Sorry, but operating in accordance with a budget requires more discipline than that.  A decision to spend should be made in consideration of the spending limit set in your budget. If your spending is maxed out in a discretionary category, you stop sending in that category. Merely looking back at what you spent is interesting history but not financial planning.

Unfortunately, the paycheck-to-paycheck crowd are better at history than they are at planning or budgeting. If you want to mess with someone who claims to be following a budget, ask them toward the end of the month how their food and entertainment spending compares - on that day - to the amounts they budgeted for that month. If they can’t tell you with any precision, you’ve exposed them as a faux budgeter.

Mr. ToughMoneyLove is not being a hypocrite here. We don’t pretend to operate with a true budget. We have a spending plan that includes non-discretionary categories plus saving, investing for retirement, and college expenses for son number 3. Everything else fits into discretionary spending. After 32 years of marriage and no consumer debt, we pretty much have a handle on that. But that will change when we retire.

We’re already working on a retirement spending plan that will need to be a lot more rigorous. Our retirement spending plan is a long term work in progress. Right now, it mostly guides us in how we need to invest to fund our plan.

So where do you come down on this issue?

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What do you feel and say to yourself after you have paid all of your monthly bills?

I have assumed different personalities as a bill payer over the years. I’m sure others have as well. Some examples of thoughts that might pop in your mind after that last payment is sent for the month:

The proud bill payer might have these thoughts: “I made it!” or “I think I’ll call Dave Ramsey and get an attaboy.”

The relieved bill payer goes in a different direction: “Whew – that was close!” and “I’m glad the month ran out before the money did.”

The frustrated bill payer: “Why did I buy that stupid gadget and charge it?” or “My car is on life support and I’m still making payments?”

The annoyed bill payer: “That pay check sure disappeared in a hurry!” or “No more kids for me!” but more likely “No more ex’s for me!”

I can’t really argue with any of these emotions. We’ve all had at least some of them. They’re legit and likely therapeutic.

So what is the one thing you don’t want to say after you’e paid all of your monthly bills?

I’ll vote for this no-no from a reckless bill payer: “Finished at last – now I can spend the rest!”

Too many folks look at meeting their monthly payment obligations as sort of a spending traffic light. When the bills are paid, the light turns from yellow to green. Whatever money remains in the bank becomes fair game for the spender. According to this story, 70% of us are living paycheck-to-paycheck. For some, it’s a matter of necessity. For others it’s a mis-guided bill-paying state of mind.

This is how bill-paying success can lead to financial failure.

Of course we should feel good about getting our monthly bills behind us. But we should not reward ourselves with a spending hall pass.

Next month that car on life support may need a transmission transplant. Where will the money come from? Not from that bank account if you’ve spent it during last month’s shopping celebration.

What should you do instead? You could rely on will-power and not even think about the post-bill paying leftovers. That’s a high risk strategy.

I suggest paying one last bill – to yourself. Move the remaining money to a different account. This could be a long-term savings account or where you keep your emergency fund. Whatever it is, make it difficult to access on the fly. You can leave a little behind as a personal allowance, but only a little. Pat yourself on the back in other, less tangible ways.

So what is your bill paying personality?

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As baby boomers, Mr. and Mrs. ToughMoneyLove have been around the financial block a few times. It started with getting married while I was in law school, living a grad student life without the benefit (burden actually) of student loans. We have come a long way since then. Our journey of 31 years and counting has allowed us to experience a lot of the ups and downs of living with and without money.

Part of my learning process has included small steps that can improve your financial mental health. More specifically, I have an initial  suggestion that may help some folks feel wealthy even if their income is definitely middle class. 

Pay All of Your Bills at the Beginning of the Month

Please don’t laugh and leave after reading that heading. Take a few seconds and push on. There is real value to be derived from that simple statement.

I read about a very interesting psychological research study a few years ago. The research showed that crossing something off your personal to-do list each day was more effective than anti-depressant medication in elevating the moods of the study participants.

