Budget Sense

When something dramatic changes in your life, how do you respond? do you change your lifestyle around it or do you change your budget instead?
For example, given the sharp increase in the price of gas in the last few weeks, do you go back to your budget and increase the amount allocated for gas? or do you keep your budget the same and instead adjust your driving, by driving less for example? how about an extreme change in weather, say to much hotter or colder? do you make adjustments at home or do you change your budget to give more allowances for heat/AC bills?

These are questions you will likely face with a personal budget, and answering them will require some analysis and number crunching.

-Is the change permanent, short term or unknown? if it is a short-term change that won’t last for long, then you can go through it and do your best to adjust to it. In fact, if you are prepared financially, you may not even need to make any changes. If the change is permanent, then you will have to sit down and do some analysis in terms of what needs to change, your budget or your whole lifestyle.

-Which one will give you a better value and utility? it is not just about the money but the value and return you get (health, life, family etc.) In other words, changes to your budget may be the way to go if it will make your life better. Example would be in buying a car. When making the decision as to which car to buy, you may come across a car that will cost a little more and even more gas than what you currently have. But this car will give you and the family more value, safety and comfort overall, so it is worth adjusting your budget for it, for a better lifestyle.

-How easy is it to make changes to your lifestyle? if it is easier to make a budget change and almost impossible to change the way you go about your life to accommodate the new changes, then go for the former. If your company is experiencing a slow season and your hours are reduced as a result, you may not want to look for another PT job due to family commitments. In a scenario like this, you would find it hard to make changes to your lifestyle, so instead, you make changes to your budget by saving less money for example.

Can you make small changes to both? in certain situations, it may be easier to make small changes to both your lifestyle and budget, rather than a big change to one of the two.  This way, you may feel a smaller hit. Example would be the introduction of a new member to a family through birth. With a new baby in the family, you will have added expenses and time commitments, not to mention all the time and energy needed. You can’t respond to such a dramatic change to the nucleus of your family by simply modifying your budget only. You will have to do more changes to your lifestyle as well. You may need to stay home more often to take care of the baby. Of course, the alternative would be to hire a nanny and pay her well over $1,200 a month, which would probably obliterate your budget. But by making small changes to both your lifestyle and budget together, you get to feel a smaller sacrifice from this huge change to your life.

The point is that you will need to apply different changes depending on the situation. Once size doesn’t fit all. And as we already seen with some examples, you don’t always have to go with one and not the other, but can in fact incorporate small changes from both.  You should hardly ever resort to making dramatic changes to one and not touching the other. If it is a huge change, it is best to split the responsibility between both your budget and your lifestyle.

Just remember, one of the last things you should touch when adjusting your budget is your savings. It is easy to look at your savings and think it is the easiest thing to sacrifice but it doesn’t have to be. With careful planning and reassessment, you may realize that making small changes to your lifestyle may spare your savings from being reduced or even eliminated from your budget.

As current or former students, we all know what a fortune it costs to buy textbooks. Sometimes in the thousands of dollars per semester. Given students’ limited income, this can be quiet tough for most students to afford, and can shred your budget to pieces!

Having said that, there is something you could do with your textbooks when you no longer need them, that could get you some much needed cash.

Sell them!

Sure, most of us know that we can resell our textbooks and make some money that can help us with buying books for the next semester or other things. But how to go about doing it? how do you compete with hundreds of other students on campus, selling the same books at the same time?

Drawing on my years of experience in college and university, here are some very good tips to help you sell your book faster and for generally good prices:

-Timing is everything: the earlier you sell, the better. But that doesn’t mean right after the semester is over. Wait till just before the start of the new semester if you can. Make sure you sell the next semester and not delay it by a year or more, because the book will probably be old by then, replaced by a newer edition.  Selling it before the new semester starts is crucial, otherwise it may be too late, as most students would have bought their copies by then.

