There are three things that you can do with money: spend it, save it or give it away. Going along with yesterday’s theme, knowing what we can do with money is another teachable moment that we can pour into our kids.
While you are enrolled in FPU or reading The Total Money Makeover, you are going to spend money. Unlike a diet, you simply can’t starve yourself past a weigh-in. You need to “un-learn what you have learned” and develop a game plan to not overspend and derail your budget.
I think the best way to accomplish this is to choose paper over plastic.
You will spend more with Credit Cards
I remember the first time in 2004 when a local McDonald’s installed a credit card machine in front of the register. I am old enough to remember when McDonald’s stopped taking checks! For many years, McDonald’s operated on a cash-basis. If all you had in your pocket was enough for a Big Mac, fries and a Coke, that is all you could buy. Today, you can add an Apple Pie because it all goes onto the card.
McDonald’s discovered that people spending went from $4.50 to $7.00 once they started accepting plastic. Dunn and Bradstreet also discovered that, on average, you will spend 12 – 18% more when using your credit card.
Why? Because of that wonderful brain in your head.
You brain will register something when you spend with cash: loss. Swiping (or waving) a card, your brain doesn’t registered that you had to give something up in order to make a purchase. Researchers at Carnegie Mellon summed it up this way: “Credit cards effectively anesthetize the pain of paying.”
Even if you are paying with a Visa Debit Card (which I use), you still spend more, but not as much because you know that it is directly tied to your bank account.
When FPU members start getting their house in order, I like to recommend that they start mixing cash back into the equation. Cindy and I waited nearly seven months before we got to this point.
Here is a scenario that you are likely to encounter. You are in the grocery store and you go through the check out. Your total is fifty dollars over what you budgeted for Groceries.
What do you do? If you are paying with your debit card, you swipe the extra fifty – it’ll come from somewhere.
Cindy played that scenario out for many years. We had a number on the budget, but, if we did not honor that number and over spent anyway, we did not have a budget. We had a theory. What she needed was something with here in the store that said “you need to put something back.”
Cindy uses an envelope system that she will put cash in each payday. She will cash a check that covers the Groceries, Sundry (things that you buy at the Grocery Store, but you do not eat), Restaurants and Blow Money (more on that later) categories. The teller is given instructions that states the denominations that she wants. Once the cash has been dispensed, she places the correct amount into corresponding envelopes.
When Cindy shops at the grocery store, she always pays out of the envelopes. Sometimes, this means that she can’t get an item this week and something has to go back. We also use the envelopes whenever we go out to eat – If there is no money in the restaurant envelope, we stay home.
Every budget needs a little wiggle room, or you will always find yourself constantly moving money between categories. Blow money is a concept that recognizes that need for wiggle. There might not be money left over in the Restaurant Envelope, but, maybe we could use some blow money and go out to eat after all.
We’ve taken the concept a little further, and divide the blow money between the two of us. You can do whatever you want to with your blow money. Most of mine seems to go to Starbucks.
How much should you be putting aside in blow? It should be Baby Step appropriate. If you haven’t saved up for Baby Step One, and both you and your spouse are giving each other $125 in Blow Money, that’s not Baby Step appropriate.
Learning how to spend within your budget is a key behavior that needs to be developed. Watch out for things that might make you overspend – start spending with cash so that you don’t bust your budget.