Can that really be true? The research says yes.

I know that it works for me. When I complete a task I have been dreading, I feel great. It sets me up on a positive wave for the rest of the day. I’ll bet many of you have had similar feelings.

In our world of money, worrying about paying bills is a constant downer. Many of us dread confronting the reality of our obligations. The payment process can be drudgery. We don’t like seeing money slowly draining from our bank account. We are concerned about cash flow, as in running out of money before the next paycheck. We end up putting off the bill-paying as long as possible. 

All of these negative thoughts are exhausting. They make us feel poor. Feeling poor only compounds the bad mood that creeps in our mind and lingers.

So why not put an end to those feelings by taking the bills off your to-do list as soon as possible?

How to Pay all of Your Bills at the Beginning of the Month

The bean counters out there are already protesting this concept. They say that we should keep our money working as long as possible, surrendering it to our creditors only at the last possible minute.

There is financial truth to that argument. But I think the good feelings that come from putting the bills behind us can outweigh the financial benefit of waiting. Plus there is a way to accomplish both.

The biggest obstacle that most people will have to paying bills all at once is cash flow. These folks are living paycheck to paycheck. Getting off that treadmill is the first step. That means frugally sucking it up for a month or two, to accumulate enough free cash at the beginning of the month. It can be done and it will be worth it. Do it.

Of course, you don’t have to start at the beginning of the month. But there is both calendar and mental logic to doing it then. The arrival of a new month brings a new paycheck and signals the time to pay up and be done with it.

The second step is to gather all of your paper and electronic bills – every one. If necessary, contact your creditors and get them to adjust your billing cycle. Alternatively, learn how to access your creditor accounts online so that you know what you owe before the bill arrives. That is easier to do than you might think. Most creditors love sending electronic statements.

The third step is to cut the checks or issue the electronic payment instructions. This means sending what you owe now, not later. Everyone gets paid until there is no one else to pay. You want the bills off your back – right now.  

If you hate the idea of sending money to a creditor ahead of schedule, there is a plan B. Use a separate bill-paying account. Schedule all of your electronic payments from that account at the beginning of the month, with payments staggered in accordance with the actual due dates. This is important: Transfer all of the money needed to fund those payments into that bill-paying account at the beginning of the month. This allows you to completely forget about cash-flowing your obligations for the entire rest of month. That is very relaxing, believe me.

Now live the rest of your month in financial peace, feeling like a wealthy person.

The Payoff – Feeling Wealthy

Here are the reasons why I feel better – and wealthier – after having paid all of our bills at the beginning of the month.

1. All the money that remains in your daily operating account is yours – to save or spend in accordance with your own plans. No one else has a claim to it. For most of each month you experience a high level of financial freedom, similar to being completely debt free. That feels good.

2. You can make daily spending decisions without having to worry about whether an unpaid bill will leave you short. That’s how wealthy people make spending decisions. If your budget allows for a splurge now and then, your splurging becomes blissfully stress-free.

3. Within a few days after you pay your bills, your account balance becomes reliably real. You have no worries about staggered bills and payments floating around. What you see on your ATM receipt or online bank balance is what you get. Refreshing.

I predict that you will have similar feelings. The money “high” you will experience after paying that last bill can sustain you. That wealthy feeling will probably energize you toward a debt-free life, the ultimate payoff.

Good luck.

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This week, the “Ms. Cheap” columnist in our local paper wrote about the Moores.   Apparently, the couple – who are in their 60′s – decided nine months ago that to save money, they would not leave the house except to go to work or to church.  That’s right, nine months of being self-imposed hermits.  Why are they doing this?  Because, according to them, there is too much “excess” in our country, people need to “get over their stuffitis” and “the days of splurging are over.”  (OK, I think I get that part.)   So, any shopping or visiting the Moores do must be done either returning from work or returning from church on Sunday.  (I don’t get that part.)  I think Steve has the worst of it because he is already retired and therefore doesn’t have a workplace to drive to.  I’m guessing that this craziness was his idea and somehow he has imposed it on his wife.

