Tag Archives: overspending

The Government Financial Resolutions You Didn’t Get

Prime Minister Trudeau just gave his New Year’s message that us Canadians should focus on “key values” for the New Year. OK, that’s nice and vanilla, but there was nothing on maybe some government resolutions on financial issues. Since it was missing, here’s what I’d want the PM, and probably all governments, to commit to:

If you’re one of the many people who are waiting for the government to fix your life – sorry – we can’t and we won’t. You need to get off the sofa and start fixing your own economy – the government makes a lot of feel-good promises, but we can’t fix it for you.

We’re going to commit to using the rule of doctors: First, do no harm. That means we’re going to fix the punishing new mortgage rules that will make it really hard for the average Canadian to sell their home or to buy one – even with 20% or more down-payments.

From now on, the government will become better stewards of your tax money. You send us a lot of it. Not just off your pay, but in GST, gas taxes, EI, CPP, and places you don’t even know about. We’re going to start treating it as if it were our personal money. No more throwing cheques at small but vocal special interest groups that yell a lot, or who we want to bribe to get their votes again.

We’re also not going to just hand out money as if it were candy anymore. Sorry about giving $10.5 million to a terrorist – tax free. If we need to settle claims, we’ll do it after a court orders us to.

Lastly, we’re going to stop lying or fudging the numbers. Sure we promised we’d “only” be overspending $10 billion and it became $40 billion.

Yes, I promised we’d have a balanced budget before the next election in 2019. Yes, two days before Christmas when nobody noticed, my finance department released a report showing we would be in deficit spending until at least 2055. Yes, the damage we’ve done will last an extra 36 years just to not overspend each year. We’ve seen the light, and our New Year’s resolution is to tell you the truth, and to actually start making the hard choices – just like each and every family has to make, and to live within a budget.

When pigs fly…..

Why We Spend More Using Credit Cards

We’ve talked about this before: Use cash and not your credit cards and you’ll spend at least 12-18% less – no matter what, unless you have the willpower of some marathon runners.

That stat comes from an extensive Dun & Brad study. My opinion is that it’s a lot more than that. I was in a golf store last week in Phoenix. I was buying a $60 club and had looked at a bunch of head cover sets. Most were $60 and that wasn’t going to happen until I found one for $20. At the cash register, I swiped my card and proudly took my club and covers to the car. It was half way out of the parking lot that something clicked in my head. Hold it…did you just sign for $120 plus on your credit card? Hmm…$60 pus $20 plus tax…time out… When I looked at the receipt, that set was $65! Of course I returned it, but what a lesson in just signing and going without connecting the money to the total to the credit card charge. Yikes! That would NEVER have happened if I’d been asked to part with six $20 bills and then some.

But now, researchers at Carnegie Mellon, Stanford, and MIT think they know why. Quite simply, they found that we literally spend until it hurts, according to their study published in the journal Neuron. Remember the old Nazareth song: Love hurts? Well, spending hurts, too.

Researchers took MRI brain scans of participants who were given $20 and the choice of buying something or keeping the money. Participants were shown pictures of products they could buy and then the price. The MRI showed the pleasure sensors part of the brain being activated when they liked the product. But when a super high price was shown for the product, it triggered the pain part of the brain sensors.

So, the old saying that there’s a pain of paying is actually true. Our brains have a physical reaction when we have to part with real money. Unfortunately, our brains don’t connect real money with credit cards. We see the product, we like it, want it, and can totally avoid the pain of paying with cash! It’s a win-win in our brain…for a while. Our pleasure centre of the brain is satisfied and we leave the store with exactly the same amount of money in our wallet! The pain is delayed until the credit card bill arrives.

If the logic of the study makes sense – and it should – test it out for yourself. Check the cut-off date of your credit card. My last date for the coming month is always the 14th. Then, starting the next day, go one month without your credit card. Pay by cash for everything from groceries to gas, lunch out to golf. Keep your ATM slips and add up what you spent for the month, compared to what your spent on your credit card the month prior.

It’ll at least be the 12-18% less – and that could be a lot of money. The logical part of your brain, your wallet, finances, budget and credit card balance will thank you for it! 99.99% of people won’t do the experiment. I know that. They’re either in denial, don’t want to know, or aren’t interested in saving a few hundred bucks a month. I hope you’re in the tiny group that will give it a try.

It’s Just “Stuff”

A few years ago, after decades in our family home, my parents could no longer handle the physical upkeep of a large single family home. It turned out that the trauma of selling our family home wasn’t nearly as bad as what us ‘kids,’ now middle aged ourselves, had to do in order to make it happen.