-Location: where to sell your books? first and most obvious place would be on the campus, by posting flyers. Be sure to post detailed information about the book, including ISBN, course code it is offered in, and of course your full contact information. Try to bundle and offer discounts: for example, the more books they buy from you, the more discount you give them. This way, you may be able to sell more books to the same person, rather than one book for each potential buyer.

Or if the new class has already started, you can stand at the door of the new class and directly ask students if they are interested.

Next best place would be local classified sites such as Kijiji and Craigslist. Here, you can reach even more people than just those from your college or university.

You can also try selling them online, where there are a lot of sites that specialize in mediating between sellers and buyers. Here are some of them:

Half.com – You choose your own price
Ebay.com – the online auction giant
Amazon.com – Set your own price while comparing it to others’ prices

Then there are those sites that will actually buy your books themselves, including:

textbooksRus.com
ecampus.com
bookbyte.com
booksvalue.com
valorebooks.com

When all else fails, you can try on-campus book stores. The reason this should be your last resort is simply due to their low payouts. Usually up to 75-90% off the original price.

How much to sell for? You don’t have to list your books for a fraction of what you paid for. Generally speaking, you could list them for 25-50% of what you paid. This will still get you some much needed money while saving the potential buyers lots of money compared to buying new.  And always remember, while it is natural to seek the maximum returns, you are not in it to make a profit.  Textbooks, much like certain car models, are terrible for lost value in a short period of time. They can only depreciate in price, and rarely ever appreciate.

Needless to say, you have to do some research, compare prices before you make up your mind as to where you will sell your books. In other words, don’t just sell to the first buyer, unless they are offering you 100% of the original price (quiet unlikely)

Last but not least, it is important to keep your books in excellent shape, and try to not highlight them or anything like that. Preserving your book in its original state can mean a big difference in selling price.

You can use the cash you get from selling your books to buy books for the new semester. If you are done from school, you can save the money or use it to start paying off your student loan debt.

Before, it was about common sense and conventional wisdom. Now, it is has been proven through real research.

According to a study published in the Journal of Consumer Research, shoppers are less likely to spend their money if they are carrying cash in large denominations. There is even a name for this social phenomenon: ‘denomination effect.’ Through experiments, the study shows that if people carry a $100 bill, they are less likely to spend it than say a $20 bill. The lower you go, the more likely it is that you will spend it. The psychological rational behind this is that our brains overvalue larger bills and undervalue smaller ones. In other words, we think of a $100 bill as much more valuable than 5 bills of $20-essentially the same amount of money.

So what are some real life implications for this other than the obvious ones? well for one, while your wallet shouldn’t be empty, if you have to carry cash, make it in a larger bill.  For general day to day activities, I am personally not in favor of carrying very large bills – say a stack of 100 dollar bills- I think $50 is the best thing.

Try to do your own experiment in real life. See what a different it makes when you have larger bills compared to those times when you have smaller bills. Better yet, compare it to those times when you have spare change. Do you spend more with spare change? For me, I have been applying this way before I read about this study and it always works. In fact, I generally like to divide my ‘personal spending’ money from my budget into some large bills and some small ones. This way, while I will go through the small ones, I may think twice about spending the larger ones, because as we all know, once a big bill has been broken, it is hard to stop spending it all.

When it comes to eliminating your credit card debt, paying the minimum payments will only mean that you are covering what is necessary to ensure a good standing order with your card issuer. But that is about it. You are not getting ahead in terms of paying off the remaining balance on your credit card.

Unless you are fine with this and don’t mind carrying a balance on your card for years and years to come, you need a new fighting strategy to reduce or eliminate your credit card debt all together. Notice the word ‘fight’: you have to be aggressive in your strategy otherwise you won’t get very far.

One of the things you can do is to increase your payments, a little above the minimum required. But even that will only make a small difference.

