in fact, the majority
of categories—where you can actually decide what
the total spent per year will be. Is there one magazine
subscription you can do without? Can you have three
Friday movie nights a month instead of four? Keep deciding
to trim a little here, a little there, until what comes
in matches what goes out. With each decision you make,
you are gaining power over your money. Put down in writing
the yearly total you decided on for each category. Now
keep track of what you spend in each category, month
by month. Create a chart or system that will work for
you. Each month when you pay your bills, check your
spending by category. If you use up any allocation early
and want to spend more in that category, you'll have
to make new decisions about what, if anything, you want
to do by seeing where you stand with the other categories.As
a reminder, post the categories you're trimming in your
planner or on the fridge. You may find—as have
many of my clients—that you can come up with wonderfully
creative ways to trim your spending so that you hardly
notice. One family (both parents work and their teenage
kids aren't home much) now has the garbage picked up
every two weeks instead of every week, trimming a painless
$200 a year. A single mother now goes to the grocery
store every eight days instead of every single Saturday,
simply paying more attention to the food she already
has in the house. Last year she trimmed nearly $400
from what she allocated for food. Another client, who
described himself as a "compulsive spender on CDs,"
now weeds out the CDs he doesn't listen to much anymore
and trades them with friends. Last year he trimmed $600
and had just as many fresh CDs to listen to. That same
client also now does his taxes himself with a computer
program, rather than going to his accountant. Savings:
$600. Bur only when you see in front of you how you
spend your money now will you be able to decide how
you would rather be spending your money. This is the
hardest step toward financial freedom. With this step
you have been honest with yourself. Now you know exactly
where you stand. Rather than being dictated by a restriction,
your actions—and your money—are dictated by
the choices you make.
Suze
Orman is a best-selling finance author. She has appeared
on Oprah, two PBS specials, QVC, CNN, CNNfn,
CNBC, Good Morning America and is a columnist
for Self magazine and a regular contributor
on NBC's Today show.
To
Contact Suze Orman, click
here
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