Sunday, July 30, 2006

Vacation money management

Managing money to spend on a vacation is an extension of the process used for A Day at the amusement park as previously described. You will probably want to set up one or more physical bougettes for the use of cash and predetermine credit card needs as much as possible. You don’t want to be bogged down keeping track of expenditures while on your trip, but you don’t want to over spend either. The more you think out your expenses ahead of time, the less problems and money management time will be needed while on your trip.

Recording Expenses Prior to the Trip: Expenses incurred before taking the trip such as hotel deposits, airfare payments, allocation of funds into physical bougettes (for the kids at least) should be documented on the associated budget ledger and account ledger like any other types of payments.

You may want to carry along extra cash and even a roll of quarters to feed toll road machines; however, these are not expenses until you actually use the dollars or place them into a physical bougette. Until then, these funds just represent a transfer of money from other accounts into your Cash account.

Recording Expenses during the Trip: I recommend that you take the time to think out your expected day-to-day expenses in advance of your trip. This process is necessary in order to determine a good estimated total expenditure. Then, while on the actual trip, you will only have to eyeball the actual expenses at the end of each day to confirm that each one is within your expectations. You don’t have to spend time and effort to total them up day in and day out unless they are getting out of line. At the end of the trip is time enough to total things up.

Consider using a Basic Expense Sheet to record day-to-day expenses while on vacation. While this form was presented as a place to start out tracking your expenses at the beginning of forming your budget system, it can be very useful in an ongoing basis while on a trip. The design of the form allows one to document both the type of expense, and the account to be used on one line. Taking along a couple of blank BASIC EXPENSE SHEET forms is all you need while on the trip as opposed to dragging along your entire budget binder! Place these sheets in a large brown envelop with as many receipts as you can keep up with. These receipts can help to confirm that you’ve included all expenses and the appropriate amounts.

I recommend entering expenses on each day; don’t wait until the end of the trip. Don’t put your receipts into the envelope until you record them on the Basic Expense Sheet. Also, if you make an expense not related to the trip costs, be sure to clearly indicate a specific budget category to associate it with on the BES.

Cash, cash, cash: The use of cash, especially for the kids, and souvenirs is hard to keep track of, while on vacation. Taking advantage of physical bougettes can make this job much easier. Realistically think through how much cash you plan to allot to each child, yourself, and your significant other before the start of your trip. Discuss these amounts in a family meeting. You may not get total agreement, but at least you should all reach an understanding. Kids as well as grownups can plow through lots of cash while having a good time. Roll after roll of quarters can disappear into the video game machines!

Unless you are going on a very long trip (more than two weeks), you should probably get all of your needed cash before you leave. I recommend using a credit card for all major expenses and restaurant meals, so the needed cash shouldn’t be a very large dollar amount. If you have kids, you will probably need several rolls of quarters to feed the inevitable video gaming machines that proliferate the landscape. Having actual quarters instead of just giving them dollars can help keep better control and prevent overfeeding the machines! Pre-allocate a number of rolls of quarters per child, and make sure they understand what they will be getting. One roll contains 40 quarters i.e. ten dollars. Don’t give them all of their allotments at once, but still keep them in separate physical bougettes. For other types of expenses such as gift stores, optional entertainment, etc., also keep dollars aside for each child. For you and your significant other, also set aside physical bougette cash. From a budget perspective, all of this cash can be dispensed with one line item documentation showing the withdrawal of dollars in one lump sum. You can get rolls of quarters from your local financial institution.

If you find a need to withdraw additional cash, you can use a convenient ATM while away from home, but bear in mind there will most likely be some kind of fee. If you do need to make a withdrawal via an ATM, try and get all of the cash you will need in at one time to minimize fees. Such cash should be allocated into the appropriate physical bougettes to alleviate the need for detailed expense documentation.

Credit Cards: For all of your credit card purchases, be sure to keep the receipts and have a special envelope to store them in. I recommend using a heavy brown type with a clasp. All of your big price items such as hotels, transportation, and car rentals should be set up ahead of time to the extent possible. The total estimated cost of these expenses should be reviewed to determine how much you have left for meals, excursions, and other entertainment. Try and make a daily tally of these other expenses to help you keep on track. While I don’t recommend dragging your budget ledger on vacation with you, there is still a need to stay within your allotted amount of vacation dollars. You can make your notes and keep daily totals on the outside of the envelope.

