Please, I Beg of You, Get In The Know

Posted on December 18, 2011 Written by Leave a Comment

You MUST know what’s going on in your personal financial world.

There are a few things in life that we all have in common.  Among those are the need for food and water, and something with which to trade for it.  Money.  Until our country collapses (Read the article 50 Facts About the US Economy That Will Shock You by Becket Adams) we have currency that we can trade for goods and services.

There are plenty of articles circulating in our electronic world that point out that Americans don’t pay attention to what they eat, and there are probably just as many that point out that we don’t pay attention to what we spend.

What do you do?  Do you really know what’s going on in your financial world?  It actually matters to you, and if you aren’t aware of what really matters to you, then you’re lost.

Your Budget (Yuck, right?  No, not so much.)

Let’s break this into a few categories.

Category 1:  The Revealed Budget, or the “Unplanned” Budget

This is where you start.  You need to simply look at what’s going on with your money, and write it down.  Write down what you make, subtract what you spend, and that gives you a Revealed Budget.  It’s a snapshot of your behavior.  It shows you what you’re spending your money on.  Don’t worry about the facts, just get them on paper so you can see the truth.  If you don’t know this information, you’ll never master the next category.

Category 2:  The Planned Budget

Start with the 4-walls.  At the top, write your net income for a given month.  Subtract the 4 walls (Food, Housing, Utilities, Clothing, Transportation.)  I know, that’s 5, but you can figure out which ones are related.

Why do we define the 4 walls?  Because these are the basics.  If ALL you had was enough to pay for the 4 walls, you could survive. NOTHING else gets a dime until you take care of the basics.

Once you’ve covered the necessities (please understand the true spirit of that word) then you move to the next most important bills until YOU HAVE NO MONEY LEFT to spend on your budget.

One the 1st day of every month, do this exercise.  Write your income at the top, then subtract your expenses.  If your obligations are such that you have something left over before paying all of your month’s bills, then you didn’t write your budget properly.  You need to revise it so the number at the bottom of the page is ZERO.  This leads us to Category 3.

Category 3:  The Revised Planned Budget

If you have money left over on your budget, assign it to something.  Make a plan for it.  Know where it’s going.  Your budget will not be right the first time you do it, and you should expect to revise it monthly as life changes from month to month.

Need help?  Just ask.  I enjoy helping people solve their money problems.

 

Filed Under: Financial Basics Tagged: , , , ,

The Eye-Opening Envelope

Posted on August 2, 2011 Written by Leave a Comment

I’ve been a Dave Ramsey nut for a long time, but until I made a commitment to New Valley Church to facilitate FPU, I hadn’t actually been through Financial Peace University.  So, while I’ve read his book, gleaned a myriad of useful information from his radio show, and adopted his entire philosophy 100%, I have not yet actually put the plan into action to the fullest degree.

Budgeting has been the most difficult aspect of the plan, but not because it’s difficult to write a budget.  The difficulty is overcoming patterns of denial and changing behavior, which is 80% of the equation.  What you know is hardly going to help you don’t change behavior.  On July 31st, I sat down and went through two critical documents that are a part of Financial Peace University (FPU.)

I also, for the first time, implemented the envelope system to track my food consumption.  There are a few other budgeted categories that can be used in the envelope system, but since this is my first attempt at using it, I thought I’d go with my most prominent monthly expense aside from my house payment.

It’s been only 2 days now, and what I can tell you is that the experience has already shifted my mindset on budgeting a single category and sticking to it.  That’s the biggest problem, isn’t it?  Sticking to the budget?

Prior to this month, I relied on the “lookback” method in conjunction with a budget category on Mint.com.  I set an arbitrary value to my Food category of $400.00 per month, then, as I went about my day, I simply lived my life based on familiar patterns in hopes that I would hit my mark by the end of the month.

This is a bad plan.  Let me stress that once again.  THIS IS A HORRIBLE PLAN.  I can prove it too, by reviewing the past 12 months, all of which will show you that I exceeded my budget.  Every.  Single.  Time.

So, this month I broke away from the familiar to start off with a finite, tangible amount of cash with which to purchase food.  I was concerned at first, because I have been emotionally attached to the idea of recording each and every purchase with my debit card.  Sure, it’s easier to track where you’ve been, but studies prove that when you pay with plastic, you tend to spend more.

I believe that the benefits of changing the pattern of behavior is going to outweigh the satisfaction of knowing exactly where I swiped my debit card every month, and I’m not actually losing my ability to track where the cash went.

