Money Milestones (eBook)

Chapter 2

February:
Budget your way to financial freedom

The relentless chill of the winter months often forces people to stay indoors for long periods of time. Warmer places in the United States, such as Southern California, Florida and Texas, usually allow for normal outdoor hobbies in the winter, while folks in colder regions rely on indoor hobbies to prevent cabin fever. In the previous chapter, I casually suggested the reader find their self-motivation to permanently gain control of their personal finances. So to build on that, I’d like to chat about why extremely expensive winter activities, like skiing, might be a major hindrance to your financial success. There are plenty of free or cheap activities to pursue as alternatives while seeking sanctuary from snow and freezing temperatures. In February, we’re going to build a budget and it seems appropriate to start by discussing indoor activities that won’t break your budget!

One of the common themes that you see in personal finance books is “budget-shaming” or “spend-shaming”. That is, the author “shames” the reader by telling them they shouldn’t be spending money on some expensive luxury item, like a sports car, fancy jewelry, or expensive hobby. In Money Milestones, I do spend some time praising the budget-minded consumer, but I hope my readers don’t get the impression that I’m shaming them for purchasing nice things. My point throughout (e.g., see chapter ten on financial vampires) is that some people can afford nice things, and others shouldn’t be paying for them at the cost of their long-term goals. So, you need to understand yourself and your long-term needs for your money. Can you afford to spend $10,000 per year on jet-skis and model trains and still stay on track to accomplish your (much more important) goals in life? If so then your budget is going to look different than somebody living paycheck to paycheck. If money is tight, and you are looking for a way to pass the time affordably, there are many indoor activities that are easily placed into a budget. Additionally, these low-budget options are ideal for those that want to save money during the long winters we have in much of the United States. It is easy to spend a lot of money on the default entertainment options for most people—movies, bars, restaurants, and travel. It is much harder to entertain yourself when you are trying to save money.

During the 2020 coronavirus self-isolation and social distancing period, many Americans were suddenly exposed to a harsh reality. Sitting at home all day is boring. Similarly, many can get “antsy” during the winter months because they crave outdoor activities that tend to be more expensive. After considerable thought, I settled on a list of indoor activities good for February. These activities are considerably more cost-effective than expensive hobbies like traveling, skiing, attending concerts and events, eating at expensive restaurants, and so forth. I also threw in a few activities (e.g., hiking) which are good for warmer weather but are also extremely cost-effective. Again, to clarify, I’m not saying you shouldn’t have nice dinners or go on expensive trips, but I’d like to provide some alternatives:

• Cooking, baking, and recipe making
• Board games (especially European-style strategy games)
• Painting (canvas and paints can be expensive, but there are cheaper alternatives like watercolor)
• Podcasting (listening and making your own)
• Hiking (most states have local trails that are free)
• Geocaching
• Editing Wikipedia
• Making music using free software
• Computer programming
• Genealogy
• Restoring furniture
• Yoga and other “at-home” exercises
• Thrift store flipping and online sales
• Mentoring/tutoring
• Fostering animals and volunteering at shelters
• Participating in citizen science projects
• Reading/writing

The beauty of these simple activities is that they don’t require a large initial outlay of cash. Many of these activities are nearly free because the resources and infrastructure (state parks, websites/software) are already established. Others (e.g., board games, painting, reading) do require money, but they provide a massive amount of entertainment hours for comparatively small amounts of money. I call this Entertainment Time Value (ETV):

ETV = (Total cost per year) / (Total hours of entertainment provided per year)

The items on my list above are low ETV hobbies. They provide an individual or a group of people an activity that occupies a large amount of time relative to its cost. For example, imagine you purchase a board game like The Settlers of Catan or Ticket to Ride from your local department store. Each game takes about 1.5 hours, four people can play, and the current price for both is around $44.99. If you play that game four times over the next year, the total hours of entertainment = 4 x 1.5 x 4 = 24 hours. The ETV = $44.99/24 hours = 1.87. What does that number mean? It means that every hour of entertainment costs you only $1.87 for the whole year, assuming you played four times. Now imagine a group of four people go to the movies at a nice theater. Let’s even suppose they don’t want to see IMAX or 3D show, just a regular showing. According to USA Today, the average cost of a movie ticket during 2018 was $9.11. The total cost for that outing is $9.11 x 4 = $36.44. Sounds fairly good until you remember that a movie only lasts around two hours. With a total of 4 people x 2 hours = 8 entertainment hours. So, the ETV = $36.44/8 hours = 4.55. Or a $4.55 cost for every hour of entertainment. In this case, it doesn’t matter how often you go the movie theater, it is always going to have an ETV of around 4.55, but our board game is reusable and will have a decreasing ETV the more it is played. So, in our example, you spend about three times as much to entertain yourself going to the movie theater than by playing a board game. As you can imagine, spending an evening at a nice restaurant, swanky bar, or concert will have an even higher cost per hour.

I know what you are thinking. How dare this nerd put a price tag on fun? While it is my job to evaluate things like this, I want to preemptively defend myself by saying that I also like fun. I enjoy fancy cocktails and restaurants, and I’d rather watch a new release movie in IMAX than on Netflix ten months later. But once you are aware of ETV (cost-hours), it will subtly change how you approach your entertainment spending. I hope you picked up this book because you are at least somewhat interested in making a change to your financial situation. I’m confident that being smart about entertainment spending is one of the fastest and most straightforward ways to make personal finance improvements. But while we’re on the subject, how do you decide how much of your budget should go to entertainment?

One of the simplest and most impactful ways to secure your family’s finances is to build and follow a simple budget plan. On the surface, it sounds easy. Just follow the plan and everything will take care of itself, right? The reality is that life tends to get in the way of budgeting, and people begin to lose track of where their money goes each month. They lose track of how many coffee drinks they purchase each week, their monthly subscriptions, what other family members are doing, or even how much they pay for basic utilities. Sticking to a budget can be a game changer for some people, especially for those that make a good income but still can’t seem to get ahead. In my years as a financial planner, I’ve always been surprised how many people are dumbfounded when I ask the following simple question:

“How much are your monthly nonhousing living expenses?”

This should be an easy question if you know where your money is going each month. The reality though is that most people get lost in the minutiae of their daily lives, and they really don’t know how much they spend each month on coffee, lunches, gym memberships, or even gasoline. The next logical step in your personal finance journey is to build a budget and figure out where all your money goes each month. The good news is that building a budget is a low ETV activity perfect for the cold month of February.

One of the most popular budgeting plans is the 50/30/20 plan. This means that 50% of your after-tax income should go towards necessities, 30% towards “wants,” and 20% towards debt and saving for retirement. The idea is that if someone follows this plan, and more importantly sticks to this plan over their lifetime, they will get out of debt, be able to retire comfortably, and most importantly still have room for fun and some indulgence. While I generally like this plan, I prefer a 50/25/25 plan. There is still plenty of room for “fun” in 25% of your income and allocating a little extra towards retirement and paying off debt is preferable over the long run. Just think of all the fun you will have when you get to retire early while your co-workers are still stuck in their cubicle at 65. Like in much of life, long-term planning and foresight are important to reach your goals.

The first step in building a budget is to separate your needs from your wants. This is where keeping and sticking to a budget gets tricky. The boundary between needs and wants is blurry, and it varies by person. I would go as far as to say many people think they need certain things, but they really are better...