A black hole is a region of space whose gravitational pull is so strong that nothing can escape it once it has moved past a certain point in relation to the hole. A budgetary black hole is a region of discretionary spending whose gravitational pull is so strong that your wallet can’t escape it when it comes too close to products or services related to the region. 

My biggest black hole is children’s activities. The instant any of my three kids show the slightest interest in something, my checkbook and credit cards fly out of my wallet and into the black hole. This fall, the black hole is funding piano and guitar lessons, gymnastics, soccer, art class, knitting, and aviation (they build model planes, not fly them). I imagine these activities could potentially lead to careers as symphony conductors, Olympians, fashion designers and/or astronauts. Or perhaps a well-dressed Olympian astronaut who conducts symphonies on the weekends. Who am I to deny them their dreams? 

I know exactly how much has been sucked into the black hole, because I have been tracking my spending on Mvelopes.com for 18 months. (Full disclosure: Mvelopes is going to become a sponsor of this blog shortly – and the company will offer its budget software to readers here at a discount! Rock on! I like the tool, I used it long before I met the folks there, and I wanted to get a deal for readers. So watch for it in the coming weeks.)

In any case, pre-paid debit card issuers like ReadyDebit.com, which I mentioned in this week’s Yahoo column, are suggesting middle-class folks like you and me buy their card ($10 upfront), pay $5 a month to use it, and then load money on it for a particular black hole of spending.   So let’s say you get a paycheck for $1,500 on the first of the month. You set aside $200 on the card for dining out that month. When it’s gone, it’s gone. The idea is that if you were blowing $250 a month at restaurants, it’s worth it to pay a monthly fee of $5 to save $50 (or, actually, $45 after the cost of the card.) 

The idea of spending to save isn’t a new one. It’s the same as the bi-weekly mortgage plans offered by mortgage companies. When you pay bi-weekly, you end up making one full extra payment a year, which reduces the length of your mortgage. The companies charge a bunch of annoying fees to do this.  If you’re disciplined, you can do this at no cost. Just take the amount of one mortgage payment, divide by 12, and send that extra amount each month, instructing the lender to apply it to the principal. (Now that interest rates on savings are higher, I no longer pre-pay my mortgage, which is at 5.18%).  

So here’s the cheapskate’s guide to plugging budget black holes: track your spending for 30 days. Keep the small spiral notebook, pen and envelope on you. Every time you pull out your cash, debit card, credit card, or checkbook to pay for anything, write down what you spent it on, to the penny. Save receipts that cover multiple categories of spending. Let’s say you go to a discount store and pick up dog food, pajamas and laundry detergent. Put that receipt in your envelope, because you’ll need to separate those purchases into different categories later. 

Don’t forget bills that are deducted automatically from your checking account, such as a student loan payment; or automatically billed to your credit card, like a gym membership. Also watch out for pesky expenditures that come on an annual, or quarterly basis—auto insurance, life insurance or sewer fees. They may not show up in your 30-day survey. Look through your checkbook, find the annual or quarterly payment, and break it out into monthly payments. So if you pay $600 a year for auto insurance, add it into your budget as $50 a month.  

After 30 days, sort the spending into categories (see my suggested list, below). What does your spending say about your priorities? Did you truly want or need everything you bought? Was it worth it? The only way to answer that question is to think about what you had to do to pay for your spending, according to Joe Dominguez and Vicki Robin, authors of  Your Money or Your Life. As they explain: “Money is something we choose to trade our life energy for.”  

Divide your weekly earnings by 40 hours (or biweekly paycheck by 80 hours) and think about what you earn in one hour of working. Let’s say you take home $14 an hour after taxes (the rough equivalent of a $40,000 a year job). You buy a $140 designer handbag. You had to work 10 hours to get it. Were the energy and the time worth it? Do this exercise for your major categories of spending. How long and how hard do you have to work to pay for things that don’t necessarily create lasting happiness? 

Suggested Spending Categories:

Rent/mortgage; Food; Dining Out/Take Out

Utilities: Heat/electric; Cable; Internet connection; Phone; Cell phone; Water; Garbage pickup

Car loan/lease payment; Gas; auto maintenance; public transportation; tolls/parking; cabs

Insurance: Home/renter’s; Auto; Health; Life Medical co-pays/prescriptions/vitaminsDay care; kids’ enrichment classes; student loans; tuition or other education costs

Clothing/shoes; drycleaning; exercise/health (gym, trainer)

Entertainment; Newspapers/Magazines/Books/Subscriptions

Personal Services (Hair, nails, massage, facials, etc.)

Toiletries/cosmetics; Home furnishings/yard expenses;

Professional services (therapist, accountant, lawyer, cleaning person)

Household supplies (detergent, toilet paper, diapers, batteries, etc.)

Charitable donations

Vacations, travel (flights, hotels, etc.)

Gifts; Postage; Savings 

Related Posts

• Making Financial Fitness Fun
• Spend More in Retirement? Or less?
• Many don’t understand their credit scores
• Should you pay off your mortgage early or invest in your 401(k)?
• Regulators Cracking Down…Too Little Too Late

This entry was posted on Thursday, September 13th, 2007 at 7:03 pm and is filed under Money & Happiness, budgeting, money and kids, setting goals. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.