Make sure your card limit won’t be blown on all of the expenses for your trip. If in doubt, use one more than one card, such as one for your hotel and one for everything else. Even though you should be able to pay off all expenses upon your return from vacation, you don’t want to incur an over limit fee on your credit card along with a negative tick on your credit report.

Traveler’s Checks: The use of traveler’s checks is viewed positively by some and yet negatively by others. I would recommend that you follow your own past experiences in this area. However, if using such checks, you will need to itemize all associated expenses i.e. don’t attempt to use them in physical bougettes.

Treat the traveler’s checks like a gift card and set up a special ledger to keep track of the current available balance. Such dollars will remain allocated to and expensed from your Vacation Budget Category. Any fees associated with the acquisition, and usage of such checks would appear as expenses against the vacation budget. At the end of the trip any excess checks would be “cashed in” with the resulting dollars placed into one of your accounts and remain within your vacation budget.

Treatment of normal expenses: While on vacation, expenses for such items as gasoline, eating out, and entertainment, even groceries if staying at a place with a kitchen, are all a part of the vacation budget and not your normal budget categories for such items. If your vacation is at least two weeks long, you may consider transferring a portion of dollars from these other budgets to help in support of your vacation budget.

However, expenses for such things as hobbies, or “Christmas gifts”, should be made from the appropriate budget categories. For example, let’s say you like to build kit models and buy a model from a gift shop located next to the exhibit of the actual ship, I recommend that the expense go against your hobby budget. For these types of receipts, annotate them with the appropriate Budget Category right away for ease of assignment after you get back home. Also, keep receipts for these types of expenses in a separate envelope.

The Hotel Bill: Charging extra expenses to your hotel bill such as meals at the hotel, in room movies, etc. can be very convenient, but be sure that all such expenses are in line with your budget. Be sure to discuss hotel charges with your kids. They shouldn’t be making movie, video game or any other purchases against the hotel bill. Be especially careful of the use of the telephone. In these days of cell phones, the kids just shouldn’t be using the hotel phone except for a dire emergency. Also, when checking out, allow enough time to carefully review your bill. If you see unknown expenses, be sure to challenge them. The hotel will most likely be willing to deduct them. If you are staying in a given hotel for an extended period of time, you should check the status of your bill on a regular basis. These days, many hotels offer the ability to check your current charges right on your in-room television.

The Hotel Key Card: Many hotels and motels are now using magnetic stripped key cards instead of actual keys for entry into your room. There have been concerns bouncing around since the Fall of 2003 about personal information such as names, addresses, and even credit card numbers being placed onto these key cards when you check-in. If true, then one should not leave these cards behind upon checkout, but take them along and destroy them later. Various checks into these concerns by a wide variety of agencies and bureaus seem to reveal that this is not the case and thus the disposition of your key cards upon checkout should be of no consequence. The phenomenon has been regulated to “Urban Legend” status. However, I would recommend that at a minimum you deposit your card at the front desk or a designated box upon checkout instead of just leaving it in the room.

Keep funds safe: If you do plan to have a lot of extra cash while on vacation, you should make sure your hotel offers a safe in the room and use it to keep your extra cash. Only take out what you need on a day-to-day basis. Individual physical bougettes can be used to keep the cash separate. I also recommend keeping any extra travelers checks and credit cards in the safe when not in actual use.

Oh, remember to have FUN!!!

Sunday, July 23, 2006

A Day at the amusement park

Like any other expense, a day of sun, fun and rides needs to be in the budget. Determine ahead of time how much money you have for such an outing. Such funds should already be within one of your budget ledgers. You also need to determine the split between cash and non-cash use. If the trip involves a significant driving distance there may be a gasoline expense. Such a use of gas should be made a part of the trip instead of the general gasoline budget. You may use a credit card for your gas, park admission and major meal (such as breakfast or dinner). For general spending at the park, cash is often used.

