Dave Says column

Dave Ramsey is America’s trusted voice on money and business and the CEO
of Ramsey Solutions. He has authored five New York Times best-selling books. The Dave Ramsey Show is heard by more than 8.5 million listeners each week on more than 550 radio stations. Dave’s latest project, EveryDollar, provides a free online budget tool. Follow Dave on Twitter at @DaveRamsey and on the web at www.daveramsey.com

(Helping them budget)

Dear Dave,
My husband and I live on a budget and are getting out of debt. Our daughter is in
high school, and we’ve been teaching her about your plan. Is it realistic to expect a 16-year-old with a part-time job and a hand-me-down car to make and live on a budget?
Marcie
Dear Marcie,
Anyone who has an income can make and live off a buget. Your daughter is at a great
time in her life to learn how to prioritize spending, saving and giving – and making her money behave!

Even in her situation, when she’s still living at home with you guys, there are plenty of things she can include in a budget. Think about it: She needs gas for the car, basic maintenance and insurance … things like that. She’ll also want a little spending money, and she might even have ideas of going to college. So sit down with her and show
her how to make out a budget to figure out the upcoming month’s expenses before
the month begins. Make sure she knows how to properly balance and reconcile her
bank account, too.

Of course, at this point it’s still your responsibility as parents> to provide her with the basic necessities. But I love your attitude and your willingness to teach her how to handle money intelligently. The sooner she learns some basic money management principles, the sooner she’ll be able to handle her finances in the real world responsibly.
-Dave

(Saving is doing something)

Dear Dave,
I know you’re all about getting out of debt, and I agree with your stance on that. I started college last month, and scholarships and Pell Grants will pay for everything. But is saving money really that important if you’re young and have a good income? What good does money do you if you don’t use it for something?
Tim

Dear Tim,
Congrats on beginning college! I’m glad, too, that you understand how I feel about debt. But it worries me that you seem to think that you’re not doing anything with your money when you save. Saving money is one of the most important things you can do with your money, because when you save you’re planning for the future and the unexpected.

Retirement may seem long way off right now, but think for a second how it would feel to have worked your entire life only to end up broke at age 65. If that thought doesn’t scare you, it should. Have you ever seen someone that age, or older, wrangling shopping carts in the rain or flipping burgers at a fast food joint? In most cases, it’s not because they love the job and being around people. They’re doing it because they have to, because they failed to plan for the future and save some money.

Let’s talk about something a little closer. You said you agree with my stance on debt. Okay, so how are you going to buy your next car without going into debt if you haven’t saved anything? How will you survive if you get laid off from your job if you haven’t saved any money? Bad things happen when people are foolish enough not to save money.

Saving is doing something with your money, Tim. It’s one of the most important things you can do with money – for yourself and those around you!
-Dave

Everyday Money Budgeting: ‘Lifestyle Inflation’ Is Sapping Your Savings

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Christian Wheatley/Getty Images

The more you make, the more you spend

Congratulations! You got a raise, came into an inheritance or sold your home for a profit. No matter what has brought more money into your budget, it’s important to manage that money wisely. Just because you have greater access to money doesn’t mean you should increase your spending accordingly.

The Basics of Lifestyle Inflation

Think back to your first adult job. Likely that paycheck left you with little money for the finer things in life after monthly expenses were paid. Now that you are making more, do you still dream about all you could have with a higher income? This perpetual dissatisfaction and increased spending in accordance to increased income is called lifestyle inflation.

When you get a financial boost that should put you ahead on your big financial goals (or help you pay off debt), if you fall victim to lifestyle inflation you stay in the same financial position. While your monthly expenses rise to keep up with your income, your ability to build wealth is limited. The money is going to non-wealth-building things like more clothes or a bigger car.

This tendency to spend more when you have more can come from feeling competitive with your peers, entitlement from working hard that makes splurging seem justified and even just lack of willpower. While spending more can sometimes makes sense and lifestyle inflation can seem unavoidable, this can get in the way of a secure financial future if it goes unchecked. Check out these tips on combatting lifestyle inflation.

