It's the Stupid Economy! Part Four

How many times have you heard a politician tell you that " It's your money, " or it's the taxpayer's money? Well, it is! But not if you throw it away, and that's just what you're doing if you don't adopt a sound budget - and stick to it! When you give it away, your money is no longer yours in fact, even though it may be in princple. You can't buy things with principles. What's the answer?
Budget.
But too many people don't know how. Across-the-board cuts are not successful in the long run. Often these unwise reductions, made only on a money basis, fail to distinguish between essentials and frivolous expenses. Trying to cut back on food or transportation can, and often does, lead to crisis points further along where adjustments have to be made that cut into other considerations. It becomes a game of " robbing Peter to pay Paul " and ultimately leads to failure. There are three reason why most poory conceived budgets go wrong.
First, people tend to regard a budget as a fixed entity rather than a dynamic process that continually changes. Static budgets fail to anticipate the unforeseen items that crop up in the course of a month. Secondly, people who contentrate only on allocation of money to specific accounts fail to consider rates of consumption. Finally, most people try, without realizing it, to rationalize two different time bases.
Taking the last item first, a person who works 40 hours a week at $12.00 an hour earns $480.00 in a pay period. After deductions, the net return may be $420.00, or $1,680.00 per month. Trying to spread this out over the entire week or month leads to difficulties that are simply resolved using the WHAM method. This an acronym for Waking Hours Accounting Method. The idea is simple. An individual is usually awake for 16 hours a day when he or she is liable to spend money. Seven days a week at 16 hours a day works out to 112 waking hours per week. To set thing on a equal basis just divide the net earnings per week by 112. In this, all too typical case, the WHAM number is $3.75 an hours. Not much, granted, but that is the rate of return every waking hour for a whole week. The next step is to start subtracting weekly and monthly expenses from this amount: 112 for weekly expenses and 448( four weeks per month ) for monthly expenses. Here's how it works.

Starting with $3.75 an hour, say the food bill is $80.00 a week or $160.00 bi-weekly.
Dividing this by 112 or 224 gives $1.07 which, when subtracted from the WHAM figure leaves $2.65. If the rent is $575.00, dividing by 448 gives $1.28, leaving a WHAM figure of $1.37. In an actual intance, after reducing every conceivable expense in this way, the boiled-down WHAM figure was $0.10. "Ten cents?" the man said when I finished processing his budget. "That's not much." That's when I showed him the magic! Yes, ten cents isn't a lot of money left to spend after you have deducted all your expenses, but - it's ten cents an hour for sixteen hours a day, seven days a week! In a month it works out to about $48.60, over a year it's $584.00! And it was there the whole time.
Hardly a bonanza but if given the choice of having it, or not, there is little doubt about which way you would go. The numbers will vary, some will even come out negative - but that's fine. At least you will have an accurate view of where you stand. Of course, this doesn't take debt into consideration, but before going there let us look at the subject of disbursements.
Development of your budget will resolve itself into a monthly expense figure, a certain amount of money you will allocate to pay the esxpenses listed on your worksheet. You will, of course, not spend the money all at one time, but will pay it out over a period of time; that's the way to keep track of and control this aspect of your budget. It's about rates, specifically the rate of time lapse versus the rate of expense outlay.

To get the time rate, just divide the current date by the number of days in the month and multiply by 100. To get the expense outlat rate, just divide the amount of money already paid out by the allocated amount for the month and multiply this by 100. As you go through the month you will try to keep the time rate behind the money rate: that is, the time should be running out faster that the money. Should the money start running out faster than the time you will likely find some way to cut corners until the rates reverse, and the time runs out faster once again.

The WHAM method may also be applied to existing debt. Suppose that, using the numbers we've been working with, your debt is $5,000.00. The first thing we will have to determine is how much additional income you will need to pay this amount off.
In one year there are approximately 5,840 waking hours. Dividing the amount of debt by the toatal number of waking hours will give $0.85 per hour additonal that you will have to come up with. Well, if we multiply 112 times .85 it works out to an extra $95.89 a week of additonal income. Take a part time job, say fifteen hours a week at $8.00 and hour minimum. You will earn enough to pay off the debt after making arrangements with your creditors to accept a fixed amount monthly over TWO YEARS. While the numbers given apply to a one-year payoff, why not take twice as long to pay the bills off and put an equal amount away. At the end of the first year you could have the debt paid down to $2,500.00 with a like amount in savings. You might then decide to pay the whole thing off or just let it ride.
The technique described here is not a quick fix, it requires discipline and committment, but it should be clear that the problem with excessive debt is time, not money. You accumulated debt over time and can only discharge it over time. The idea of borrowing money to pay off debts is foolish, like treating alcoholism with bourbon. When faced with substantial debt the only way out is to hunker down and work your way out gradually, following a dsicplined approach. In any event, saving is the key to ultimate success, and if your current financial position disallows a savings program, find an income source that will provide dollars to put aside. Now I am about to give the appearance of contradicting myself. Although I recommend saving your way out of debt and decry bill-payer loans, there is one notable exception: Credit Unions.
Savings in a credit union are called shares and they draw interest just like bank deposits. When shares accumulate to significant amounts ( as little as $500.00 would be enough ) you could take out a share-backed loan and pay it out over a period of time, all the while working to reduce your current outstanding debt. Take out two or three of these small loans as you go along and build a record of successful loan repayment along with your savings program. The idea here is to build a shares balance equal to the balance of a credit card obligation, then borrow against it to pay off the credit card. Credit union financing is so much cheaper than credit cards in terms of interest that a loan at 5% interest is better than the 18.9% ( or more ) that you would be paying on the plastic. And keep your eyes open.
In times of economic downturn, when enough people have bad credit suddenly everyone's credit is good! I personaly have had a low credit rating for twenty years, not because I defaulted on anything but because I just didn't use credit cards. A couple of years ago my bank sent me a credit card that I didn't apply for. After ensuring that there would be no penalties for not using the card I decided to keep it. I used it for small purchases and cash advances that I quickly repaid. When the credit union sent me a brochure about their credit card I applied for it; the APR is only 11.5% - a good deal. Both these cards have a $2,500 limit on them, but it's the one from the credit union that I use if buying something on credit ( like my new computer ) that I pay out over time.
Now about the Keeping Your Eyes Open part.
In a bad economy there are always people who have items they wish to sell for cash in what we call " distressed situations ", willing to sell at significant discounts to established value. I recently purchased an automobile, my first in twenty-five years. It's an excellent car in mint condition, nine years old with only 58,000 miles on it. The man I bought it from inherited it and needed some quick cash for a move he wished to make. I made an offer, held held the line, and wound up getting the car for $1,600 less than the current book value. It was easy to finance it through ( you guessed it ) the credit union at 5% interest. Now, imagine if you found a deal like that - and they're out there - you could finance the purchase of some item of value being sold at distress and turn it around in a quick sale, then plow the money back into shares.
In closing let me reiterate that the only way to financial solvency is work over a period ( perhaps a decade or more ) of time, following a disciplined approach, and an alterness to opportunties that may present themselves. Above all, don't hand your money over to credit counsellors or financial advisors to manage for you. Do it yourself. At this point I could say " Where ther's a will there's a way ", but that's so trite that...
I won't say it.