Friday, February 15, 2013

Why A Monthly Budget May Be A Terrible Idea For You

If you google the phrase "budget template", you will be bombarded with a plethora of free or not-so-free templates that you could download and use.  Notice anything in common with all of these templates?  Go ahead, I'll wait while you go google them...   All these budget templates are on a monthly basis.  Chances are, if you are like most money earning individuals out there, a monthly budget is a terrible idea for you.

Hear ye, hear ye, the only people who should keep a monthly budget are those that get paid monthly.  

For those of you who are paid once a month, whew, best of luck to you.  You really do need to keep a budget because you have to go a loooong time between paychecks. Never fear, the upcoming budget nuts and bolts post will suit you as well. As for the rest of us, we all get paid every other week or maybe every week.   If you are in the bi-weekly or weekly paycheck club, your bills and expenses may follow a monthly cycle, but your income does not.  Trent and I tried the monthly budget approach and we ended up really bogged down and frustrated.  We realized we were trying to budget based on an arbitrary time frame that did not match our actual cash flow.  So we decided to break it down.

We now keep a budget based on two week pay periods.   My pay day is every other Tuesday.  Trent's deposit from Mission Waco is every other Wednesday, the day after mine hits.  His deposit from church hits every other Friday, within the same week as the other two.  So, in a four day span, we receive all the income we are going to get for that two week period.  We begin each budget period on the Tuesday of my deposit and go from there, knowing the rest of the income will be there shortly.  We start with our total income for the pay period, which is basically always the same, then list the bills and expenses for that two week span only.  If the pay period at hand ran from the 1st of the month through the 13th, we would only include any bills due on those dates.   If something is due on the 14th or thereafter, that is included in the next column which represents the next pay period.

Every single budget period is a bit different, because we are going by the dates of our paychecks.  Since each month (besides February) is a few days longer than four weeks (two pay periods), things end up shifting a bit.  Generally they switch off.  For example, the 1st of the month bills will be in one budget period, then not the next, then back in the third.  If one period ends up light on bills due, that means that the next period will be top heavy and there may actually be more bills due than there is income.  Never fear, our budget template (that I will go over in detail in the next post) accounts for the times when a carryover of money is needed from one period to the next.

Is everyone tracking with me?  Don't worry, this will be shown very clearly in the upcoming Budget Basics post where we'll get nitty gritty about rows, columns, categories, color coding and formulas.

For now, here's a summary of the reasons I believe it is beneficial to budget based on your pay periods instead of monthly:

1. It follows actual cash flow of income, which is not monthly.
2. It breaks it down to shorter, more manageable budget periods.  If you totally screw up in one, you are not far from the next restart date.
3. It allows for you to better account for the items that you spend money on more often than once a month, like groceries and gas.  Bills may be monthly, life expenses generally aren't.
4. It allows you to see at a glance when you might need to borrow from one income heavy pay period and stash some for the next bill heavy pay period.
5. It has revolutionized the way we handle our money and I hope it can do the same for you.

Monday, February 11, 2013

Bank Account Business

For those of you who have been following this money series from the beginning, you may notice that I went back and added another post to the original line-up.  This post about bank accounts wasn't in the mix at first but I decided it would be a good one to throw in.  Bonus post!  For those of you just tuning in, click here for the introductory post for this series and click here for the first real post of the series about giving every dollar a name.

Moving right along.

How many bank accounts do you have?  Do you have a system for how you use them?  Trent and I have four bank accounts and have landed on what we think is a pretty good system. It works well for us at least, so I thought I'd share it with you as well.   Here is an overview of our accounts, what we named them and how we use them.

Savings Account
This is pretty self explanatory.   It's a plain jane money market account to which we shuffle a piece of every paycheck.  It is reserved for unplanned car repairs, home repairs, big doctor bills and general life surprises that don't end up fitting well into our regular cash flow.  Let me tell ya, once we got this account built up a bit, we realized what a relief it is to have it in the times when we need it.  Staring down the cost of a busted tire or a $100 pharmacy trip to heal my husband from simultaneous bronchitis and sinus infection is not so bad when you have a place to pull the money from.  

Bills Account
This is a free joint checking account and its sole purpose is for bills to be paid out of it.  At the beginning of each budget period, I transfer the right amount of money into this account to cover all the regular bills due for that period.  I include groceries in that as well. My paycheck is already deposited into this account and Trent's is deposited into our Operating account (see below), so I just look at our needed outflow of money, make sure that amount is present in the Bills account, set up all the bills to pay, then leave it alone. I know there is enough money in there to cover the payments I set up, so there is no need to check up on it and worry about a balance. If there is money in this account, it is already fully designated and on its way out. I have a debit card and a checkbook for this account, Trent does not.  That is not because I don't trust him, it is simply because he doesn't need it.  I pay our bills and get our groceries so it is one less card for him to have to carry.  Since it is a joint account, he could access it any time if he needed to.   Whatever money in the budget period does not go to the Savings account to cover surprises and does not go the Bills account to cover bill payments is left in the Operating account.