1. Keep a Budget

Although making a budget may seem obvious, people tend to “forget” to adjust that budget when their circumstances change. Before you start spending or even thinking about spending, it’s important to crunch the after-taxes and expenses numbers to see how this extra money is really going to affect you. This perspective can help you balance your finances more accurately and help you to be more conscious about where your money is going.

Keep in mind that if you put all that spending on your credit cards, you could hurt your credit in the long run. Increasing your credit card spending above 35% of your credit limits can have a negative impact on your credit scores.

2. Assess Your Values

While you are living in the rat race, it can be hard to remember what really matters in life. Instead of thinking of the next material item you “need,” it can be a good idea to step back and look at the big picture. Consider what success really means to you and use your wealth to get you there.

3. Prioritize Savings & Goals

It’s a good idea to always pay yourself first — your future self, that is. When you come into money, think about your financial goals and how this increase can help you reach them faster or more comfortably. Whether it is the amount you contribute to retirement or how much you pay down on debt, these changes may seem to be taking from your new spending balance, but can actually help you in the long run.

4. Pick & Choose

That doesn’t necessarily mean you shouldn’t celebrate your change in circumstances. It can be a good idea to build some balance in your budget and plan for a reward of your hard work if you want one. Avoiding lifestyle inflation doesn’t mean you are cheap or a no-fun money hoarder. Just be careful and conscious about where you spend. Identify which purchases really make you happy and which ones will still make you happy about in three months, a year or even ten years.

5. Avoid Comparing

You may feel like you need to spend more to keep up with your family, friends, co-workers or even strangers — but it’s a good idea to remind yourself that you don’t need to lead the same life they do. Everyone has different priorities and circumstances. You can always find someone who has something better than you do and you can always spend more, but it’s important to make an effort to steer clear of peer-pressure spending and focus on what is important to you.

Lifestyle inflation can really sneak up on you when your finances are growing gradually. All of a sudden, you drive a nice car, pay more for clothes, upgrade your housing and eat out whenever you please. This may sound great, but it’s important to make sure you are actually enjoying your inflated lifestyle and not just spending because it’s possible while squandering future goals.

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Dave Says—

* Dave Ramsey is America’s trusted voice on money and business, and CEO of Ramsey Solutions. He has authored five New York Times best-selling books. The Dave Ramsey Show is heard by more than 8.5 million listeners each week on more than 550 radio stations. Dave’s latest project, EveryDollar, provides a free online budget tool. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.

Dear Dave,
I’ve spent most of my marriage not being a good husband and not being involved in our family finances. After being introduced to one of your programs at work, I realized how irresponsible I had been and went home to apologize and tell my wife about it. During this conversation I learned that we have about $80,000 in debt I didn’t know about, plus $45,000 in debt on a new car and motorcycle I did know about. We also have a mortgage on our home. My wife apologized for making a mess of things, but it wasn’t all her fault. She wasn’t sneaking around spending and taking out debt, she just made mistakes and was afraid to tell me. Together, we make about $100,000 a year. Can you help us?
Curtis

Dear Curtis,
I’m really glad you’ve made the decision to man up. That’s a big step in the right direction for you and your marriage. To me, what you described is a lot different than her completely lying, hiding stuff, and actively having a financial affair – so to speak – on the side. You weren’t plugged in and she wasn’t doing a good job, but she didn’t have anyone to talk to about it. Things got worse, then she probably felt ashamed about how ugly it got and didn’t want to tell anybody.

Not counting your house, you’ve got about $125,000 in debt. You’ve got to look at all this with a $100,000 income and say, “What is the fastest way to clean up this dadgum mess?” That’s going to mean beans and rice, rice and beans. That means a scorched-earth lifestyle and living on a budget, which also means you’re not going out to eat, not going on vacations, and you’re going to start selling so much stuff that the kids think they’re next.

I’d probably sell the car and the motorcycle. Get into a couple of basic cars, and spend about two years of crazy intensity getting debt free except for your home. You can clean this up that fast, but you’re going to have no life during that time.

The two of you have some relationship work to do also. It sounds like you’ve already started on that with you owning your part and her owning hers. The thing is not to blame. From this point forward you need to sit down together and make all of your decisions – financial and otherwise – together.

Trust me, if you’re both willing, you can heal the math problem, the debt problem and the marriage problem all at the same time. It will be an amazing thing!
-Dave

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