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Playing Financial Defense

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In their book The Millionaire Next Door, authors Stanley and Danko swipe a couple of sports-related terms and effectively introduce them to the world of personal finance.

According to the authors, individuals and families essentially have two ways to better their financial positions. They can elect to "play offense," which means that they would set about doing what they can to make more money:   asking for a pay raise, taking on a second job, or starting another business on the side. Of the two options presented by the authors, this is the more difficult. Let's face it:   Goading your boss into giving you a pay raise isn't the easiest thing in the world to do, nor is initiating another form of income. Often, the stress that accompanies "playing offense" is so trying that the entire effort turns out to be unworthwhile.

Alternatively, people can choose to play great "financial defense." This occurs when individuals and families make efforts to control and downsize their spending habits. Generally it takes less effort to pull this off. Most people are quite surprised when they discover all the places that their money is slipping through the cracks. All in all, playing great defense is a matter of studying your spending habits, planning your expenses, and disciplining yourself (and your family, if applicable) to carry out your plans — no matter what life throws at you.

Study Your Spending:   If You Don't Know Where It's Going ...

If you're serious about improving your finances, and you don't already have a copy of Intuit's Quicken or a similar program for your home computer, then it's probably time to pony up and get your hands on one of them. These programs are absolutely invaluable when it comes to seeing what your expenses really are and where all your cash is going.

Personally, I don't think it's necessary to always have the latest version of either program. I'm a Quicken devotee, and have been since the late 1990s. My first copy was Quicken 98 Deluxe, and I've upgraded every few years since. So the call is yours to make. But I can tell you from personal experience that the money I've spent on Quicken is easily the best investment I've ever made.

When it comes to spending — and this was very true in my case — we know that most of it is done by habit. So it stands to reason that much of the money we spend is being done almost unconsciously. We'll spend $6 for lunch every day simply because that's what we've done for years; we'll spend $60 per month for long distance because it's been that much for years; we'll pay $30 for an oil change because ... well, because that's what it costs at the local service department. But each of the above expenses could be reduced just by (1) realizing that they exist, (2) figuring how much they add up to over time, and (3) deciding to put your mind to work to figure out a way to lower those expenses. And all this is much easier to overcome when you have a computer program (Quicken or Money) that can generate reports to break down, categorize, and print out your expenses.

Once you've got your printed reports (in Quicken, for instance, they're called "Cash Flow Reports") in hand, showing a few months' worth of expenses, then you can easily see how much you're spending on this or that. Now . . . in what areas can you cut back? Put your mind to good use and see what you can figure out. Some ideas (from experience) include:

Fast-food lunches ... long distance service ... car maintenance ... dining out ... groceries ... and on and on.

Once you see what percentages of your money are going where, then you'll have an idea of what you're up against. And that's a start. Now you're in position to do something about it.

Planning Your Expenses:   Make Frugality a Habit

Again, most spending is done by habit. And most people are not willing to put in the effort that it takes to grab control of their spending. Why? Because habits are extremely tough to break.

So what can you do?

For starters, the next time you're out shopping — whether it's for groceries, standard household items, or whatever — pay attention to yourself and your family. Really open your eyes.

Disciplining Yourself ... and Your Family

For someone like me, this is where the going gets tough. I can tell myself Hey, remember your money discipline! all day long, but it seems as though there's always that "one more thing" I need to buy. And since Target (or Barnes & Noble, or Home Depot, or whatever) is right there, on my way home from work, and it'll just take a few minutes . . ..

Anyway, "spontaneous spending" is a common problem. So what can you do about it?

  1. Be brutally honest with yourself. Is this a need, or a want?
  2. Institute a "48-Hour Rule." Have you given yourself at least 48 hours to think about this expense and how it fits into your budget or plan? If not, then you're giving in to temptation and the need for immediate gratification that comes from acquiring "stuff." Which is exactly what the credit card companies and advertisers want you to do.
  3. If you'd have to put the purchase on a credit card, then it's even worse. Don't do it. Take time to plan.
  4. If paying for this item outright means you'll have to put a future necessary purchase on a credit card, then it's even worse. Don't do it. Take time to plan.

When it comes to gaining control of your money, learning to play great financial defense is paramount.