Operating Account
This is another free joint checking account that is sort of our leftover, catch all account for items that do not need to be covered in the Bills account: gas, eating out, coffee, random spending, blow money or cushion money in each budget period.  Trent and I each have a debit card for this account and we don't have a checkbook for it.  If a check needs to be written for something that would normally come out of the Operating account, we transfer the amount to the Bills account and write the check from there.  That way we know the money is there and don't have to worry about the check being cashed at a bad time when there wasn't enough balance in the account.   The Operating account does take more checking up on and monitoring.  With two people spending from it with debit cards, it's easy to get carried away and quickly realize we overdid it.  I check up on this account a lot and regularly fill Trent in on the balance, what's left, what it needs to go to, etc, so we are both on the same page.

Holding Account
This is yet another free joint checking account, but it doesn't see a ton of action.  It is exactly what its name implies: a holding account.  This is where we stash money that is extra income and we don't quite know what we want to do with it yet, like a tax refund, Christmas money or my tax season overtime money.  If we let it hang out in our regular accounts, we will spend into it on regular stuff, and that is not how we like extra money to be used.  We try to be intentional about using it for a special house project, maybe a small trip or another fist is debt's face.  So this money sits in our Holding account until we decide where it needs to go.  Pretty simple.  We also use this account as a place to hold any money that needs to be carried over from an income heavy budget period to an expense heavy budget period (more on that later).  Overall, this account is a good place for us to hide money from ourselves until we make a good plan for it.

That's it.  Maybe to some people, four accounts is a lot, but it works really well for us.  Here are some other suggestions I'd offer regarding bank accounts:

1. Have all your accounts at the same bank.  We do lots and lots of transfers among accounts and that is not easy if they are at different banks.  I can understand if you find a super savings account interest rate at another bank.  But at this point our savings account is not there to earn us interest, it is there to save us from cratering financially when life surprises pop up.   Overall, it's just simpler if your accounts are at the same bank.  Everything is in one place.

2.  Use a bank with good online banking.  This is pretty common these days. Most banks are good at it and may even have their own mobile app.   Setting up online bill payments is so much easier than writing checks and they end up processed and off your radar much quicker.

3. Use a local or regional bank.  We used to use a ginormous bank that began with the word Bank and ended with the word America.  While we were never entirely frustrated with them and generally had a good experience, we got a bit fed up with the red tape, the bigness and the lack of human contact.  So we moved our accounts to a smaller regional bank in our area and it has been GREAT.  They remember our names when we come in, are so, so helpful and when we call their main phone number, a live person answers!

So there ya go.  I hope this run down of our banking system is helpful.  Does anyone else have a different system that they use?  Please share in the comments below!

Saturday, February 9, 2013

Every Dollar Has A Name

Welcome to the first installment of this series about MONEY, as introduced in this post.   Buckle up, here we go.

Have you heard the phrase "A place for everything and everything in its place"?  Well, I'm adapting that for this post to "A name for every dollar and every dollar goes to its name".   Doesn't have quite the same ring to it but oh well. 

When your money comes in on payday, do you have a plan for how it will be dispersed?  I'm not talking about a nitty gritty detailed budget, not quite yet.  I'm talking big picture plan.  Are you aware of what your bills and expenses are, what your debt payments are, how much you actually spend each pay period on eating out, gas, groceries, etc?  Let me tell ya, we had no clue.  A couple years ago, I decided to print out our bank statements for the past three months and just see what our expenses were adding up to.   It was partly appalling and mostly educational.   Money spent on eating out was crazy bonkers, meanwhile we apparently spent very little time at the grocery store and lots of time (or at least dollars) at the gas pump.  It was a learning experience.  We got to know our finances.  "Hi, nice to meet you, finances."  Do you know your finances or do you need to introduce yourself to them?

Here is the first step to gaining control over your money and managing it like a BOSS:  give a name to every single dollar you spend.   Ok, not every single dollar, that would get really redundant, but every category of dollars.  Make a list.  For real, open up a Word document or Google doc...or there's this thing called a piece of paper...  This list will be the starting point for your awesome budget later. 

Here are the names of some of our dollars:

Trent UAS Student Loan
Trent AES Student Loan  Not any more, this one was paid off this week.  BAM!
Trent ACS Student Loan
Anna AES Student Loan
House Payment
Cell Phone 
Trent Health Insurance
Car Insurance
Trent Car Payment
Cable & Interwebs
Eating Out
Trent Misc Spending
Anna Misc Spending

What would you add to your own list that you don't see here?  Be specific!  If you spend money on it, put it on there, even if it is a small category.  Do you go to lots of movies?  Do you buy lots of clothing?  Do you have frequent doctor visits?  Do you spend money on craft project supplies?  I can't make this list for you.  Nobody can but you.  At this point, this is not yet about what you should or should not spend money on or what you could maybe cut back on.  That comes a bit later.  For now, this is just a list of what you spend money on right now.

Ok, have you made your list?