One Friday we ordered one of the big commercial dumpster bins to be delivered to the house. After giving away stuff family members, friends and neighbors wanted, we knew there’d still be a lot of things that had to be thrown out: sleeping bags to tools, furniture to books, and extra dishes to everything else, none of which could go into a one bedroom nursing home unit. What we weren’t prepared for was the visual impact of a huge and full bin being hauled away, then a second bin, and a third bin. In total, the stuff accumulated over a lifetime added up to over 14,000 pounds – in the dump.  Few things in life have had such a powerful and visual impact on us.

Literally hundreds of thousands of dollars of stuff, purchased one thing at a time, over a lifetime, boiled down to 14,000 pounds of trash. It sure put things into perspective. You’ll now understand why I’m just not that excited about buying that newest whatever, the next model of some gadget or another, or running up my credit cards. Hopefully it won’t take that kind of experience for you to look at “stuff” a little different in your life, or with Christmas presents this year.

When you decide you want to reach financial independence and become debt free, it needs to start by turning off the buying and borrowing tap, to end your continuous borrowing and payment cycle. That decision comes with good news and bad news. The good news is that ending your borrowing cycle rapidly accelerates the date of your debt freedom.  After all, you’ve now stopped digging and stopped making things worse. Besides, if you look at all the debt you have, there’s a good chance that today, most of it couldn’t be sold on e-Bay or given away on Kijiji.

What’s Your Credit Limit?

What’s an expensive night out? I’m thinking $100 maybe $200 tops. Well, there are people with much higher budgets for a night on the town than you or me.

We talked in 2011 about the six Boston Bruin’s players who charged up $158,000 at the Foxboro Resort to celebrate their Stanley Cup win. But if you thought that was expensive – not really:

Could you charge $241,000 on your credit card? Apparently Robert McCormick managed to do it on his American Express. The CFO of Savvis Inc., a Missouri Internet hosting company expressed concern on the company web site that most people had never heard of his firm. That’s all changed now after some huge media coverage. You see, one night two years ago, his boss, Robert McCormick took some clients to a New York “gentlemen’s club” called Scores.

We don’t need to get into the details, but suffice it to say that Scores claimed he spent time with as many as 15 of their dancers for an all-night event. Even with drinks at $22 a pop, it takes a lot of effort to run up $241,000 in charges. But then the vast majority was apparently in tips for these ladies. The reason it came to the attention of the public? Well, it turns out his company is refusing to pay the American Express bill. They are disputing the amount and accusing Scores of “padding” the bill, something the New York Attorney General is investigating. At this time, Mr. McCormick is suspended and American Express has sued for payment. There is an ending to this in that Amex settled for an undisclosed amount and Scores is now out of business.

It’s another valuable lesson that a credit card should stay in someone’s wallet…and pants.

That must be some kind of limit. But then, maybe you’re more like Brittany Spears. According to The Insider on ABC, she couldn’t get her credit card approved at Barney’s in New York. And then it was: Ooppss I did it again – when her second card was also rejected. However, her bodyguard stepped up to cover the purchase on his card.

Best guess: It’s been reported that her husband Kevin loves to spend and apparently she cancelled a number of credit cards for just that reason.

According to In The Money, J Lo also had hers declined before Christmas at a fundraising gala when both her credit cards were maxed out.

The Money’s All Spent – Now What?

Now that it’s the week after Christmas I’m reminded of an old Irish Rover Song called: Wasn’t that a party, and then talks about the hangover.

That’s kind of like our financial lives, having just spent over $22 billion on Christmas, mostly with borrowed money, and including lots of presents for ourselves. I know, I know, we work hard, it’s our money, we deserve something, it was on sale, we really needed it, etc. Well, if we were to be honest with ourselves, that’s all nonsense. Broke people can’t afford to buy stuff, and it’s almost always a “want” and not a “need.” That’s how we get to spending over $4.2 billion on impulse purchases in a year, according to one Canadian study. And, to be honest, that number is way low, because it’s the last thing we’ll admit to.

Yes, we work hard, and yes it’s our money. But do you want to keep working hard forever? Freedom 77 doesn’t have the same ring to it as that old commercial campaign of Freedom 55, does it? At some point in time, we do have to get away from the spending party and focus on paying off the hangover and saving something for someday down the road. Intellectually, we know that, but when are we actually going to get around to it is the big question that will change your entire financial life.

Right now, let’s be honest: We spend more time planning our vacation than we do our financial situation. Make 2012 the year that you’ll actually turn that around. Here are a couple of suggestions that are small enough where you’ll do it, but big enough to have a significant impact. Why small steps? Because our sub-conscious mind will revolt against huge goals that seem impossible to reach.

You’re not going to lose 60 lbs, but you can lose a pound a week. You won’t run the marathon this summer, but you can go for a 15 minute walk each day. You also won’t be debt free by February, but you can start on that journey with one step at a time.