What kind of life can it be to take frugalism to this degree?  Not much of one.  The fact that it started nine months ago is also a head scratcher because they can’t blame it on post-traumatic stress disorder brought on by recent events. 

The other troublesome aspect of this is that the Moores do not seem to have established a particular financial goal that their hermit behavior is intended to achieve.  That’s contrary to my idea of being a money strategist.

What is somewhat ironic and funny is that on the same page of the paper, right above the Ms. Cheap column, is an article about the increasing number of baby boomers who are joining and serving in the Peace Corps.  They are not only leaving the house, they are leaving the country.   Wouldn’t it be better for everyone if Steve and Diane Moore chose that lifestyle rather than the un-lifestyle they now have?  Yep, it would.  Someone – maybe a family member –  needs to find the Moores a good therapist and send them in a different direction, after first getting them to leave the house.

Now I am really curious.  I read a lot of stuff on other blogs about extreme things that frugal people can do to save money.  Are people actually doing those extreme things, like the Moore’s have?  Is it contagious? 

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Christmas decorations and holiday sales promotions are already appearing in malls and stores.  For many employees, awareness of the approaching holiday season and calendar year-end triggers an anticipation of receiving a bonus.  Many employers have traditionally handed out bonuses at year end, either as a celebration of the holiday or as a merit bonus for year long performance.  

Mr. ToughMoneyLove has lots of experience with year end bonuses, both as a recipient in my younger days and more recently as an employer distributing them.  My message today is to encourage all of you who have reason to expect a bonus to stop thinking about it. 

Most Bonuses are Spent Before They are Received 

This is my biggest beef with year-end bonuses.  When employees come to expect them, they end up spending the bonus before it is even received.  In fact, it got to the point at my former firm that some staff employees would implore management to distribute the bonus checks early, before the annual Christmas party.  Traditionally, one of the senior members of the firm would dress as Santa and work the room during the party, discreetly handing out Christmas cards with bonus checks inside.  I know it sounds corny, but it was fun and in keeping with a spirit of giving.  That all changed with these urgent requests.  It seems – as we were told – that many employees had already spent their bonus on Christmas gifts.  The credit card bills were rolling in and they needed the cash to send to Mr. Visa and Mrs. MasterCard.  Talk about sucking the holiday joy out of a bonus program.  Frankly, I lost all enthusiasm for the bonus program and proposed that in a measure of tough love, it simply be eliminated.  My proposal was a little harsh for my partners but we ended up changing the program to remove the holiday “gift” component entirely.   

Don’t Be a Clark Griswold 

Similarly, merit bonuses paid to sales and professional employees are also spent in anticipation of receiving them.  Remember poor Clark Griswold of National Lampoon’s Christmas Vacation fame?  Expecting a year end performance bonus based on Christmas past, Clark put $7,500 down on a new family swimming pool.  Clark didn’t actually have the $7,500 in the bank but decided to cut the check and play the float.  When a “jelly of the month” certificate showed up instead of a cash bonus, cousin Eddie had to take matters into his own hands. 

Sadly, there are lots of Clark Griswolds out there.  By the time the employee bonus actually arrives (if it does at all), it’s a huge anti-climax because the employee has allocated it to prior expenditures.   In our firm, we often debated the size of merit bonuses by focusing more on what someone would expect to receive rather than on what he or she deserved.   Again, that came about because we knew that significant employee expense outlays had already occurred based on a bonus expectation. 

This Year-End Calls for Extreme Bonus Restraint 

Let’s be realistic and face the hard truth.  The end of 2008 and continuing into 2009 is going to be a time of layoffs, with many economists expecting unemployment to rise to 8%.  (If you heard Paul Bernanke speak this week, you have to expect this.)  This is what the U.S. Bureau of Labor Statistics recently reported: 

The unemployment rate (6.1 percent) was unchanged in September, following a 0.4-percentage point rise in August.  The number of unemployed persons was little changed at 9.5 million. Over the past 12 months, the number of unemployed persons has increased by 2.2 million and the unemployment rate has risen by 1.4 percentage points.

