Beth Kobliner

What do you do when shopping has taken over your life?

Beth tells Liz — and anyone else with a consumption compulsion — how to rein in spending.

Liz spends a minimum of $24 a day — that's about $6,000 a year — on a car service to take her to and from work. That may sound exorbitant to most people, but the car service is important to her (she finds it relaxing and hates the subway) so she can afford to keep doing it, as long as she's willing to cut back elsewhere. For Liz, it's all about prioritizing. She works very hard and likes to pamper herself, and she can afford to — a little bit. In general, though, she has to cut back. Right now, she's living way beyond her means.

Liz is keeping the financial nightmares at bay, thanks to the Consumer Credit Counseling Service. But her situation is tenuous — one accident, one illness could send her spiraling back into debt. Then there's the matter of her future. How does she protect herself and move beyond this paycheck-to-paycheck lifestyle?

1. Prioritize.
   
   Liz spends a lot of her money on things she doesn't value very highly. She often lays out $400 in a month for gifts to friends — almost 8% of her monthly income — and she's been known to spend the same amount on magazines and books. But when pressed she says those things aren't that important to her.
   
   Liz needs to make her spending consistent with her priorities, but first we need to know what those are. Beth asked her to make a list:

She also needs to think about her goals. Besides spending money on books and other goodies, what does she really want? A larger apartment? Enough money in the bank so she can change jobs without worry? She should figure out what she'll need money for down the road and spend less today with that in mind. Saving for the future should be a budget priority, too.

To see how Liz might bring her adjustable expenses into line with these priorities, take a look at the spending guidelines Beth put together for her. Her top priorities — taking a car service to work every day and those expensive bath oils — were left untouched. In order to make it as easy as possible for her to save, we also suggested that her IRA contributions and her emergency fund come straight out of her weekly paycheck and gave her a flat $100/month spending limit on a number of the items she spends the most on, including clothing, books, and music.

Monthly Expenses

1. Be vigilant about debt.
   
   Credit counseling has helped Liz devise a plan for paying off her credit-card debt. At her current pace, she will retire those high-rate debts in seven months. That will be quite an accomplishment, but Liz can't rest on those laurels. She needs to keep up her guard against credit card debt, because it could prevent her from reaching her goals.
   
   Liz should start by putting all of her credit cards away and relying on her American Express charge card. As long as she pays off the AmEx balance every month, she'll avoid finance charges and won't fall any deeper into the debt trap. (Liz shouldn't use her old credit cards but she shouldn't cancel them either, since that will hurt her already wounded credit score.) Then if her budget cooperates, she might be able to increase the payments through the credit-counseling service. That would help her eliminate her existing debt even sooner and free up more money to devote to her other priorities.
2. Build a cushion.
   
   Even with a balanced budget and no debt, Liz could be teetering on the brink of financial disaster. That's because she doesn't have a backup in case things go wrong. An emergency fund would provide some security and keep her from racking up new debts to boot.
   
   A general rule of thumb is that you should save enough to carry you for at least three months. Based on the budget Beth created for her, Liz probably needs to save at least $12,000. She can start with her $8,000 bonus and save $100 per month until she retires her credit card debt. Then she could either increase her monthly emergency fund contribution to $250 (and be finished in 20 months) or else just use part of next year's bonus.
   
   In any event, this money should go into a money market fund or a high-yield online savings account. For the best deals on money funds, she should check out iMoneyNet.com; Bankrate.com lists the highest savings rates out there. Liz can probably have her bank pull cash straight out of her checking account and deposited into either of these savings alternatives.
3. Account for the unexpected.
   
   An emergency cash fund is just one part of the safety net Liz needs. What if her apartment is robbed or damaged? She would have to replace all of her belongings by herself. That's why she needs insurance, in particular renters insurance, which will protect her property in the event of theft and damage. She can choose from a variety of providers on Insweb.com.
4. Invest for the future.
   
   After she gets her emergency plan in place, Liz can start thinking for the long haul. Even though she's about 35 years away from retirement age, it isn't too soon to start thinking about that. Her contributions to her 401(k) plan and her pension benefits are good starts, but she might consider saving up to $5,000 a year in a Roth IRA, too - in fact, she should at least consider doing that first and then going back to her 401(k), since her company doesn't provide any matching funds. (If she got a match, there'd be no question: The 401(k) would be the best deal around.)
   
   Whether she stays with the 401(k) or opens a Roth IRA, she should contribute as much as she can. (With her income, she can probably save at least $2,000 more a year for retirement.) She could stand to devote a bit more money to fixed income investments like bonds, which should reduce the swings of the all-stock-fund portfolio she has now. One possible breakdown would be 50% U.S. stock funds, 20% international stock funds, and 30% fixed income funds.
   
   Liz should consider her 401(k) and Roth IRA investments as part of her fixed spending. The 401(k) contribution already comes out of her paycheck; she should make a Roth IRA just as hands-off. If she opens a Roth IRA with a no-fee provider like Vanguard or Fidelity, she can request that the money be withdrawn from her checking account each month. And she'll be able to pick the investment from a host of choices. In that account, Liz should start with a broad-based index fund like Vanguard Total Stock Market Index Fund. That will give her a firm foundation on which to build.

All this won't be easy — cutting back never is. If Liz finds herself unable to rein in her spending, she may need to take a hard look at what is making her spend the way she does. (Note: See how Debtors Anonymous helped Anna control her spending.)

If she can follow this game plan, though, it could give her the freedom to do the things she really cares about in the long term: take more time for her writing, or even get a roomier apartment for herself and her cats. By sacrificing today's less important indulgences, Liz could afford to pamper herself in much more serious ways down the line. And that's what financial planning is all about.