The Family Budget — A Never–ending Tussle
By: A. B. Jacobs
There seems to be no shortage of advice on how to create and live within a family budget. Simply entering those two key words into either of the major Internet search engines, Yahoo or Google, reveals hundreds of thousands of websites that offer to guide the American family through the financial thicket and into the golden realm of solvency. By visiting these sites you will discover tools and techniques recommended to direct you along the road to prosperity. You will be enticed by the myriad of subjects covered: Developing a Plan, Saving Money in the Kitchen, Spending Guidelines, Credit Card Blues, Hunting for Bargains, Teaching Kids the Value of Money, The Cost of Credit. The lists are endless.
Although some of the offers of guidance are well-meaning, most are simply commercial enterprises with a product to sell. That in itself does not render them valueless, but it makes their recommendations suspect. The basic problem, of course, is one of human nature: Many persons are simply incapable of limiting their expenditures to their income. Firms that ply on these hapless souls are a further part of the problemï¿½not the solution. It is much like the diet industry that relies upon continuous failure of the dieting customer to produce a profit. A successful regimen would quickly put an end to the business.
Having dismissed those for whom advice will not help, I'll now offer a bit of guidance for those who might be inclined to profit from it.
Dealings with your friendly credit card issuer: In analyzing credit cards and their use, much is made of matters like annual fees, interest rates on the unpaid balance, and the use of an account to establish credit. Articles abound on charge strategies to secure tax deductions for otherwise nondeductible interest payments. There are even dissertations explaining how balances due on one card can be financed for prolonged periods through borrowings on another. Much of the information is of marginal value, and some is preposterous.
Here's the straight word: The lower the annual fee, the less the fixed charge you pay each year. Some banks and other organizations offer a card without a fee. If so, grab it, but make certain that it's not merely the first year's fee that is waived. In case you can't find a free one, shop around for the lowest price.
This now gets us to the bare bones of the matter. My belief is that a credit card has a single purposea convenience when neither check nor cash is handy. Most importantly, when the monthly statement arrives, pay the full cash balance before the date that interest is charged. Follow this rule and the interest rate means nothing. If for any reason you cannot regulate your credit card use in this manner, destroy your cards, swear off cold turkey, and fashion your life accordingly.
Harnessing the horseless carriage: With the exception of hearth and home, the motor vehicle constitutes the average American's single most important fixation. Far more than transportation, it is for many the embodiment of beauty, pride, status, and individuality. There is no single product more forcefully promoted or representing such a substantial portion of disposable income than one's vehicle, and the potential for financial dilemma is all too real.
From a logical viewpoint, it's easy to dispense the following advice on the purchase of a motor vehicle.
- Don't buy anything you cannot pay for in hard cash without borrowings of any sort.
- If a new car is not within your budget, search for a serviceable used one.
- If continuing to use your present vehicle costs less than buying a replacement, don't make the change.
Unfortunately, many of you will not conduct your lives in this Spartan fashion. You are entitled then to a next-best alternative. If you badly want a new car you cannot afford, consider a late model used car. These past several years they all look alike anyway. Finally, whatever you select, minimize your financing, and shop for the lowest interest rate. If available, check with a credit union. Better yet, get a loan from a family member at little or no interest. Finally, remember that the more rapidly the loan is paid off, the better. An elderly mortgage lender once put it most succinctly: "Interest is not something you pay; it is something you collect."
What we buy and why: A person's possessions speak volumes on what that individual regards as important. The advertising industry is devoted to identifying what the citizen considers significant. Even more so, the market manipulator creates those choices. There are massive sums to be spent and the competition is as fierce as it is grotesque.
What brand of watch do you wear? Whether a top-of-the-line Rolex, a fashionable Cartier, a respectable Bulova, or an economy Timex, recognize that all are battery-operated, with a similar quartz movement, and none fail to keep excellent time. The day of the mechanical Swiss movement is a thing of the past. The only justification for a high-priced model is self-image and, let's face it, the illusion of prosperity.
What can be said about wristwatches is equally true as to other highly promoted products. These include magazine offerings, timeshare projects, $300 per ounce bottles of perfume, Las Vegas weekend getaways, and the purchase of lottery tickets, to name just a few. As a rule of thumb, the more overpriced the merchandise, the more innovative its promotion. Perhaps there is a connection, if only because moderately priced items that reflect honest value incur less sales resistance, so need not be touted with such vigor. Reflect, for a moment, on the recognizable voices and faces that make the outrageous claims. If there's a benefit to this, perhaps it's that the association of certain marketing celebrities with a product of any sort saves you the effort of analyzing the offering; you may reject it out of hand.
The final point is, sharpen your buying habits with a healthy dose of skepticism. In most of our purchases we are less familiar with a product than are its vendors. We can overcome this disadvantage by educating ourselves. The results are cumulative and your performance will improve with time.
Al Jacobs has been a professional investor for nearly four decades. His business experience ranges from real estate, mortgage, and securities investment to appraisal, civil engineering, and the operation of a private trust company. In addition to managing his investments on a day-to-day basis, he is a featured financial columnist for both online and print publications. He is the author of Nobody's Fool: A Skeptic's Guide to Prosperity. You may subscribe to his financial Newsletter, "On the Money Trail," at no cost or obligation, by visiting http://www.onthemoneytrail.com/.