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Hitting the Personal Financial Reset Button

Hitting the Personal Financial Reset Button

"With an extended family of more than 20, I figure I spend $75 a year on cards. They are now getting photo cards I print off my computer and pictures that my son draws."

By David Kiley | Business Week

Here’s a blow-by-blow account of the great budget beat-down:

We pay monthly, like most Americans. To knock down the principal, we are going to make smaller payments twice a month, a strategy that will add the equivalent of two extra monthly payments a year. This will reduce the 27 years we have left on our mortgage to a little over 22 years, saving us $77,000 in interest payments. We also are refinancing, from a 6% rate to a 5.12% rate with no fees.

School payments
Our seven-year old son attends a private school, but we’ve been thinking this is unnecessary because there’s a very good public school in our town. For at least the next four years—until he starts middle school—we plan to bank the $11,000 a year, replenish his 529 college fund, and invest the rest.

Household expenses
It is difficult to look at daily, weekly, and monthly budget leakage. Some of the things we are identifying may make us sound like nickel-and-dimers. But we are using this recession as a teaching moment for us and for our son to change habits. Some of the things we are chopping out of our budget will likely return when the market does, but who knows? New habits may die as hard as old ones.

Greeting cards
With an extended family of more than 20, I figure I spend $75 a year on cards. They are now getting photo cards I print off my computer and pictures that my son draws.

I know. I’m squeezing dimes, right? But budget cutting becomes contagious. My son and I were going to the barber every six weeks to get our hair buzzed. That’s $30 for the two of us. Over a year, the roughly seven visits added up to $210. I’ve bought a buzzer/trimmer for $22 and we now do our own hair.

Health care
I was seeing a chiropractor twice a week for $35 per visit. Cancelled. I think I can accomplish the same relief for my back by working out more on my underused Total Gym. Also my wife was seeing an out-of-network specialist, which could have cost $2,000 this year. She is now seeing an in-network specialist, which requires a 90-minute round trip.

My wife and I are dialing back on clothing purchases by 50% this year. To maintain domestic harmony, I promised I wouldn’t publish how much we’re saving, but the number is substantial. The limits do not apply to our son, who is growing rapidly.

We’ve cut back our spending at the fancy deli in town by $100 per month. We’ll make do with Havarti cheese instead of the stinky expensive stuff for a while. Minimum savings: $1,200 a year.

We’ve piggybacked family trips onto two of my business trips this year to New York and Florida, with days off, to save some airfare and hotel expenses. We’ll save about $3,000 this year, based on what we would have spent taking those trips on our own.

Dining out
We have dialed back on going to our favorite restaurant, from twice per month to once. That saves about $80 a month, or $960 annualized.

It may all sound like a penny-pincher’s life, but there’s an old adage: “Watch the nickels and dimes and the dollars take care of themselves.” What’s better, we feel much more in control of our financial destiny.

Savings like these can be illusory if you don’t track them and set the money aside for real. Each month we put the savings on greeting cards, dinners out, and haircuts into our vacation fund. That way it’s sitting there when we need it and we aren’t draining our working checking account. Fancy food savings are going to the 529 fund.

As market conditions dictate, we will divert money-market and CD reserves into the stock index fund as part of a dollar-cost averaging program.

We calculate that our minimum annual savings will be, to us, a staggering $24,000-plus. If we merely continue those savings over five years, add them to our remaining principal, and keep it all invested for a very conservative compound-interest return of 3.5% after taxes, it will add at least $213,000 to our nest-egg. That will put us above where we were before the markets tanked.

So the party—and the financial laziness we developed—is over. And even if the markets and home values bounce back sooner than many of us think, our new, frugal habits will hopefully die harder than our old ones did. We do, however, look forward to going back to the barber. I’m not sure how long my son will put up with Dad cutting his hair.

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