An Eye On Spending

by Carmen C. Garcia, CPA

A young widow came to me recently, overwhelmed by her circumstances. She was in her mid-thirties and her husband had died a couple of years before and left her with two children, ages 10 and 5. Her part-time income was not enough to support her household and she was living on her husband's life insurance proceeds. The money was running out. Hoping to improve her situation, she was also enrolled part-time at the local community college. Her financial situation was worse, with a big mortgage, a car payment, day care expenses and school tuition and lots of credit card debt. The stress of it all was keeping her awake at night with anxiety and making her sick. She saw herself slowing sinking and didn't know what to do or where to start.

Sound familiar? The detail may not all fit but, generally, many people find themselves in similar circumstances. They know they are slowly sinking and don't know where to turn.

A good place to start is by being aware. Recognize that there is a problem and commit yourself to being open and honest with yourself as you examine your spending habits and patterns. Do what we call "spreading the expenses." Take a sheet of paper and turn it sideways, laying it on its side. Across the top of the page write the major categories of expenses in your life: Household, Transportation, Food, Clothes, Medical, Educational, Recreation, Savings, etc. Down the left side of the paper list the checks you actually write, and then place the amount again under the various categories, forming columns of numbers. The totals of these columns are your expenses in that category for the month. Do this exercise for at least three months. Look at the totals for each month. Is that what you thought you were spending in these areas? Do you see any patterns you'd like to change? Are all these expenses necessary, or are some of them the result of impulse buying or emotional spending? Do you know that your mortgage company doesn't want you to spend more than 28% of your gross monthly income on your house payment? There are averages for each category in your income bracket. Be aware.

Now, knowing how much you are spending, make a decision whether or not to continue as you are or make a change. If you want to change your situation, prepare a budget of basic expenses that are both reasonable and achievable in each category. These are your GOALS. Use the information gained in the previous paragraph a your guide. As you set these goals, remember to put balance in your life by including a category for Savings and Recreation. Including a category for Savings means you pay yourself first, instead of last. Also, including a goal for Recreation, for movies, lunch with friends or self-care, will make the basic expenses easier to keep. Each month, when you get your bank statement, post and summarize your expenses. Examine it closely and honestly. Compare the totals to your goals. Are you satisfied? The backbone of successful finances is knowledge and self-discipline. If you have a computer available, Quicken, Microsoft Money and Microsoft Works are programs that can be very useful in managing your finances.

Another problem is the increasing ease and availability of credit cards debt. A week doesn't go by that I don't get at least three offers for another credit card and line of credit. Look at your credit card statement closely. Notice how much of your payment is for finance charges and how much is actually a payment on the balance. At minimum monthly payments, it will take 17 years to pay off the average credit card. It's O.K. to have credit cards. Buying things on credit is the American way of life. It's when your debt becomes unmanageable and you find yourself paying a credit card with another credit card that it becomes a problem. It's not uncommon to find that some clients have 10 or more credit cards at rates between 14.9-22.99% interest. The offers of 0%-6.99% rates are usually only temporary, six months or less. Of course, you know that credit card interest is not deductible anymore. Finance charges are expenses you get no benefit from, except for the use of the credit, but you pay dearly for the convenience. Imagine what you could do with the money you spend on finances charges: save for a vacation, college fund for the kids, a down payment for a new car or saving for retirement.

If you find yourself in this situation…STOP… Don't even open the envelopes. Trash them immediately! Begin TODAY and say NO to credit card debt. If you have equity in your home, consider a home equity loan to pay off the credit cards. The home equity loan is at an interest rate much lower than the credit cards, usually between 7-9%. Also, the interest on a home equity loan is deductible on your tax return. You actually save money on your taxes!

If you don't own a home or don't have enough equity in your home to cover the debt, seek the assistance of a non-profit credit-counseling agency. They will talk to your creditors and reduce most of your interest rates to 8-10% and reduce your monthly payments, also. You make one payment to the agency for all your credit cards and they make the payments for you. Best of all, they don't charge you anything. However, you can make a contribution to the agency in gratitude for their assistance. These non-profit agencies collect fees from the credit card companies. From the creditors' point of view, it is much better to reduce interest rates and pay a fee to the agency, then to write off an account in bankruptcy.

Question: How do you eat an elephant?
Answer: One bite at a time.

Take one bite out of that big elephant by being aware, knowing what you are spending and setting a plan with reasonable goals in motion.

Carmen C. Garcia, CPA, is President and Owner of C.C. Garcia & Co., P.C. a San Antonio CPA firm serving individuals, small businesses and non-profit agencies. Email carmen@ccgarcia.com or visit her website at www.ccgarcia.com.