Curtail Extra Spending, Even When It's With Cash
Ages: Tania, 39. Carl, 38.
Background: Married with two children, Myles and Sydney, and living in the suburbs in Maryland. Tania is a school counselor. Carl is a systems consultant. Together they earn about $137,000 a year.
New Year's resolutions: Build up an emergency fund, and pay down debt.
Progress so far: They've made a good dent in their $14,400 credit card debt. They've paid off about $2,400 of it, starting with the two cards with the lowest balances. They've saved $3,200.
Their challenge: They still haven't developed a budget. The couple has worked hard at watching everyday spending. They pack their lunches for work. They've nixed spending on vacation trips. Carl even took on some extra work.
But there were some recent unnecessary purchases, which they tried to justify by paying with cash. The Chandlers said they needed new family-room furniture, and Carl bought a PlayStation 3.
I do understand why they thought the expenditures weren't out of line. The couple thought the savings achieved in other places made room for the purchases. This is a common mistake people make after months of savings -- rewarding themselves with something they've wanted. The problem is that such a purchase keeps them from reaching their goal sooner. If either one of the Chandlers became unemployed or disabled or if a major expense arose, that crisis could take them out financially. They don't have enough saved even for one month to meet their debt payments, mortgage and basic household expenses.
You can't keep spending, even if you're using cash, when you're in debt. All nonessential purchases and wants, such as a vacation or a game system, have to be put off. The debt comes first.
The next step: The Chandlers have promised to not buy any more unnecessary items. They also promised to create a budget that will be their bible for spending. If it's not in the budget, it can't be bought.