Question for you all

[Aria]

How would you define a 'big spender'?

I have a reputation in my family for spending money frivolously. My sister recently said, "Aria would handle that by just buying the most expensive one." Which is true, if I don't know much about an item I go for what I perceive as quality. It's not foolproof but it tends to work. But it got me thinking... do I have a problem? I usually carry between 1 to 2k in credit card debt. However, I'm paying it off and charging it back constantly... I'm probably paying enough interest to keep Capital One happy, but nothing excessive. I fund this with overtime, which is fine because I enjoy my job. As I said to my sister, I might learn to be more frugal if I hated it. XD

But would you guys say that is a problem? I've noticed that my carrying capacity seems to be 2k. I'm comfortable with that but much more and I start quietly wigging out and conserving every penny to get it paid off. The thought of carrying the maximum debt load I could have - which is absurd for my income - gives me hives. So... what do you think? Is this fairly normal or something I should work on?

[csquared]

You are just touching the surface of the question. If I were your financial advisor, the first things I would ask is "How much are you putting away for retirement?" "How much do you have in savings, long term and sort term?"

Economics 101: The true cost of an item is not the price tag, but what you forgo to obtain it.

What is your spending habits keeping you from doing? What WILL it keep you from doing? Could you replace your car if it breaks down or is totaled? If you lost your job, how long could you last?

Your debt may not be your problem. It could be your lack of savings.

Pay off the credit card. Think about what you could buy (or put into savings) with the money you are not paying Capital One. By the way, Capital One makes 2.5% on every dollar you charge. The interest is icing on the cake. They will have no problem if you pay off your card in full every month.

[Aria]

You are just touching the surface of the question. If I were your financial advisor, the first things I would ask is "How much are you putting away for retirement?" "How much do you have in savings, long term and sort term?"

Economics 101: The true cost of an item is not the price tag, but what you forgo to obtain it.

What is your spending habits keeping you from doing? What WILL it keep you from doing? Could you replace your car if it breaks down or is totaled? If you lost your job, how long could you last?

Your debt may not be your problem. It could be your lack of savings.

Pay off the credit card. Think about what you could buy (or put into savings) with the money you are not paying Capital One. By the way, Capital One makes 2.5% on every dollar you charge. The interest is icing on the cake. They will have no problem if you pay off your card in full every month.

I don't think the credit card actually works like that... it's a department store card, no annual fee, and I earn points towards that particular store. And I love that store, so I get plenty of use out of it.

My savings... I do have three savings. Firstly, my work has a pension plan and I'm lucky enough to have the really good one. Every pay, money goes into that. I could max out the contributions and I think next year I might. The second savings I have is my stocks. The company matches my contributions 1-1, so that's excellent. I have that maxed out and it comes out every pay. If my car broke down or was totaled, I would yank that to pay for a replacement. It's not high right now... I did buy a new car recently... but hopefully by the time this one is gone it will be enough. My third savings is a TFSA, which gets 50 a pay. However, I can make irregular contributions whenever I have extra cash. I plan that to be a very long term savings.

I hear what you're saying though. If I lost my job tomorrow I'd be in hot water and no mistake. Given the economic downturn, I might have to sell my condo and move home. However, I'm unionized and my department is expanding. So I'd have to do something REALLY bad for that to happen. :P Pweh, that makes me nervous even thinking about it. But I'm a bundle of nerves lately.

My current spending habits are keeping me from taking a vacation. I really want to go on a cruise but I've sworn to myself I won't do it if I have to put it all on credit. The crappy exchange rate does not help...

[Seshat]

"Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

That's a quote from "David Copperfield", by Charles Dickens. It's also very, very true.


I can't tell you how you should spend your money. It's yours. But I can tell you what I consider to be one of the many wise ways to handle money.

First of all: think about how many of us on this messageboard are injured or ill, and unable to work. Or unable to do the sort of work we used to do, and stuck doing less lucrative and/or less satisfying work.
Each (okay, most) of us in that situation - including me - was once in your situation: working, earning enough money to be 'result happiness' as per the quote. Here but for the grace of God go you. And that luck can be withdrawn with no warning.

So. Calculate what it would cost you to have a minimum healthy life. Living in your sister's spare room, buying the day-old bread and the bruised fruit and vegetables and the cheapest meat (or tofu) available. Basing your clothing purchases on what's durable and repairable and cheap, and repairing everything that's not worn to the weft. And allow some for medical expenses, since that's one of the potential situations which could mean you'd have to live like that.

And think about how long it might take for you to get income such as a disability pension or other permanent/semi-permanent payment to keep you going if you are injured or ill.