A good way to isolate the gasoline cost for the trip is to fill up the tank just prior to the trip as an expense to your normal gas budget. Right after the trip, fill up the tank again as an expense against the budget used for amusement park cost.

If you are providing cash for the group members such as your children, then you probably want to use the concept of a physical bougette for your total cash expenditures. See my prior posting: Expense Classifications for an explanation of a Physical Bougette. In this way, you won’t have to worry about trying to keep track of each individual expense for your budget ledger documentation. For credit card purchases, you will have the receipts to use in documenting them later in the budget ledger. I recommend using some type of envelope in which to stuff your receipts and expense notes. This will make it easier to update your budget binder after the trip. To determine your cash availability you should do the following:

1. Add up all pre-known expenses that you plan to use a credit card with such as park admissions.
2. Add up estimated credit card use such as for gasoline, breakfast, dinner, etc.
3. Subtract the totals of the above items from your total available amusement park budget.

If your remaining dollars from the above procedure is less than or near zero, then you should probably defer your trip until you have more funds available! Your past experiences with your “crew” should dictate how much cash you will need. The use of the physical bougette also makes it easier to let each child (if they are old enough) manage his or her own cash. Let each person know that when their cash is gone, there is no more! However, don’t let them have cash for items that you will deem absolutely necessary such as for dinner. In those cases, keep the related cash yourself to make sure that everybody eats at least one proper meal.

When you get back home, take the time to update your budget ledgers as soon as practical. All deductions should be from the budget category that contains your amusement park dollars. Credit card purchases would each have an individual line item. Your use of a physical bougette for cash expenses will allow you to enter only one line item for all such cash used. For leftover cash (if any), receive it back as normal for retrieving dollars from any physical bougette, as income, deposited into the Cash Account, then allocated back into the budget category that you use for amusement parks. You can spend the actual cash dollars for any budget category that comes up as long as the appropriate allocation of the dollar amount was made back into the proper budget category.

Sunday, July 16, 2006

Expsense Classifications

An expense from your budget is the use of dollars from a given budget category used to obtain associated goods or services. These dollars are also deducted from one of your accounts or detailed in a credit card ledger. Such expenses can be said to fall into one of three classes:

1. Actual dollars expended for specific goods and services. This involves the use of cash, a check, a debit card, or a direct withdrawal (such as online bill pay) from an account. Once the expense is made, the money is immediately gone. Note, in the case of using a check, there may be some float time i.e. the time it takes the receiver to take possession and actually deposit the check. However in these days of electronic transactions, one should assume that once the check is written, the money is no longer available in the account. Hence, one should insure that the dollars needed to cover any given written check are in the account already.

2. A credit card is used to pay for a given expense. In this case, the associated dollar amount should be deducted from the appropriate budget category; however, the balances available in your accounts are not reduced. Instead, a notation is made in an associated Credit Card Ledger. This is one important reason why you should only look at specific budget categories when making expenditure decision, not account balances. Until you actually receive and pay your credit card bill, such credit card expensed dollars must remain available within your account balances. This discipline is required in order to allow you to pay off your entire credit card bill each and every month! I call such credit cards “zero-balance” cards

3. The third type of expense is similar to the first in that the dollars used are immediately removed from an account. The difference lies in the usage of such dollars. Instead of being used to cover a well-defined expense such as the purchase of a tank of gas, or some groceries or to make a loan payment, the money is set aside for use on undocumented expenses. This can be very useful for such things as allowances. You may want to set aside a certain amount of money on a regular basis to cover routine day-to-day expenses such as buying a newspaper, cup of coffee, lunch, a couple of snacks at the office and so forth. Having to record each and every such expense in a ledger, day in and day out can really be a drag and a discouragement to properly maintain your budget. On the other hand, just recording say one expense per week, as cash from your allowance budget should be easy to do. However, a word of caution, such dispensed cash must be kept physically separate from any cash that normally resides in your wallet i.e. Cash Account cash. Dollars within your Cash Account are still in your budget, while dispensed Allowance Cash is no longer in your budget. I call cash maintained outside of your budget system a “physical bougette”. The word “bougette” is the French root word for “budget” and the word “physical” is used to indicate the need to keep such cash physically separate in its own special wallet or change purse.

