Managing the budget items that make a difference

Doug Horn

There is an old saying, “Being penny wise but pound foolish” which can often describe an individual’s actions when it comes to trying to save on their budget. The saying refers to making what may be thought to be a smart decision, only to create more costs or problems in the future. An example would be to purchase a used washing machine to replace a broken one. While the expense of the used machine may initially be far lower than the cost of a new one, there may be many repair bills in its future, and it may need to be replaced much quicker than if a new one had been purchased.

Efforts to reduce the costs of smaller budget items will not have the same impact as addressing higher cost items. And recently the banking industry was forced to reformat their statements due to legislation, the new information on the interest cost had to be a surprise to many consumers. By adding up 2010’s interest charged by each credit card account and dividing by 12, the result is the average portion of total monthly credit card payments that is going to interest rather than purchases. Shifting to being a cash consumer and paying off credit cards can have a tremendous impact on the monthly budget.

To be successful at paying off the credit cards even when life rains on your parade with unexpected expenses you must have a resource other than a credit card to pay them. If not, one new charge can wipe out months of prior reductions on the balance. First, it is critical to build an emergency fund to meet these unexpected expenses. To do this, no new charges should be added to existing balances. Next, pay only the minimums on the credit cards and place any extra funds into a savings account. As soon as the savings balance is large enough to cover one or two unexpected expenses, $3,000 for some and perhaps $5,000 for others, then the funds going into savings each month can be used to pay down the credit card balances.

I recommend paying a minimum payment on all cards except for the one with the smallest balance. Do not lower the payment amount each month. If the minimum goes down, just continue paying the same for that card. Once the savings balance is reached, use that monthly amount plus the minimum payment to focus on the account with the smallest balance. Doing this will produce the quickest results and the number of accounts with balances will fall off quickly. As each account is paid, use what was being paid toward that account and add it to the minimum of the next account. Once all remaining account balances are about the same, it is time to focus on the ones with the highest interest rates.

Another place you can save is reviewing monthly payments for services like insurance. While it may seem easier to pay auto, life, or long-term care insurance monthly, generally there is a charge for doing so. While the difference may not be labeled as interest, it is a higher cost. For monthly payments, many companies use a factor of .09 times the annual rate. Thus, an annual premium of $1,200 converts to a monthly premium of $108; $96 of additional costs when compared to the annual rate.

Remembering to price check service contracts and insurance coverage can be another source of savings. Examples include services such as annual termite protection and quarterly pest control. Also, for those of you in good health who do not use tobacco you can generally get life insurance at lower rates by purchasing directly rather than through an employer’s group plan.

I hope some of these pointers will make a positive difference in your annual budget.

For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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