The Eye-Opening Envelope

August 2, 2011 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 With: , , , ,

No Eat Out December, Hmmm…

December 6, 2010 By Leave a Comment

Okay, so I made a goal at the beginning of the month.  I’ve done things like this before, and usually they’re too lofty.  Once again, difficult to do, but not because it’s hard to say no.  It’s actually because I forget to plan sometimes.  I’m getting better, but…well…

I have a history of eating out rather than cooking my own meals.  It’s terribly expensive comparatively.  Now, if you’re one of these natural food people, you may be in the running for high cost food, albeit much better for you, so they say.

It’s day 6.  I’ve eaten out once.  That’s actually a huge accomplishment.  Ironically, I did it on the very morning that I challenged a friend to do the same.  What’s funny is that later that morning, I cleaned out my truck and she saw me walking with an empty fast food bag to the garbage can.  The improvable fact was that it wasn’t trash from that day.  It wasn’t even trash from December, but it sure did look like I was ditching the evidence :) .  Anyway, not a big deal.  What is a big deal is that a normal expense and eating pattern of mine is being broken.

There was a time about 10 years ago when I would eat out only once per week.  I lost weight, felt better, and enjoyed the time eating out even more when I did eat out.  There’s something to be said for delayed gratification, even if it goes against what everyone else is doing.

Things are looking up.  Below is a pie chart showing my food spending for October and November, and as soon as December closes up, I’ll post the results.  If I continue the direction I’m going right now, I should stay under $300.00 for the entire month of December, which would be a $250.00/month improvement.  That’s $250.00/month towards…well, normally I would say paying down debt, but now it’s going to go towards my fully funded emergency fund.  Cross my fingers :) .

October 2010

November 2010

Filed Under: A Call To Action Tagged With: , ,

It’s Fun to Watch Money Grow, Even If It’s Only $1000

November 18, 2010 By 2 Comments

The fuel that fires the burners in the financial fiasco is that wonderful concept called compound interest.  If you don’t know what that is, here’s a simple explanation.

When you borrow $100.00 from someone and they expect a payment of $110.00 by a certain date, you’re paying a total of 10% interest on the money you borrow.  If you don’t pay them, aside from late fees, the next time they calculate interest on your balance, they’ll use $110.00 as the basis, not $100.00.  So, for the first month, 10% of $100.00 is $10.00, but the second month, 10% of $110.00 is $11.00.  On the third month, 10% of $121.00 is $12.10.

(keep in mind, we’re charging 10% per month in this example, which is an insane rate [sorta like a title loan company or check cashing company] just to show the sheer awesomness of compound interest.)

My Emergency Fund

Putting $1000.00 in the bank, in an easy-to-access, fee-free account is exactly what you need to do to manage Murphy’s Laws of Diminishing Returns.  In other words, emergencies.  Before you start making plans to get rich, or get out of debt, or whatever, you need to set aside at least $1000.00 to handle possible problems, which I might add, will happen. It’s not a matter of if.  It’s a matter of when.

  • Tire blows out
  • Alternator fails
  • Air conditioner dies
  • Water heater dies
  • Son breaks arm (deductible)
  • you name it, it will happen…

In July of 2009, I transferred enough money into my ING Savings Account to equal exactly $1000.00.  At the time, the interest rate on the account was a measly 1.3%.  Let’s be clear about savings accounts designed for emergency funds:  They’re not meant to make you money.  They’re meant to handle emergencies, so the interest rate isn’t important.  However, thankfully, there is actually a rate on this one, which means I get to watch it work for me, even if it’s only a few bucks.

It’s now November 18th of 2010 and I have been paid interest every month on the balance of the account for 16 months.  Below is a graph of my account, which shows positive growth with no effort from me whatsoever.  Watching money work for you is exciting!  It’s measurable progress, and that’s what we’re looking for in our finances.  We want to be earning interest, not paying it.  We want the fundamentals of compound interest to work in our favor.

