Financial Guide for One Income Families

By Anthony Rogers
Mortgage payments, car payments, utility payments – the list goes on. Of course, you already know the list goes on! You’re probably far more aware of “the list” than you want to be. Once a month it, like clockwork, it sneaks up on you. Via snail mail or e-mail – they never forget.

If you are like most homeschool families, you rely on one income. With astounding rises in housing costs, not to mention record-breaking heat-waves and cold-snaps and their associated utility costs (among other things) – it can be difficult to stretch that one income far enough to cover all the bases.

This article begins a four-part series on finances with the homeschool family in mind. This article will begin the series with some general advice on managing money. The next three articles will cover:

• Part-time, low-risk business ideas you can implement from home
• Steps to starting a home business
• Basic investment guidelines, from purchasing a house to high-yield savings accounts

* * * *

General Financial Guidlines

When most people visualize a path to financial well-being, it is usually in the form of a high paying job or some other type of increased income. What is amazing is how much you can do with what you have, if you manage it wisely.

Credit Cards

We live in a credit-card nation. Statistics tell us that the average household credit-card debt is roughly $10,000. The average household spends nearly $2000 a year on interest and finance charges alone – that is a lot of money into a black hole!

Credit-cards are a powerful trap. Once the brain realizes that it can have what it cannot pay for, dangerous territory has been entered. The more a person uses a credit-card to make purchases for which there is no actual money in the bank, the more at-ease the mind becomes with making purchases for which there is no actual money in the bank.

As the monthly balance carried on a card grows, the finance charges increase. After some time, the finance charges become so great that the card-carrier can no longer pay towards the principle, and is stuck paying pure interest. The credit-card becomes, in effect, a free cash-machine for the credit-card company.

Credit-cards, like many other gray-area issues, are not inherently bad. But the ease of misuse by someone lacking in self-discipline is so great that their use must be approached very cautiously! While credit (in general) can be used effectively, and debatably sometimes must be used (by large corporations, for example), for many people, the safest answer is this nifty little machine that sits atop a trashcan, with a slot on top, and a powerful motor driving intermeshing blades just below.

Some call it a “paper shredder.”

“But what about convenience?” you ask? For online shopping, buying gas and many other things, nothing beats the convenience of the plastic. That’s why we have debit cards!

If you simply must have a credit card (if you’re building up your credit score, for example), here are two important guidelines to remember:

• Do not spend what you do not have! Check your bank account before making a purchase, and make sure you have the money to back up that purchase.
• Pay off your balance as soon as possible. You don’t have to wait till the end of the billing cycle to do so! If you stick to guideline #1, you should be able to pay off the card immediately. This is particularly easy with the online bill-pay interface that nearly all credit cards provide.

Also keep in mind that studies have shown that people are less likely to spend as much if they’re handing over actual, cold hard cash instead of a piece of plastic.

Budgeting

It is absolutely astonishing how much money can slip through our fingers without our being aware of it! Small bits here and there add up very quickly. The most effective means of improving your savings ability is to become aware of how you spend your money.

Whether you simply save receipts and add them up into categories at the end of the month, or utilize a full-fledged custom-programmed spreadsheet to track your spending day by day, you need some form of feedback. My wife and I were, at one point, buying three medium pizzas every Friday night. Without much thought, we’d shell out $20 a week on that pizza. But when you stop to think about it – that’s $80 a month! $80 a month, minus some for replacement food, put into a low-risk investment account at a modest 5% interest would return over $30,000 in 20 years. Do we really need $30,000 worth of pizza over the next 20 years?

Recommended Order of Financial Priorities

A very common mistake among those who are starting off in the right direction is being too eager to invest money while they still have debts outstanding. I’m guilty of this particular mistake myself! I bought a car several years ago, and at one point had about $4,000 left on the loan. (Taking out a loan to buy a car is a whole other can-of-worms that we’ll touch on later – for now, suffice it to say, if you can’t pay cash for a car, you probably shouldn’t buy it!) At about the same time, I began experimenting with the stock market, and put $3000 in. My slightly-above average performance in the stock market was more than lost on finance charges on the car. I would have been better off to put the $3000 towards the car loan’s principle!

Here are some guidelines for ordering your financial priorities - to help you avoid similar mistakes:

1. Save up an emergency fund. Put this money in a bank account that is not accessible via checks or debit cards, so you won’t be tempted to access it for normal expenditures. Ideally, you should have enough in the account to meet all your financial obligations for two or three months if your income drops to zero (i.e. you lose your job). Now this part is important, so read it twice: set up automatic monthly transfers from your primary savings or checking account to your emergency account. You must do this! – if you don’t know how to do it over the internet, ask the teller to help you next time you’re at the bank. You need to make the transfers as easy for yourself as possible. If you set up automatic withdrawals, then it takes action to not make the transfer, rather than the vice versa. If you’re like me, you’ll find yourself conveniently “forgetting” to make the transfer if you don’t have it set up to happen automatically!
2. Pay off your debts. Interest rates on consumer credit (credit cards, car loans, etc) are typically far higher than return rates on investments. Putting money into investments while you still have debts makes about as much sense as digging for gold in your backyard to pay for a new house because your current house is burning down – rather than, say, calling the fire department!
3. Invest - you have an emergency fund and you’ve paid off all of your debts – now is the time to think about investing or funding a home business. I’ll cover that later in this series.

In Closing…

If you remember only one thing from this article, let it be that you should not spend money you don’t have! Sounds simple, right? A brief glance at credit-card statistics seems to tell us otherwise.

Now go set up that emergency account!