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August 25, 2004

Basic Financial Management

by SS613

My purpose in writing this column is to give those in the heimishe velt, who are beginning to build their own families, some tips for sound financial management. Nothing that I have written here is particularly unique, nor do I purport to solve everyone’s financial issues, as I cannot do that in such a forum. Rather, I come with a list of methods and ideas to think about and to experiment with.

1.
Establish a Budget: Using a computer spreadsheet, delineate all sources of income and all areas of expenditures. There will be two types of expenditures: fixed and variable. Fixed expenditures are expenditures that do not change from month to month, such as rent/mortgage, insurance, tuition, etc. Variable expenditures are expenditures that change from month to month. These include food, utilities, clothing, entertainment, gas, parking, dry cleaning, etc. Make sure to include a separate line item for all major areas of expenditures, as well as for minor areas of common expenditures.

Track Actual Budget: Track every penny that comes in and that goes out for a period of time. I recommend about six months. Although it is difficult to track every expenditure made by every person, it is necessary because this is how you will identify areas that can be targeted for change.

Identify Areas to Cut: Once you know where you are spending your money, you can start to identify areas that can be cut. Often times our resources are being chipped away at by small expenditures. Is the soda machine drinking you dry? Is dry cleaning cleaning out your wallet? Are your sheital setting fees setting you up for financial disaster? Small expenditures add up over time. Many of these could be cut if you just could identify them. Eating out, take-out, convenience foods, coffee, paper goods, dry cleaning, manicures/pedicures, and credit card interest are good places to start.

If you are willing to undergo a major change, consider moving to a less expensive area. There are many communities throughout the United States would love to have you. You might be able to cut your rent in half by giving these communities throughout the United States a try. In addition, it will be easier to buy a house in one of the communities.

2.
Live Below you means: Successful financial management includes controlling your emotions and desires. Pirchei Avos tells us that the rich man is the one who is pleased with his lot. Being pleased with your lot requires a great amount of internal discipline. You certainly don’t want to set yourself up in a situation where you are unhappy with your status because you must adjust your lifestyle downwards. Therefore, it is highly advisable to live below your means. And, most successful people in the United States do just that.

You must be able to define between needs and wants and to learn the value of deferred gratification. You do need clothing, but is it necessary to have a $200 plus outfits for daily and Shabbos use? You do need to eat food, but are you spending too much money on take-out? You do need to have a seudas mitzvah for you newborn son’s bris, but do you need to have balloons at every table? You do need a way to communicate with the outside world, but do you need the latest technology right now? You do need to cover your hair, but do you need a custom sheital?

In the frum velt, we spend a great amount of money on Chassunas, Bar Mitzvahs, other simchas, Pesach vacations, engagement gifts, camp, clothing, etc. Not everyone has the means to make such expenditures. And, not everyone wants to make such expenditures. There certainly is a great deal of pressure to make spend beyond our means, and it is necessary to learn to say no and to control your impulses.

3.
Avoid Debt: There are two types of debt, good debt and bad debt. Good debt is defined as a mortgage. Bad debt is defined as credit card debt. Avoiding bad debt is necessary in the quest for sound financial management. If you are using credit cards, pay in full every month to avoid interest charges. That blouse you loved could end up costing you twice as much by the time you pay interest! If you are currently only making the minimum payment, work to cut your expenditures and apply the amount saved to your credit card balance. Any unexpected and unbudgeted income should also be used to pay down credit card debt.

Don’t overestimate the value of credit card benefits that you are receiving (miles, cash back, point for merchandise), if you are unable to pay off your balances in full every month or if you find your self spending more just because you can. If you are not using your credit card responsibly, start paying for purchases by cash or by check. Having to part with your money immediately is often a deterrent to unnecessary expenditures and an impetus to seeking out better options for necessary expenditures. Of course, make sure to avoid ATM fees!