The orange line represents the balance of the account, and the blue line is the amount of interest paid each month.  The blue line fluctuates because the interest rate fluctuates.  The orange line increases steadily over time because nothing is taken out of the account.  The is the direction your money should be going.  If you’re spending less than you make, then you’ll see this trend on your net worth.  What you don’t see here, is that the orange line is actually a curve that gains momentum as time passes.

The goal, in your financial life, is to reach a point where the interest paid on your nest egg covers all of your basic living expenses.  But, before you can get there, you need to remove the dead weight of compound interest being charged to you, instead of paid to you.  Get that $1000.00 socked away as fast as possible.

Filed Under: Financial Basics Tagged With: , , ,

What If You Don’t Know Your Future Income?

November 15, 2010 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 With: , , , ,

Customer Service, I Vote With My Wallet

July 25, 2010 By Leave a Comment

There’s nothing more important in a business transaction than making it clear to your client that you’re happy that they have chosen you.  After all, they do have a choice.  It’s been a while since I was inspired to write about the experience I’ll explain below, but reading A Customer Service Confluence. Realizing the Key to Business Success by a fellow REALTOR® reminded me of the incident, and how important customer service is.

Now, when it comes to where you purchase your gasoline, your coca cola, or your convenient store snack, one usually doesn’t have high expectations for customer service, as these transactions require very little interaction between the purchaser, and the attendant.

At the corner of Indian School Road and Pima Road sits a standard convenient store and filling station which received a visit from me recently.  At the pump, I paid for my gasoline to the tune of around $40.00 total.  While the tank was filling, I stopped inside to pickup a drink.  When I handed the clerk my debit card, I was told that there was a $5.00 minimum purchase to use my card.

ME: “I’m sorry, what?”

HER: “Sorry sir, there’s a $5.00 minimum purchase.”

ME: “I just spent over $40.00 at pump one.”

(At this point, it didn’t matter, I had already made my decision.)

HER: “It’s per transaction, sir.”

ME: “Are you serious?”  (there were plenty of people standing around who overheard me.)  ”You know what?  Keep your drink.  I’ll go do business with someone who wants my money.  And I’ll make sure never to visit here again.”

I wasn’t angry, I wasn’t rude.  I didn’t raise a stink, or make a scene.  I simply said these words kindly and matter-of-fact-like, and went on my way, never to return.

Was I effective?  It’s possible.  I won’t be able to measure it.  Perhaps this article will inspire you to be more conscious about your purchasing decision and you’ll avoid the same gas station.  I do know that they will never receive any of my business ever again.  ”Come on,” you say.  ”It’s just a gas station.  It’s not like it’s a big deal.”  Well, to me, it is a big deal, because it doesn’t just happen at the little gas station.  It happens with all of the places you choose to spend your money.

It’s my observation that even though we as consumers have the power to dictate the products that come to market, and the services that certain companies offer, we often believe that we are powerless and are subject to whatever is offered at the price it is offered.  Part of this reasoning comes from the impulsivity that we bow to as we have to have it now and fail to exercise patience and planning to acquire the things that we like.

Yes, the convenient store was a “have to have it now” scenario for the fuel, as I need to be able to drive, but I didn’t need the drink.  In fact, it was well worth it to me to sacrifice the joy of cracking open a fresh beverage, even in the midst of one of the hottest weeks of the year in order to make a financial point.

Where I spend money and on what is the determinant of what will be available to me and where it will be available.  If I don’t like the service, I don’t have to use it.

Sometimes it’s not the product that we need to step away from, but the middle man who provides it.  If one purveyor provides lemonade with a smile, and the other frowns at you, it’s still lemonade, but the choice is clear.  You will vote with your wallet whether you like it or not.

Start recognizing that you have the power as the consumer to tell the world who you support and who you do not.

Filed Under: A Call To Action Tagged With: , ,
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