What you need is to create a turning point. One where the difference before and after is quiet noticeable. Let me explain. This turning point is nothing more than a payment that is at least 5 to 10 times the minimum payment that you are supposed to make. By injecting this one-time lethal shot, you are helping put a stop to the spread of disease (accumulating interest)

Once you have gone through this turning point, both your balance and interest charged will be significantly lower. From here on, and unless you can afford to take some bigger shots at your balance, you may continue to make payments that are slightly above the minimum required. But not much longer after, you need to create another turning point and reduce your balance to an even lower amount. Until your debt is down to zero or a very miniscule number.

Again, the idea is simple: even if you are unable to make consistently big payments to eliminate your balance, you need to create these turning points, which help from a psychological boost. That is, when you make a payment that is much larger than the minimum required, you are convincing your brain that you are finally able to beat your debt and not be controlled by it for years and years. And as you see your debt going down-much faster than before-you will be motivated to finish it off even faster.

This active plan of attack on your debt will require some sacrifices on your part. Most importantly-as you have may have already guessed it-is to attempt to stop using your credit card, unless in extreme emergencies or very small purchases. You don’t need to walk one step forward and then take two steps backward.

Your plan: Start your plan by designating a certain payday on the calendar, where you will make a large payment.  After that, continue to make payments that are larger than the minimum required. After your debt has been reduced to a more manageable amount, schedule another date to make another big payment-at least 5 times the minimum.

Example: Let us say your balance is $1800 and your minimum payment is around $60 (usually around 3% of the balance) .  To make a difference and lower your balance dramatically, your ‘turning point’ large payments should be anywhere from $300 to $600 dollars, which could bring your balance well below 1500-1200. After that, continue to make payments that are at least $100. In 3 months, your balance could be down to less than $1000. At which point you should make another large payment that is 5-10 times the minimum payment. Say another $400. Eventually, you will see your balance well below $500, down all the way from $1800!

Tip: to speed up your debt elimination, you can set a date on the calendar as a point of reducing your debt to zero, one that is not too close or too far, but gives your brain enough time to focus on the task.

Like  everyone else, I occasionally see something I really like and want to get it that moment. Problem is, it may not be anything I can easily afford. It could be something big, say a nice car, a new electronic gadget, computer etc.

Call it ‘instant gratification on steroids!’

Unless I have a lot of money saved, and I can spare some of it for this big purchase, I won’t be able to afford it.

Which is why you should always start saving early, so that you are able to afford things you want with ease. Remember, or if you haven’t already read it, one of our ‘5 Principles of successful budgeting and finances’ is to be patient and have discipline. In this case, if you start early enough, your patience will pay off at the end by being able to afford that big purchase.

I can’t stress enough how how important it is to start early and give yourself a good head start. The earlier you start the more ready you will be to make these big purchases. Moreover, by allowing yourself enough time to save for big things, you will not only be able to afford them, you will have spare money leftover for other purchases or emergencies.  And last but not least, by starting early, your stretching your timeline which allows you save comfortably without making big sacrifices, compared to having a shorter timeline.

When it comes to incorporating it into your budget, saving for big purchases should have its own allocation and not to be mixed with all your general saving. Otherwise, what are you saving for: a rainy day, a big purchase or both? so it is important to separate the two saving goals.

If you didn’t start saving for a big future purchase yesterday, last month or last year, no problem. You can start today, and by this time next year, today will have been long in the past and enough time for you to have saved your money.

But saving doesn’t and shouldn’t stop. The idea is to keep saving, all the time, because your needs and wants will always be there. In a few years, you will want to replace your car. In a year from now, you may want to buy a new version of your favorite smart phone. And in a few months from now, you may want to take a vacation to a hot destination.  The list doesn’t end and therefore our saving should always be active!

Failure to save for big purchases in advance-months or even years in advance- will mean you will either have to resort to using credit cards and other financial means where you will have to pay it back with interest, or not be able to afford your purchase at all.

Tip: you can either create a new item in your budget for these big future purchases or just include it as a sub category in your existing ‘savings’ allocation.