Multiply the one by the other. That's your 'ohmygod it's all gone to hell' savings target. You want a minimum of that much stored away in a long-term savings account that you never touch - probably some sort of 'every six months' self-reinvesting term account. Discuss this with a financial planner or at least someone who understands banking.
Be aware that these term accounts tend to have an interest rate slightly less than inflation; you're not actually acquiring value, just storing emergency money.

Don't try to put all that money away at once - it's going to look like an intimidating number. But if you put - oh, 5% of your income (gross or net as you prefer) into the account every payday, it'll build up.


Now figure out how much it costs to live the way you want to live; but realistically.
Assuming you're basically satisfied with your current life, add up your current costs. Include depreciation, and costs that are often forgotten (such as haircuts, tips, entertainment). Estimate slightly on the high side.

If that exceeds your current net income; then you've been living beyond your means.

Ideally, figure out a way to live happily with your net income - 10%. 5% of that will - for a few years - be going into your 'ohmygod' account. The other 5% will go into other savings; some of which is for spending on things like expensive concert tickets or a new car. The rest is for your mortgage (if you ever choose to buy a house) or your retirement.
When your ohmygod account has its target, put its money into the other savings accounts.

If you can't store away 10%, store away what you can. If you have more than 10% available, allow yourself a percentage for luxuries and entertainment (and charity, if you are so inclined), and save the rest.

Start building two more accounts. One for short term goals (less than a year), the other for long term goals (a car, an expensive vacation, a mortgage down payment...). Actually, it can be good to make the mortgage down payment its own account.
Note that these do not have to be separate bank accounts - if you have the willpower, you can put them all into one bank account and use a tool like GNUCash to keep track of how much you have in each. Thus you check your GNUCash, see that you only have $X in your short term goals account, so you can't buy those concert tickets that cost $X+Y.

If you want to be even smarter, have yet another savings set. This one is for retirement.

For your long term savings, such as the mortgage and retirement, you'll want them to be a mix of the various different kinds of investment. And I don't mean all of them being stocks just different kinds of stocks - I mean some stocks, some bonds, some term deposits. The exact balance depends on how much risk you want to take, but please, please, be diverse. That means that what you lose on the roundabout you gain on the swings - though admittedly if you'd had it all on the swings you would have gained more.
But none of us can predict whether the roundabout or the swings is going to do well, and which will do poorly.


Review this whole process periodically. You should probably check up on it thoroughly every year, for the rest of your life. It IS your money, after all, and it's your security blanket (the ohmygod account) and your one-day house (or luxury yacht), and your retirement.


Anyway, that's what I would do if I could spend nineteen, nineteen and six, instead of twenty ought and six.

[csquared]

There you go. You have just answered more of your question.

There is no one answer for everyone. It all depends on your income, your cost of living and your priorities. Only you can decide what you can afford.

[Pedersen]

Over the past year and a half, I've been using the method espoused by You Need A Budget. That's not a free app, and their next version is going to be subscription based (which thrills me so little I'm starting to write my own version).

Basically, they use the envelope system, provide an app for iOS, Android, Windows, and OSX, and also (possibly most importantly) spell out what they call their Four Rules. Now, all of that is a method for controlling your spending. The real question is this: What should you spend your money on?

The folks at YNAB do a podcast. On one episode of the podcast, they interviewed Carl Richards, and part of it was a plug for his book, The One Page Financial Plan. I cannot recommend this book enough. It's short, easy to read, and absolutely not what you expect to read about financial planning. It focuses first on your priorities, then gives advice on how to work on meeting those priorities.

This past year has been brutal on my income, especially the last four months. By my best estimate, we've had to spend about 25% of our gross income on emergencies. We came out of these past four months with a debt load of about 2% of our gross income. And I attribute that to having followed what the book and the four rules provide, and using that app religiously.

And the best part? If you've got your saving and spending aligned with your priorities (your real priorities, not your "where should I do lunch today?" priorities), you will know it, and you won't feel at all guilty. You can buy whatever it is you're looking to buy, because you will have the money set aside for it.

Check those things out. Even if you buy nothing of it, it's food for thought and could help you figure out if you're spending the way you should be spending for your life.

[Aria]

Thank you! I've ordered that book, it looks interesting. The app, I might download when I get my new phone. I wonder if it would work on a Blackberry? If not I can always try it on my laptop.

[Ironclad Alibi]

How would you define a 'big spender'?(

A "Big Spender" is a showoff who spends their money to impress other people.

[Seshat]

This is a big spender.


More seriously: as long as you have a decent savings plan, and are living within your means, who gives a damn what you spend your entertainment/luxuries money on?

Oh, the greedy part of me says 'give me some'.

The slightly less greedy part of me says 'hand some to pain researchers'.

