March 2007 Issue of
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Cutting Corners
 Frugal Families
Make “cents” of family finances and plan for the future.
By Kristin Bustamante
“Money is good for nothing unless you know the value of it from experience,” said P. T. Barnum, American showman and founder of the show that eventually became known as Ringling Brothers and Barnum and Bailey Circus. From experience, Houston families know both the headaches and happiness of successfully budgeting their expenses and planning for future financial needs. Here are some tips from the trenches from local and national experts, as well as Houston families, who have successfully mastered the art of family frugality.
Get Started
Sometimes the most difficult part of turning the family finances around can be getting started. Catherine Scrivano, financial planner and president of CASCO Financial Group, recommends setting goals. “The absolute first thing to do is set goals. I am not interested in how much a client makes or how they spend it. I need to know their financial goals. This includes long-term goals, like educating their children, or short-term goals, like purchasing a new dishwasher. Money is just a means to an end; I’m interested in talking about the end and looking at what’s important.”
After prioritizing goals, the next step is to divide these goals into short-, medium- and long-term goals. Only then does Scrivano dive into the dollars and cents of making these dreams come true with the use of a spending plan. “I think of a budget and a diet as the same kind of thing—they both require restraint and abstinence to some degree. A spending plan is proactive. It is a way to make goals come true.”
A monthly spending plan can also help families keep expenses under control. The spending plan should cover anticipated expenses such as rent, utilities, telephone, gas and groceries, and should also allow for special events such as birthdays and celebrations. Preparing the spending plan before the next month is key to giving families the opportunity to make up additional finances if needed.
Budgeting Black Belts
Steve and Annette Economides began budgeting from their first day of marriage 25 years ago. “We wanted to survive on Steve’s income and not accrue any debt. We decided we were going to figure out how to do it. When we started, we didn’t know much, but now we’re black belts!” shares Annette.
The couple began with the old-fashioned envelope method of budgeting, by which cash is placed in envelopes and designated for fixed and non-fixed expenses. Families begin by documenting their fixed monthly and yearly expenses, including rent or mortgage payments, while predicting non-fixed expenses such as automobile repair.
“Within six months, we had more than $1,000 sitting in envelopes around the house. And that was on just $838 of take-home pay,” explains Steve. The Economideses then decided to place their money into their checking account, which they “divided” into about eight envelopes. “We like this method because it helps us track and manage our money. Our account is now divided into about 22 envelopes and we save for everything in advance,” says Steve.
Crown.org, the Crown Financial Ministries Web site, states that the envelope method is effective for controlling spending because it is a cash-only system. For example, when reviewing the food budget category it is easy to determine three things: how much cash is disbursed to the food budget category based on the amount of cash placed in the envelope; what the balance in the food budget category is by the amount of cash remaining in the envelope; that one of three choices has to be made when the envelope is empty—move money from another envelope, wait to buy food until cash is received, or borrow cash and put it in the envelope.
Oprah Debt Diet
The Oprah Debt Diet is designed to help American families stop overcharging, overleasing and face their debt denial. Oprah.com provides the steps, calculators and tools families need to follow this program. This online resource helps dollar dunces make sense of budgeting, saving and spending, in everyday terms. Houston families can apply these principles to their personal spending and saving situations.
Jean Chatzky, one of Oprah’s debt experts, says many people don’t know how much debt they really have. Phase one of the Oprah Debt Diet helps families assess and track their debt in order to come up with an effective debt-reduction strategy. Step two includes a helpful exercise developed by David Bach, called the “Latte Factor.” By tracking unnecessary expenses, such as fancy cups of coffee, families can find extra money each day to put toward their debt.
Take Charge
The Oprah Debt Diet also includes several steps dedicated to helping Houston families learn to play the credit card game and pay down these balances. Bach recommends applying the extra money found using the Latte Factor calculator to credit card balances. The only way to get ahead in the credit card game is to pay more than the minimum balance each month.
When playing the credit card game, knowledge truly is power. It is important for Houston families to have the same rule book as their credit card companies. The Oprah Debt Diet advises families to be aware of these four tricks that credit card companies play.
Interest Rates: Interest rates are not fixed—the bank can typically change a fixed interest rate with sufficient written notice, and families can claim the same power simply by asking for a lower rate. Web sites such as www.lowermybills.com and www.bankrate.com showcase competitive card offers that may help families lower their monthly payments and interest rates.
Late Fees: Late fees can range from $15 to $39 and can also trigger a hike in interest rates. It is reported that nearly one third of credit card revenue is generated from late fees alone! Families can avoid late fees by calling ahead and asking for a grace period.
Teaser Offers: Zero percent interest rate credit card offers flood mailboxes every day. The secret of these offers in the fine print. Often, a single late payment fee will cause a zero percent interest rate to increase dramatically. Transfer fees applied to balance transfers are also common in these teaser offers.
Annual Fees: Often, annual fees can be waived simply by calling and asking. While cards with frequent flyer programs or rebate offers won’t usually waive fees, regular cards may waive their annual fees for customers in good standing.
Catherine Scrivano recommends treating credit cards like cash. “I have a theory that credit cards should be kept at home. If I want something badly enough to drive home and get the card, it reduces impulse buying.”
Starting Young
“I love it when we can get kids involved in the financial planning process,” shares Scrivano. “How we spend money communicates to our children what we value.” Talking about money with children will help them understand the ins and outs of saving and spending.
An allowance is a common way for children to earn money. Steve and Annette Economides offer the following advice, “Parents need to have a system that is consistent and real. We take care of general living expenses, and the kids have to buy their own clothes and pay for their own insurance, gas and cell phones.” (see the MoneySmart Kids Kit for more details)
Family finances can be just that—a family affair. Teaching children early about the value of their work and allowing them to save and budget their own money will set them on the path for financial success and family frugality in the future. It’s never too late to rein in spending and take control of the family purse strings.
The Typical American Family
According to the Federal Reserve Board’s Survey of Consumer Finances, the typical American family has about $3,800 in their bank accounts. This figure does not include their retirement fund, which is only worth about $35,000 if they do have one. The family makes over $43,000 per year, but maintains a $2,200 credit card balance that they do not pay off.
Helpful Resources
America's Cheapest Family Gets You Right on the Money
Your Guide to Living Better, Spending Less and Cashing in on Your Dreams
By Steve and Annette Economides
The Automatic Millionaire
By David Bach
Girl, Make Your Money Grow!
By Glinda Bridgeforth
www.americascheapestfamily.com
www.Oprah.com/money
Score a Free Credit Report
Houston families can get one free report each year from each of the three credit bureaus. Oprah.com recommends getting one every four months to guard against identity theft.
To get a free report, go to www.annualcreditreport.com (a secure Web site maintained by the Federal Trade Commission), print the online form and mail it to:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348
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