4.
Take Advantage of the Tax System: The Internal Revenue Service (IRS) Tax Code encourages certain behavior and rewards you for these behaviors. Familiarize yourself with the tax code so that you can take advantage of it. The most beneficial way to save in taxes is to buy a house. When you have a mortgage, you will normally qualify for itemized deductions. Once you are itemizing and taking a deduction for mortgage interest, you can also start to take deductions for charitable contributions. Yes, you heard me correctly, the tzedakah that you give every month to qualified organizations, becomes tax deductible. You most be able to substantiate your deductions, so once you can deduct tzedakah, I recommend paying your tzedakah payments by check or credit card. That way, you can keep track of such payments.

Of course, buying a house is hard work. But, the advantages owning a home or a condo are so great that it is a worthy goal. Remember, your monthly mortgage might cost more right now, but in a few years, rent will catch up and surpass that mortgage. Try to find your way into any type of home or condo that you can because there is one more great benefit that the IRS Tax Code offers: a tax free gain of up to $500,000 for a married couple for a home IF you reside in the home as a primary residence for 2 of the past 5 years. Therefore, don’t worry about buying your dream home, if you can, buy something and live in it for at least two years. The tax free gain can be used to buy your dream home!

5.
Don’t pass up free money: A common mistake people make is passing up free money. If your employer offers a 401(k) retirement plan, chances are that the employer will match your contributions after a set period of time, up to a certain percentage of your salary. This is known as vesting.

Imagine that your company allows employees to vest after 10 years and will match contributions of up to 5%. If you make $30,000 a year and contribute 5%, or $1,500 per year, after 10 years you will receive a matching contribution of $15,000.

6.
Know your prices: Before you buy anything, especially major purchases, research prices. Don’t assume that buying at discount stores, such as Ross or Marshall’s, will cost you less. A lot of research can be done on line, which is a great way to avoid the temptations of the mall. Get to know prices for everyday prices too. Pennies saved on groceries and diapers will add up.

7.
Be Creative: Creativity can save you a pretty penny. Can you wash your own sheital? Can you wear a hat or tichel outside the home to cut down on wear and tear on your sheital? Can you buy meat in bulk with a friend, saving both of you money? Can you form a babysitting co-op with a group of friends and do away with babysitting costs? If you are a mother working outside of the home, can you work a different shift than your husband works (or learns), so you don’t have to hire a babysitter? Can you borrow a swing for your baby? Can you borrow baby clothing?

8.
Shop Outside the Velt: Unfortunately, many things costs more on 13th Avenue than they do at the mall. You can find beautiful, tznius clothing in many places, and many times, you will pay much, much less for these purchases. If you are wearing a synthetic sheital, pay a visit to a non-Jewish wig shop. If you find a suit at Macy’s for less, hire a seamstress to put in a kick-pleat.

9.
Set Goals you can Meet: The biggest mistake that people make, in my opinion, is write off ever saving anything because they don’t see hundreds of dollars in their paycheck that is going unused. However, saving money is an avodah. And saving money means saving your pennies.

10.
Reward Yourself for a Job Well Done: Financial Management and the requisite discipline is an avodah. When you have achieved a goal. Reward yourself “midah keneged midah.” If you sacrificed the pleasure of a weekly manicure for a year and saved yourself $250 for the year, go get a manicure. If you gave up your morning latte and brought your own coffee to work, saving yourself $500 a year, take the family out to the coffee shop. Good luck in your quests and reward yourself when you meet your goals!

Back in February, SS613 posted in a message on Hashkafah.com about the importance of financial responsibility. I sent her an email and this article is what I got in return! Leave any comment for SS613 or email me and I'll forward to her.

Posted by notepad at August 25, 2004 08:25 PM

Comments

Great article! Another way to save money is to shop at www.melodyclothing.com, the manufacturer of tznius modest clothing for girls. Prices are below retail, and you'll find everything you need; long skirts and jumpers, 3/4 sleeve t-shirts, cover ups, suits!

Posted by: Nomi at July 25, 2005 11:14 AM

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