Resolve to say no: Whether it’s to yourself when it comes to spending, to your kids, people at work, or anywhere else. It’s the one word that’ll change your financial life.

Take your credit cards out of your wallet: At least for January, leave the cards at home. If you have an emergency, you’re one call away from getting help. But going to the mall or charging this or that isn’t an emergency – honestly.

Set a cash limit: Pick an amount below which you’ll always always pay by cash or debit. The higher the limit, the better – if you make it $50, gas, small grocery purchases, lunch, etc., will all be paid cash. That alone will drastically reduce the charges on your credit card. When we use a credit card we spend 12 to 18% more – period. Whether you pay it in full or not, it’s still a ton of extra spending that isn’t helping.

Stop being financially stupid for 2012: You know exactly what that means. They are different things for all of us, but make the New Year one where you’ll stop doing the top two things that get you further in debt, or don’t grow your savings.

And finally, here’s a great post from Facebook this morning that kind of says it all: Do something today that your future self will thank you for.

Government Debt vs. Ours – Is It Fair to Compare?

Now that the Canadian Federal Election is a month behind us, what are we in for? If you voted Conservative, it’s nice to see there’s a majority government and we won’t be spending the $300 million on an election every two years.

If you’re not Conservative – don’t worry about it – that’s not a true conservative government that’s elected in any event. Partly, because us Canadians wouldn’t want it, or tolerate it.The budget two weeks ago had $37 billion in deficit. That’s more spending than income. And the government will take four years to get out of the hole. If you’re spending more than you’re earning, four years puts you into bankruptcy, and you had better deal with this BIG problem sooner.

You may also realize that nobody is talking about our $500 billion debt. That’s no different than most of us individuals. We only really want to focus on making it through each month, and thinking about our total debt is way too depressing. Well, you cannot change what you don’t acknowledge. But….let’s not talk about that, or even think about the total staggering amount of debt…. Right now, however, that debt takes $40 billion of interest payments. That’s the deficit right there if we weren’t in debt!

Again, it’s exactly the same as most people’s finances. The interest we pay each month has a real choke hold on our finances.

Four years to get out of the hole? That’s four years of not a single dollar onto paying down the debt. And that’s in an economic upturn cycle. So what happens when the next down cycle, or recession comes? Yup. We’re right back to borrowing, just to pay the bills.

The vicious cycle, for governments all over the world, and all of us, is totally backwards. Financially successful people SPEND during a bad economy and SAVE during the boom times. Think about that. They’re spending when everything is on sale and saving when earnings are up and inflation makes things more expensive.

Lastly, can we please stop comparing ourselves to broke countries? Well, we’re better off than this country or that. What nonsense. My neighbor might have one foot in bankruptcy court and that makes me financially successful? Give me a break!

And a final question to ponder: Who leads the way here? Should the government be the ones to balance their budget and live within their revenues, or should we lead by example and then hold the government accountable?

The Financial Nightmare of Greece

Finance 101 is something I can teach every fifth grader: When you buy something, you have to pay for it. Either you pay for it right away, or you pay for it later at a lot higher price.

That, essentially, is the problem in Greece playing itself out with riots and deaths as protestors fight that basic logic of going in debt. When full pension retirement comes in the mid 50s, their utility company loses money, taxes are low, they have a huge underground economy, and massive social programs are so-called “free,” eventually the tab comes due. That’s now.

There was a protestor quoted yesterday as saying they’re being bled to death. No, that’s just stupid. You’re being forced to pay for what you and your countrymen have enjoyed for decades that your country never could afford – period.

Greece owes hundreds of billions of Euros to bond holders, lenders, and other governments. Now they’re asking for more and more bailouts. But others have money – the Greeks don’t. So, if I’m borrowing money I get to set the rules. Same as when we apply for a loan. YOU don’t set the terms – the lender does. You can say no, but you don’t get a vote in the rate, etc.

Right now, Greek bonds are at 30% for two years. Imagine that! That’s how risky the investment world thinks Greece is. And the $17 billion the European Union is asked to advance right now is just to cover the next few months! It isn’t solving a thing but treading water. But they won’t write the cheque if the Greek government doesn’t sell their money-losing public utility, increase tax rates, and do some other austerity measures.

When there’s financial trouble, whether it’s you, me, or governments, you can see it coming years in advance. Ignoring it means somewhere down the road, it’ll be hugely painful. Greece is there. The US has another two or three years, based on the estimates of a number of experts.

One thing you can bet on is that the Greek government will fall and there’ll be an election. And the next party elected will be one that’ll promise to ease up, reduce taxes, and the likes. People want to hear what they want to hear. Even today, Greeks are still in denial. I would suggest they haven’t learned. But then, I’d suggest we also don’t learn from others until we, as individuals, are in the same place. How sad. How stupid. How unnecessary.