Sunday, July 09, 2006

Account dollars versus obligations as budgets

Let us look at some of the basic concepts involved in setting up a budget system. We all tend to accumulate an ever expanding set of expenses. To address such obligations we need to have a source of dollars know as income.

Account Dollars
In order to develop a budget, one must have dollars available to expend on goods and services. Such money will reside in entities call Accounts. Obvious examples of such items are checking and savings accounts. Less obvious is the dollars and change that we carry around with us. The total is such funds should be considered as a part of our Cash Account. New dollars flow into our accounts in the form of income from such sources as paychecks, pensions, social security payments, and dividend checks as well as other sources. Money already existing in our accounts as well as continued new dollars flowing into our accounts is typically associated with obligations in the form of expenses. When one looks at the dollars residing in their various accounts, it is very import to determine obligations that may be associated with said funds.

Obligations fall into several different categories such as those listed below:
Past obligations – represent items and services that are acquired in the past but have yet to be paid for. Credit card purchases often fall in this category. You will need to have current money available to pay for or at least make payments toward such obligations.
Current obligations – represent goods and services that you acquire on a today to day basis such as groceries, gasoline, dinner carryouts and so forth. You need dollars available now to be able to meet these obligations.
Ongoing obligations – represent items such as loan payments and recurring services such as utility bills. You need money available month-after-month to be able to meet such obligations.
Future obligations – represent items that you plan on spending money for in the future such as vacations, college tuitions, holiday gifts and so forth. You should have a savings plan that allows you to set aside dollars on a regular basis to allow accumulation of needed funds over time.
Conditional obligations – represent items that you may purchase if and when you attain a certain savings goal such as a new home entertainment system. For such items you also need to be able to accumulate funds over time or at least allow for the making of a payment on a needed term basis to acquire such an item.

The association of available account dollars with expense obligations forms the basis of developing a budget system. A successful budget develops and sustains a harmonious relationship between available account dollars and expense obligations. That is to say, at any given point in time, sufficient dollars reside in accounts to pay currently due expense obligations day-in and day-out.

Monday, July 03, 2006

Vehicle Loan Payments

Buying a new vehicle can be a fun as well as financially frustrating time. While searching for the car of your dreams, you don’t want to end up with a budgetary nightmare! When looking to take out a loan one should be primarily concerned about how much you can afford to pay back on a monthly basis and for how many months. Of course you want to get a reasonable price deal on the item or service to be purchased, but you also must be able to afford to pay for it over time.

Key factors:

Loan amount or principal: This is the driving force in determining affordability. An item’s costs must fall within your means to pay for. You can reduce this cost by the use of a down payment and/or trade-in. You can also attempt to negotiate a better price. However, at the end of the day the principal amount must lead to an affordable monthly payment.

Interest rate: Interest charges reflect the cost of the loan in dollars and cents i.e. the cost of borrowing money. While the principal amount will have the most impact on your monthly payment, you also want to keep the interest rate as low as practical. Interest rates for loans can vary widely at any given point in time. Your credit rating will have the greatest impact on your ability to take advantage of the best rates available. Also, such factors and dealer financing or credit union direct payments/ direct deposit of salary/pension checks, etc. can reduce loan rates by a quarter of a percent or more. Also shorter loan periods tend to offer lower rates.

Number of months for repayment: The longer you take to pay for a given loan; the lower the monthly payments tend to be. However, you never want your loan to outlive the item that was purchased! Also, you need to take into account future obligations that may need access to those loan payment dollars. With the exception of a house, your loans should generally be no longer than five years. A possible exception might be a large motor home, or yacht.

Monthly Payment: People often use the other factors above (principal, interest rate, and number of months) to determine the monthly payment needed. However, I recommend that the payment be your starting point in determining affordability. This is the item you need to set up first, then proceed to check on loan rates/durations and then calculate associated principal dollar limitations.

Other factors:

In addition to the above items, some loan terms include origination fees, annual fees, insurance fees, etc. All such charges and fees should be avoided. Do not enter into any loan agreement that contains any such language.

Also there could be some type of early pay off penalty i.e. if you choose to include extra payments you could be penalized by way of additional charges and fees. Such a loan agreement should also be avoided.