Here’s how to implement the cash Envelope System

Since you’re already assigning all of your money to a category at the beginning of each month, this will be fairly simple for you.  Start with Food, like I have.  You’ve determined that you intend to spend no more than $300.00 this month on food, for example.  That includes grocery, eating out, bars, etc.  Anything that you consume to sustain yourself, or entertain yourself would be considered part of this $300.00.  Go to your ATM and withdraw $300.00 or write yourself a check for $300.00.  Put the cash in an envelope and use it ONLY for food.

When you visit the grocery store, take some cash out of the envelope, purchase your food, then put the change back in the envelope.  Coins can go into a jar, or your ashtray.  On the envelope, write the date, the amount spent, and the balance remaining in the envelope.

By doing this simple exercise, you’re going to see a finite source of funds slowly deplete.  You’re going to be more conscious of what you’re spending, where you’re spending it, and how long you have before you’ll run out.  You cannot replenish this envelope until next month, so make it count.  Your eyes will be instantly opened to the reckless spending habits of your past as you compare familiar behavior with what really needs to happen.

Like I mentioned before, I’m only on day 2 and I already see a huge need for behavioral changes in order to slow the depletion of my “food cash.”  If you implement this, I imagine you’ll be as surprised as I was at how much of an instant change this is making in my way of thinking about a budgeted item.  I can also see that by having a finite source of funding for a given category, I’m going to end the month with money left over, rather than going over budget.

Filed Under: Planning and Budgeting Tagged: , , , ,

What If You Don’t Know Your Future Income?

Posted on November 15, 2010 Written by Leave a Comment

A Twin Cities connection of mine, Jerrid Sebesta, is a fellow hard-core money mastering fool like myself.  He’s also a meteorologist.  Why anyone would study meteors is beyond me.  They’re too fast…and haven’t you seen what will happen to Earth some day?  Just ask Bruce Willis and Morgan Freeman.

“ooh how I wish it would rain down…”

Jerrid is also a guest-blogger who contributes to the Life & Money section of momslikeme.com. His most recent articles on personal finance touch on the dreaded “B” word, a topic I’ve written about quite a bit as well.  In an article entitled, Budget Basics, Jerrid shows you a simple spreadsheet budget for the average income earner, whereby every penny is spent before the month begins.

If you aren’t familiar with this concept, get familiar.  It’s critical to your financial success.  Before you start your month, you need to assign a destination for all of your money, yielding a zero balance before the month starts.  In other words, if you make $4000.00 net in one month, all $4000.00 needs to be given a name and a place.  This will help you avoid the “too much month at the end of your money” problem, as Dave Ramsey says.

But what happens to your budget when you don’t have a regular income?  How do you assign your money to an expense plan if you’re 100% commissioned?  It’s easier than you’d think.  In Jerrid’s example, there’s only one thing that I would change, and it’s simply a preference.  I would prioritize the expenses on the spreadsheet.  For all intents and purposes, the result would be the same in his example, so it’s not too much to fret over.

For those of us who don’t know when we’re going to get paid next, it’s critical that we use a prioritized spending budget. It’s pretty much the same concept, and the end result is similar.  The major difference is that with a regular income, you’ll be able to balance your monthly budget so the resulting difference between your income and expense is zero.  In a prioritized spending budget, you’ll probably have a negative number at the bottom of your page until you get paid.  Some months you’ll see a loss, some months you’ll see gains.

Whatever it may be, you’ll need to start by listing your expenses in the order of priority, always starting with the 5 basics in this order:  1) food, 2) utilities, 3) housing, 4) transportation, 5) clothing.  Continue with all of your other expenses as you know them, and then when you’ve got everything written down, begin asking yourself the following question.  “If there was one thing that I absolutely had to spend my money on this month, what would it be?”  Put a #6 next to that thing (you’ve already got #1-5).  Ask the question again, and put a #7 next to that.  Keep going until you reach the end.

If after you cover your basics, you’re out of money, then you need to make some serious changes.  You either need a new job, or you need to lower your housing lifestyle (remember, no more than 25% of your take-home pay.)

Be careful though.  With a prioritized spending plan, it’s much easier to stray from the plan, because you don’t know how much you’re going to make, and you may hit a big sale one month, giving you the false sense that you’ve got all kinds of money.  Don’t fall into that trap.  In fact, when you start to refine your craft to the point of making a regular average income, you can modify your spending plan to reflect a steady figure.