Now comes a step that is not quite as easy: putting dollar amounts with these categories.   This is not hard for spending categories that are the same amount or close to the same amount each time they roll around, like house or rent payment, cell phone, student loan payments.  These are no brainers.  But what about things like eating out and groceries?  If you really have no clue how much you spend on these (it's ok, I've been there too), I would suggest doing what I did and print out a couple months worth of bank statements, turn on some tunes, grab some highlighters and start categorizing.  Go through and mark all the grocery trips one color, the restaurants another, gas another. Add in whatever other categories you have on your list. Then just sum up each category to get an idea of your spending habits.   Try to pick months that would be pretty indicative of your regular spending.  For instance, if I had picked a March bank statement, then coffee and eating out would be majorly overstated because March is in the middle of me working tax season hours.  Meanwhile, gas would be understated because the only place I go then is the office.    If you do have flukey seasons of life like I have tax seasons, that does need to be accounted for but again, baby steps here, our budget and timeline will take care of that later. 

So you have made your personalized list of spending categories and summed up your dollars that go with those categories.   Now step back and see what you think about it.  Are you appalled by how much you are spending on a certain category?  Are you super proud of yourself for actually being economical in another, unbeknownst to you?   I can't tell you what you should or should not spend money on, what expenses need some self control and what expenses you are rocking at.  That is all up to you, your priorities and your goals.  Give this some thought.  Are you wanting to tackle some debt?  Maybe less money needs to go to eating out and more to extra debt principal payments.  

We'll deal with the detailed number crunching soon.  For now, give every dollar a name and spend some time thinking about how many dollars are going to each of those names.  Keep your list, we'll need it later.

Saturday, February 2, 2013

The Twelve Dollars Till Tuesday Game - A New Series About MONEY

Trent and I used to play a game that we grew to hate.  It is a stressful, terrible game that many people find themselves in the midst of.  We named it The Twelve Dollars Till Tuesday game.

The way this game goes is that you hit a pay day, are very excited because there is money in the bank, then proceed to pay bills but otherwise spend it willy nilly with no real plan and suddenly find that you have about eight days left until the next pay day and only about $12 in the bank.  Your game may be called Twelve Dollars Till Friday, or whatever day of the week you get paid.

Does this game sound familiar to anyone?  'Scuse my language, but this game sucks.

About two years ago, we decided we had had enough of it and we took control. Through a combination of Dave Ramsey's Financial Peace University and me deciding to use my nerd skills for good use, we have really gotten on top of our finances.  It has benefited us greatly and I want to share with y'all some of the tips, tricks and strategies we have learned and used.  This will not be a rehashing of Financial Peace.  I will indeed pull from a few of his concepts, but mainly this will be a genuine, personal offering of our experiences, successes and failures.  So, consider this the beginning of an unofficial series about MONEY.

Here is a sneak peek at what I am planning to write about in the near future:

Every Dollar Has A Name - It is important to have a plan for every dollar of your income before you even get paid.  I'll discuss how to create a big picture plan for your money, determine what your priorities are and then name every dollar according to that plan so that when the dollars come in, you already know where they need to go.

Bank Account Business - How many bank accounts should you have?  What kind?  We have four.  I'll tell you what they are, what we named them and how we use them.  We have landed on a good system that works really well.

Why A Monthly Budget May Be A Terrible Idea - So many money tips out there say to keep a monthly budget, but that is actually a terrible idea for most people.  I'll tell you why and show you what I recommend instead.

Budget Basics - I know there are folks out there that don't even know where to begin when it comes to making and keeping a budget.  Never fear, I hope to give you some good nuts and bolts for building your budget, and even offer a free non-monthly budget template in Excel/Google Docs that you can customize and make your very own (pending me figuring out how to post such a link within a blog post).

Operation Debt Smackdown - Trent and I paid off an insane amount of debt in 2012.  Any guesses for how much?  It is a huge WIN for our financial life and we want you to have the same awesome feeling of accomplishment and the same weight lifted.  The secret is about 30% planning and 70% attitude.  This post will talk about the attitude part of it.

How To Create A Debt Payoff Plan - We'll go through the nitty gritty part of the 30% planning mentioned above and I'll walk you through how to create a loan amortization schedule, which is a fancy accounting name for a debt payoff plan.  I'm hoping to also offer a free template in Excel/Google Docs for this schedule, in addition to the budget template mentioned above (also pending me figuring out how to do so).

Why I Don't Agree With Dave Ramsey's Main Slogan - Don't get me wrong, Dave Ramsey is a great guy and has helped a lot of people, including yours truly, but overall I don't agree with his main slogan and premise.   I'll tell you what that slogan is, why I don't love it and what I think the focus should be instead.

Y'all ready for this? Don't worry, it won't be all money talk around here.  I'll throw in some normal posts too. But get ready for lots of words and not many pictures (besides screen shots of spreadsheets and formulas).  Get ready for some brain bending concepts and some detailed explanations.  Get ready to ask me any and all questions that pop into your head as you read these upcoming posts.  Get ready to whip up on your finances and show them who's boss!

Let the games begin...