For vehicle purchases a very important consideration is insurance. The acquisition of a new car will most likely cause your auto insurance bill to go up. Be sure to check with your policy company and get estimates for each type of vehicle that you are considering. Don’t assume that vehicles that you consider similar are treated the same by the insurance company. There are many factors that go into the computation of insurance premiums so be sure to include the make and model of each one for an estimate. You need to have room in your budget to handle an increase in your insurance cost. Also, if you plan on keeping an older vehicle for use by another family member under your policy (e.g. a child), then you need to take into account the impact on your premium which could be significant.

Loan independence
While the company offering the item for sale often provides loans, one should always have an independent source from which to get a loan quote. This will allow you to compare the cost of the item to the cost of the loan. Issues such as rebates, miscellaneous fees, potential penalties and other dollar related issues can be looked at apart from the actual selling price of the product. In theory, if you get independent financing, the actual price of a given item should be less than if you elect some type of dealer loan offer. At the end of the day, you may still elect to choose dealer financing, but you should always have an independent loan offer to compare it with.

Pre-computation of key amounts
You should always come up with payment estimates, prior to getting serious about closing a deal on a item that requires a loan. Formulas to determine payments are rather complicated, but there are functions in spreadsheet programs and calculators on the Internet that can be very helpful. Here are the recommended steps:

1. Determine the maximum monthly payment that you can afford to make for the item in question. This dollar amount must be available within your budget month-after-month. Don’t be over optimistic on income sources or your ability to cut back on other expenditures to come up with this payment amount.
2. Determine the number of months that you can sustain such a payment. The ideal answer is “indefinitely”. However you must be realistic here. If you know of obligations that will be coming up in a few years such as a child starting college, or kindergarten for that matter then you must take the financial impact of such an event into account.
3. Develop a list of potential loan offers including interest rates and durations.
4. Determine an estimated loan dollar amount needed i.e. the cost of the item to be purchased. Appliances can be estimated fairly easily while the out the door cost of a vehicle can be much harder to determine. However, it is vital that you come up with a reasonable upper limit cost here.
5. Confirm that month payments and time limits are realistic for the available loan terms and estimated purchase price. Using the results from items 3 and 4 you can determine if you can match them to your item 1 and 2. That is, your maximum affordable monthly payment for your maximum number of months falls within a give set of loan terms for the needed purchase price.

Let us walk through the above issues with a specific example:

We are looking to purchase a new vehicle and can afford to pay $400 per month for sixty months within our given budget. This gives us the answer to items 1 and 2 above.

We look at several potential loan offers available for sixty months:

Zero percent (from the dealer)
5 percent from our credit union.

Note, the dealer offers $4,000 in rebates in lieu of zero percent financing.

We now have information on item 3. Next, we must develop a realistic cost of the vehicle. This should be done independent of financing issues i.e. without considering such things and trade-ins or rebates. Be sure to include items such as destination charges, sales taxes, dealer preparation, alarms, and any add-on warranties that you are interested in. Let’s say this estimated total is $25,000. We know have input for item #4.

Next we can work on item #5. Let’s consider the Dealer financing offer followed by the Credit Union rates.

Dealer Financing at Zero percent
This one is easy to compute since there is no interest to take into account, simply divide the loan amount by the number of months:
$25,000 / 60 = $416.67

We can see that we are in trouble right off the bat! The computed payment is $16.67 per month over our maximum. While this is a relatively small amount (compared to $400), it is still over. We don’t want to be over. Our maximum amount should have been chosen with a small amount of pain in mind – we don’t want to introduce any additional pain.

However, we may have a trade-in or may think that we can negotiate here. Let’s see how much we need to get down to achieve our maximum of $400/month. To do this, multiply by the number of months to get $400 x 60 = $24,000. Then subtract from the estimated cost $25,000 - $24,000 = $1,000. Hence if we can get $1,000 for our trade-in and/or/combo negotiate the price down then an affordable deal can be achieved.