But really, it's your money. Be sensible, but do what you want. Just take a bit of time to work out what you really want, don't buy the first flashy thing you see.



Hm.
You said in the original post that you're not sure how to identify quality, so you go for expensive. Would you like advice about how to find out what quality is?

[Aria]

Hm.
You said in the original post that you're not sure how to identify quality, so you go for expensive. Would you like advice about how to find out what quality is?

Nah, I'm good. That's with things that are otherwise extremely similar and not super expensive. With big purchases I ask dad. He LOVES to look at Consumer Reports. XD My sister told me what type of car I should get. She loves cars.

[EricKei]

On the credit card -- do you mean "no annual fee" or that they do not charge you an APR/interest for a certain period of time? The latter normally is only ever a promotional gimmick used to get you to sign up in the first place, and generally disappears after six months to a year.

"No annual fee" means they're not charging you $25 a year or so for the right to have the card.

APR is your Annual Percentage Rate, split into 12 monthly payments. As an aside - note that, if you did not pay your bill at all for a year, your "APR divided by 12, charged 12 times as you go along" would actually end up several points higher than the base APR percentage, thanks to the wonder of compound interest. APR on store cards, in particular, is often in the 22-28%/year range.

Each month that your card balance is NOT zero come payment time, you are getting charged a certain percentage of your outstanding balance (approx. "outstanding balance x APR% / 12" -- if your balance is $1000 and the APR is 24%, that fee would be ((1000 x .24) / 12), or $20/mo). The fact that it's a "rewards" card offsets this to a certain extent, but only if you keep on spending AND making payments every month -- they are betting that your payments will be LESS than what you're spending, resulting in them making money off of you more rapidly. e.g. If you don't make your payment this month, your next bill will have a fee of ((1020 x .24) /12)), or $20.40 + late fee or $25 or so) and so on and so on and so on. Another way to look at it is that, not counting late fees, every $1000 on your card balance is costing you $240/year in interest alone at that rate. That's $240 wasted that could have gone into your "Oh shit" fund, for instance.

I agree with the advice above -- Pay this down to zero first, *especially* if it's your highest-interest/APR loan (and CC's ARE loans, don't let them tell you otherwise), followed by any other outstanding loans, from highest interest to lowest. If you have several, pay as much as you can on the highest while paying the minimums on the rest, then knock 'em all out in order.

Sorry to be such a downer

For quality, I only really know one useful tidbit: Store-name branded items are often really other major brand names with the store's label slapped on there and marked up by an additional 30-50%. Sometimes, the store's items are the really good stuff; sometimes, they're utter garbage that's worse than the Wal-Mart specials. Same price, either way. Store brand clothes might be Brooks Brothers, and they might be sweatshop shirts; a food item might be the pick of the crop, and it might be the stuff gleaned off of the ground at the very end of harvest season that nobody else was willing to buy. All you can do on these is to research them ahead of time.

[Pedersen]

I agree with the advice above -- Pay this down to zero first, *especially* if it's your highest-interest/APR loan (and CC's ARE loans, don't let them tell you otherwise), followed by any other outstanding loans, from highest interest to lowest. If you have several, pay as much as you can on the highest while paying the minimums on the rest, then knock 'em all out in order.

On this one specific item, I'm not in 100% agreement. Paying off the cards is done for a very small number of reasons, but all of those reasons wind up being "free up money for something else" in one fashion or another. Because of that, paying off a low interest card first can be a better strategy, especially if money is tight. It can free up money more quickly, and then you can turn around and use that freed up money to pay down the higher interest.

Here's a more concrete example. Assume you have two credit cards, one has a $1000 balance and a 24% interest rate, the other has a $250 balance and an 18% interest rate. Minimum payments are likely to be $30 for the high rate, and $15 for the low rate (I'm using this site to calculate things). Assume you have an extra $15/month that you can send to pay things off.

If you send $30/month to the low balance card, that account will be paid in full in 9 months. You now have $60/month to spend on paying down that high rate card.

That high rate card, paying just the minimum, will take you 125 months to pay off. If you send that extra $15 to it (so now $45/month), it takes you 30 months. If you pay off the low one, and then send the now extra $15 (so now $15(extra)+$15(no more low rate)=$30/month), it takes you 28 months (19 months at $60, 9 months at $45). You've stilled paid the higher rate one off 2 months faster than you would have before, and your low rate one got paid off quicker, too (9 months instead of 20 months of sending just the minimum to it).

You also wind up with some flexibility that you wouldn't have otherwise, since you can send just the minimum on occasion when you find yourself in a crunch for that extra $15 or $30 that you were going to send in.

Paying off the high interest helps, a lot, but don't just focus on that one item to the exclusion of others.