If the predicted unemployment increase to 8% comes to pass, an additional 3-4 million jobs will be lost in the next twelve months.  This means that for some, this next year-end bonus may also be their severance pay.  For those who remain employed, many employers will be taking a fiscally conservative approach and cutting back or eliminating bonus programs.  Every employee must prepare for these recessionary effects. 

Look at this way.  If you mentally treat your “bonus” in name as a “bonus” in function (as it was intended), it will represent found money that can be used for the financial protection of you and your family if and when needed.  If you end up not needing it as the economy recovers, pay off debt with it or save it.  Heck, you might eventually be able to take a vacation with it.  (Maybe to Wally World?)  On the other hand, if you spend it in anticipation of receiving it, you could end up with a disappointing outcome in more ways than one.

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In case you were wondering why you should be reading the hard truth on money and personal finance from Mr. ToughMoneyLove, you need only soak in the sobering news released today about U.S. bankruptcy filings:

Total filings rose to 967,831 from 751,056 for the period ending 6/30/1008, a 29% increase.

Chapter 7 filings rose 36% to 615,748.  (Chapter 7 is for individuals who are liquidating their assets.)

Chapter 13 filings rose 17% to 344,421 (Chapter 13 is for individuals who are on re-payment plans)

Businesses fared no better as Chapter 11 filings rose more than 30% to 7,293

Bankruptcy Reform Was No Deterrent

Keep in mind that these huge jumps came even after the bankruptcy laws were substantially amended in 2005 to make it harder for individuals to liquidate under Chapter 7.  Candidates McCain and Biden supported this change in the law.  Candidate Obama opposed it.  I suppose this doesn’t really matter because the change in the law clearly didn’t have its intended effect.  This proves once again that politicians know little or nothing about economics.

Folks, these numbers are shocking, sad, and pathetic, all at the same time.  Now more than ever, we need to pay more attention to doing the right things with our money and our financial planning.  You can start with watching out for warning signs of a normal financial life.

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Economic Bubbles Bring Worlds of Troubles

What is a “bubble” in the world of money and personal finance?  It is a situation where an asset or asset category has become inflated in value or worth based on non-substantive factors.  The asset value is supported by irrelevant air or fluff.  The U.S. economy, including its investors and consumers, having experienced two significant bubbles in the last decade.  The hard truth is that some of you may be about to experience another bursting bubble.  It is a very personal one:  your standard of living.

If you are over the age of 25, you probably clearly recall the “dot com” stock market bubble of the late 1990′s, and the dramatic bursting of that bubble shortly thereafter. 

Unless you are a caveman, you have also seen and perhaps personally experienced the popping of the real estate bubble in 2007.  Unfortunately, this bubble is still letting out its air.

This brings us to what Mr. ToughMoneyLove believes will be the next bubble to burst:  the standard of living bubble.  Why do I believe that?  Let’s examine the data.

Personal Incomes Have Not Increased

The graph below shows changes in the employment cost index (ECI) from 2003-2008 for different regions of the country.  (This data is brought to us from the U.S. Bureau of Labor Statistics.)  The ECI is a good indicator of total wages and benefits paid to U.S. workers.  Note that the rate of increase in ECI began trending downward in 2004 and has remained relatively flat since 2006.  Note also that the rate of increase has hovered at 3.5% or below.  This is below the current inflation rate, meaning that adjusted for inflation, U.S. workers aren’t making any more money now than they were in 2003.  That’s not good.