Credit Union at 5.0 percent
Next look at the Credit Union plan of 5 percent for 60 months. In this case we need to adjust the cost of the vehicle to take into account offers such as rebates that in our example includes $4,000. Hence the loan amount is reduced from $25,000 to $25,000 - $4,000 = $21,000. To compute the loan payment one needs a special electronic calculator, spreadsheet formula or Internet calculator or the table in the appendix of my Basic Budgeting Concepts book. The result is $396.29 per month. In this case, the result yields an amount below are limit of $400 per month without any special gyrations! Of course, one should still use a trade-in if desirable, and one should always work to lower the out the door cost, but we can have the confidence that the vehicle can be acquired.

For the above example, be sure to perform all calculations before sitting down with the dealer to negotiate the final deal. You need enough information ahead of time to come up with a reasonable purchase price and you need to get pre-approved from your Credit Union for the loan terms. However, you don’t want to commit to any thing until after you’ve completed your calculations in a quiet place (home is best), but away from distractions). From the example above, we can see the potential power of rebates and/or hard price negotiations with the dealer.

The hard part in the above calculations is item #5, determining the monthly payment calculation. Below are ways to do this in EXCEL and some recommended Internet loan calculators:

First of all, you should already be comfortable in using this spreadsheet program; otherwise, I recommend that you pass this approach by. Within EXCEL there are two functions useful in computing loan information:

PMT the payment function. It will compute the monthly payment for a given interest rate, number of payments, and loan principal. The formula is entered as “=PMT(rate,nper,pv)” where:

Rate: the interest rate stated as monthly interest. For example, if the rate is 5%, then it should be stated as 5%/12 or .05/12 or the calculated result of .0042. I recommend using “5%/12” for readability.

Nper: This is stated simply as the number of months for the loan duration e.g. 60.

Pv: Present value or loan principal is stated as the amount of the loan e.g. $21,000.

The answer returned in the spreadsheet cell is the monthly payment stated as a negative amount. For example for 5% interest, 60 months and $21,000 the answer is given as -$396.30 i.e. a negative number.

PV the present value function It will compute the initial loan principal for a given interest rate, number of payments, and payment amount. The formula is entered as “=PV(rate,nper,pmt) where:

Rate: is the interest rate as stated above.

Nper: Ths number of payments as stated above.

Pmt: The monthly payment as a negative number. For example enter $396.30 as “-$396.30”.

The answer returned in the spreadsheet cell is the initial loan value amount. Note, if you enter a positive number for the payment (pmt), then the answer will be correct, but negative.

The PV or present value function can be very useful in determining the answer to item #5 above. Since you already know the maximum payment your budget can afford, you can use your loan terms information to calculate the largest principal you can afford to borrow. Comparing this amount to the actual cost of the vehicles you are looking at will let you know whether you can reach a deal.

Internet Calculators.
Listed below are some websites that contain loan value calculators.
Sponsored by This calculator is very straightforward, but can be used to compute monthly payments only.
Sponsored by Time Value Software. This calculator will compute the value for the box you leave blank. Hence it can be used to calculate either the monthly payment or initial loan amount. Note; leave the following boxes at zero:
Points; Fees; Pre-paid Interest days
Sponsored by USA Today. This web page will have a variety of calculators. Select “Autos” for car loan selections. You will get a pop-up list with a variety of options. For payment calculation select: “How much will my vehicle payments be?”. For loan amount calculation select: “What car can I afford?”. When the appropriate calculator comes up, fill in the appropriate boxes. I recommend that you leave down-payment and rebate boxes blank, to focus in on the out the door cost to you. You can always fine tune your calculations later is desired.
Sponsored by State Farm Insurance. These calculators are very similar to the ones under USA Today, but seem to be easier to access for the Auto Loans. The initial web page includes a variety of calculators with the Auto Purchase ones listed first.

To get more calculator sites, I recommend using Google® with a search for “loan calculators”. You will get a long list. Don’t be afraid to search page after page for one that catches your fancy. As with all searches be wary of websites with pop-up ads, deceptive links and excessive advertising.

Now you are armed with tools that can let you determine how affordable a give purchase is in terms of your personal budget. If you spend time on the factors needed to develop a scenario that you can live with, then you have an excellent chance of success. Such information will allow you to get the best deal while staying within your means. Good hunting!