Thursday, September 28, 2006

One question that leads to financial wisdom

Want to get better at avoiding financial trouble? Make a habit of asking yourself a simple question:

Where’s the money coming from?

That may seem like an obvious question to ask whenever you buy anything, from groceries to a car. But it’s one people tend to avoid because they don’t know—or don’t like—the answer. Being financially wise means knowing exactly how you’re going to pay for something before you buy it—besides putting it on your credit card.

No vacation from financial stress
A couple I once counseled had committed to going on a family vacation they could no longer afford. The husband had unexpectedly been unable to work and they were struggling to make ends meet on the wife’s schoolteacher income alone. However, they had made plans months before to spend a week at a friend’s North Carolina beach house, rent-free, with several other families.

Canceling the trip was not an option, the couple had firmly decided. They’d already told their two kids they were going and were reluctant to disappoint them. With the free lodging, they actually considered the vacation “a good deal.” They also were embarrassed at the thought of backing out on their friends, especially for financial reasons.

With the trip just weeks away, the couple had not estimated the other potential costs, such as food, gas, tolls, and activities. They also had no idea how they would actually pay for the trip, other than knowing what credit card they’d use.

A change in thinking
Their perspective began to change when I asked point-blank: “Where is the money for your vacation coming from?”

Once they admitted to me—and themselves—that they didn’t know, the wheels were in motion to find an answer. With a little help, they came up with an overall budget for the trip that included every possible expense they could think of. We totaled up the driving distance and divided it by their van’s miles-per-gallon to get a decent estimate of the travel costs. They set a limit for their recreational spending money—miniature golf was fine, but jet skiing was out.

Scraping up the cash
With a rough idea of the vacation’s cost, the couple turned their attention to finding the cash to pay for it. The wife, who managed the household bills, determined to tighten the family’s belt over the next few weeks and scrape together some surplus dollars. The husband agreed to sell his barely used racing bike that was gathering dust in their garage. They’d also pay for a portion with their modest amount of savings—though not enough to deplete their entire account.

When they returned from the trip, the couple said that sticking to their budget wasn’t easy, but they’d managed. Knowing that the vacation was paid for freed them from worry, if only for a while, and helped them enjoy a little family fun during a difficult time.

“Where’s the money coming from?” It’s a simple question that may require a hard answer. But asking it before you head to that beach house will help keep you out of the poor house.

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2 comments:

Jason S. Burton said...

That reminds me of the SNL skit fo the self help book, "Don't Buy Stuff You Cannot Afford" - http://danwho.net/mp/index.php?id=snl_dontbuystuff .

Good stuff!

--jason

FIRE Finance said...

Very nice post and a great example. We discovered this principle early-on and divided our budget into different containers. That helped us during our purchases. We constantly reminded ourselves from which container the money is coming from. The no. of $ present in each container determined our affordability wrt a purchase. This principle keeps the mind free and gives a healthy debt free lifestyle.