Personal Savings are Almost Non-Existent

The chart below shows the personal savings rate trends for U.S. consumers.  Note that it went negative in 2005.  It stayed very low through the first quarter of 2008 and then showed a jump in the second quarter.  Of course this jump was only to 2.8% of disposable personal income.  Folks, that is nothing to be excited or optimistic about.  Anyway, this tells us that U.S. consumers have little or nothing left over after they pay their monthly bills.  (If they do, they must be spending it in Vegas because they sure aren’t saving it.)  We are living paycheck to paycheck or worse.

You Can’t Use Your Home Equity – It’s All Gone

After the markets collapsed in 2000-2001, consumers remained optimistic and continued to spend.  (As the data shows above, they sure didn’t save.)  This optimism and spending was closely tied to the continued rapid appreciation in real estate values.  Consumers apparently figured that they could continue to spend and not save because they were building wealth through home equity.  To maintain their standard of living with increasing food and oil prices and flat incomes, they turned to their home equity.  HELOC’s became all the rage.  Now we know that the real estate bubble has burst, home values have fallen, and many homeowners are tapped out and even upside down on their loan balances.  There is no more using your home as an ATM machine.   Some lenders have frozen HELOCS altogether because of falling real estate values.  What is worse, suburban real estate values may continue to decline.

To Keep the Standard of Living of Bubble Inflated, They Turn to Credit Cards

With no access to extra cash from employment income or home equity, consumers have turned to their credit cards to maintain an inflated standard of living.

The table below is from the latest Federal Reserve Board statistical release on increases in usage of consumer credit on an annualized basis.  I have highlighted in red the most recent data (from June 2008) which shows a substantial increase.  The “revolving” debt number corresponds closely to credit card debt.  That number jumped big time in May, 2008.

What does this data tell us?  That consumers faced with a combination of (a) flat incomes, (b) increasing inflation, and (c) no home equity left to tap, are turning to their credit cards to maintain their standard of living.  Instead of cutting expenses, they are swiping cards at an alarming rate.

The Bubble Has to Burst

Consumer access to revolving credit is not unlimited.  Two things can and will happen.  First, consumers will reach their credit limits on existing lines of credit.  Second, banks have and will tighten up credit standards and deny more credit to stretched consumers.  The tightening of credit standards in the real estate markets has proven this.  Bottom line:  Consumers will not be able to use credit of any kind to maintain their inflated standard of living.

What You Can Do

By this time you are probably thinking” “Why is Mr. ToughMoneyLove bringing more bad news?  I am not in a standard of living bubble.  Even if I am there is nothing I can do about it.”

My tough love response to thoughts like this is that you had better be sure you are not in the bubble and, if you are, you sure as heck better find something to do about it.

Mr. toughMoneyLove’s recommendations:

1.  Get out all of your financial records and determine ALL of your spending for the past 6 months.  Then compare the spending to your income each month.  If your spending exceeded your income for 2 or more of those 6 months, you need to honestly consider whether you are using credit cards to prop up your standard of living.

2.  If complete and accurate spending data is not available to you, then calculate your net worth as of 6 months ago and as of today.  Excluding any paper losses in your investments and real estate, if your net worth has decreased, you should also honestly consider whether you have a standard of living that is being supported by credit cards.

3.  If you determine from steps 1. or 2. that you are in a standard of living bubble, you need to get out of that bubble before it blows up in your face. 

4.  I am no genius in reducing a standard of living by cutting costs because we have always lived below our means.  I do have some suggestions for saving money in some basic spending categories.  I have also talked in the past about small expenditures that can bust your budget so you can consider those as well.  Also, don’t forget the lunch time cash drain as a way to cut back. 

5.  Find a way to completely stay off the credit cards so that your standard of living bubble can shrink in an orderly manner.  Here are some ideas on how to avoid the use of credit cards.

6.  Set up a budget that defines your new standard of living that is not in the bubble.  There are a number of free online tools that will help you do that.

Mr. ToughMoneyLove brings the hard truth but he also wants you to succeed.  Be honest with yourself about being a bubble-dweller, take action now, and you can succeed.  When you do, please come back and tell me about it.

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