For instance, if in 2009 you were paid $64,000 in commissions erratically in only 4 months out of the entire year, then you can create a baseline target goal of +/- $64,000 for 2010.  Then, because you don’t know if the year will be as good as the previous, write your budget based on a $42,000 annual income, and stick to it, socking away all of the extra money for a rainy day.  If you continue to increase your income over time, you can adjust your “salary” to fit better.

A common mistake people make is to see that big commission check as a huge bonus that they can just spend, because, “hey, I’ll sell the same deal next month.”  Not a good plan.  Tighten your lifestyle so that it doesn’t bleed you dry.

Whether it’s a prioritized budget for the unknown income, or a steady budget for someone who knows how much they’ll be paid every month, having that plan will not only result in financial success, simply knowing the details will alleviate all kinds of stress in the family.  Don’t be frustrated if you don’t get your budget right the first time.  If you do, you’re a superhero.  Trust me, you will make mistakes and it will take a few months to refine it and deal with the various compromises you and your spouse may have to make to dial in a good plan.  Remember, if you’re married, you both have a vote.

Filed Under: Financial Basics, Personal Finances, Planning and Budgeting Tagged: , , , ,

The 5 Essentials

Posted on July 10, 2010 Written by Leave a Comment

This reference article outlines the obvious, but it’s important to understand how often people over look these 5 things when concerns of their credit score is thrown into the mix.

We have 5 essential expenses every month that we must take care of first and foremost, and they can be mixed up into any order of priority as long as they are all handled.

  1. Eat.  You have to eat.  You’re a biological creature and you need food to live.
  2. Clothe yourself.  Don’t want to be caught out in the cold or exposed to the sun, and the rest of society without some basic coverage.
  3. Sleep.  You need to keep a roof over your head.
  4. Lights.  Make sure the household has the proper utilities, at minimum, electricity so you can iron your clothes, and see.
  5. Transportation.  Whether it’s a car or bicycle or walking shoes to get to the subway, make sure you can get to and from work.

These 5 things are at the very top of your budget.  If your income doesn’t even allow you to fulfill these basic requirements, then you either have an income crisis, or most likely, your housing expenses are too high.  I could also be some other form of unnecessary extravagance, like shopping for your food at a high end grocery store or driving too much of a car.  You’ll have to reduce your lifestyle or improve your income.  There’s no other way to do it.

Filed Under: Baby Step 2, Financial Basics Tagged: , , , , , ,

What’s Too Much Of A Car?

Posted on July 10, 2010 Written by Leave a Comment

A good rule to follow when considering your modes of transportation (and we’re talking about all of your motorized toys that move you from point A to point B) is to keep the sum of the current market value of all of your transports at an amount equal to or less than half of your annual income.  For example, if you make $40,000/year, you should keep no more than $20,000 worth of vehicles.

Why?  Because all of those vehicles are going down in value, not up, and it’s likely that you have too much money tied up in those vehicles, which means you’re losing even more money.  If you can manage to lower your vehicle lifestyle, you’ll be able to save some of the cash that was slowly trickling away to nothing and put it somewhere it can grow instead.

So when can I buy a new vehicle?

If you’re buying something new that goes down in value (usually 60% in the first 3 years) then you’d better have the type of nest-egg or income that would justify it.  Buying a $60,000 car new that will be worth $24,000 in 3 or 4 years means you’ve got enough passive income from your investments that you can afford to misplace $36,000 and not have it affect you.

Here’s what’s interesting about that behavior.  Rich people don’t do that.  Rich people are the ones who end up bailing you out by buying your previously valued $60,000 car for half the price.

Imagine if you have $1,000,000 saved, earning 5% annually.  That’s $50,000 in passive income annually, the first year.  After that, it compounds.  You’re not going to get to experience that if you have all of your money tied up in vehicles before you can afford to lose the kind of money that having new vehicles causes you to lose.

Too much of a car is:

  • any car or other vehicle that carries a monthly payment.  Paying the bank interest on a loan isn’t a good idea to begin with.  Why do it on something that’s going down in value?  There is no benefit.
  • any car or vehicle that’s worth more than half your annual income.

Dave Ramsey’s rule of thumb is to evaluate if you can pay off the car within 18 months.  If you can, AND the car is worth less than half your income, keep it.  Otherwise, you may have too much of a car.

Filed Under: Baby Step 2, Financial Basics Tagged: , , , ,
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