The Color of Money

Face your financial truths before making your New Year’s resolutions

By Michelle Singletary
Washington Post / December 26, 2010

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One of my favorite movie quotes comes from “A Few Good Men’’ when Jack Nicholson, playing a Marine colonel, shouts, “You can’t handle the truth.’’ And when it comes to money, people often fail at keeping their New Year’s resolutions because they don’t honestly assess their situation.

I was answering listener questions recently on a radio show when two callers found themselves caught in some money untruths. I asked the first caller if she had a budget. She paused, and then gave a hesitant yes. But when you get a pause followed by an “um’’ or “uh,’’ it can indicate that the truth may be otherwise.

Turns out, the woman didn’t have a budget. She was, however, trying to pay off debt. Budgeting will help you identify expenses you can cut and the savings you’ll need to devote to reducing debt.

Another caller was fretting because she couldn’t keep up with her bills. She earned a good salary. She said she had cut out every possible luxury — cellphone, cable, dining out. Then I asked her what percentage of her monthly take-home pay was going toward her mortgage (many experts suggest it should be no more than 36 percent).

She quickly answered 30 percent.

But something didn’t add up. If her expenses were low and she didn’t have any debt except her mortgage, then why was she still broke? With additional probing I found out she had lost the part-time income that was used to help her qualify for the mortgage.

I pointed out that if her income had dropped, then the percentage of her current pay going toward the monthly mortgage couldn’t still be 30 percent. By facing the reality, she could put more effort into finding another part-time job, take in a boarder, or move to a more affordable home or apartment.

Here are my favorite financial fibs:

■I have a budget. Having a budget in your head doesn’t count. You have to write it down, which also leaves a record of how you are doing financially.

■I have an emergency fund. People will swear they have an emergency fund. But they raid it so regularly it’s really just a backup checking account.

■I can manage my spending better with a credit or debit card. People love to think the monthly credit card or debit account statements that track their spending are great tools to manage their money. But that’s not the case. Not only can credit and debit use increase how much you spend, it can result in unhealthy food purchases, according to the Journal of Consumer Research.

■I own my home. Unless you’re mortgage-free, you don’t own your home.

■I don’t understand why I’m always broke. It’s about needs versus wants. Be honest, you’ve moved too many of your wants to the needs side of your budget.

So before you make your financial resolution for 2011, take a truth test. If you can handle the truth, you stand a better chance of becoming the better money manager you want to be.

Michelle Singletary is a columnist for The Washington Post.

SOURCE: Bloomberg News