Total Money Makeover, Week 6

Week 3 in FPU is the Cash Flow Planning week.  It’s the week where we talk about the dreaded B-word… the budget.  I, being a nerd, love the budget.  As soon as I committed to making one, I was happier and more secure.  It was like an instant raise!

There are many reasons people don’t do a budget.  It may seem constricting or confining, with the connotation of never getting to do anything you want to do.  A budget may have been used to abuse or control you in the past.  You may have never had a budget that worked.  Or you may be freaking terrified to actually look at where your money goes.

I’ve said it before and soon I will no longer have to say it ever again: I make too much money to be this broke!  I make a very reasonable salary, and yet I was living paycheck to paycheck and overdrafting once every couple months when I wasn’t paying attention.  No more! I don’t even need the overdraft protection from the bank anymore, because I know I am never going to overdraft again, and that’s a very freeing feeling.

A budget should never be used to control, manipulate, or abuse someone.  A budget should be a joint effort between partners to come together an commit to a plan each month.  That’s all a budget is – just a written plan of where your money is going to go.  A written budget removes the crisis management of your money.  I used to be a crisis budgeter.  Oh crap, overdraft, move some money over from savings to cover it.  Oh crap, my electric bill was scheduled to be paid and I wasn’t paying attention and bought something with my debit card, I am going to overdraft! I even switched banks to one that would send me a text when I overdrafted and allow me to move money over from savings without sticking me with a $37.00 fee… I had been with the same bank since college, but I switched for better overdraft policies.  That’s serious.

NO MORE OVERDRAFTS.  It’s all about the budget.  I love my budget.

Here’s how my prior experience with budgeting in my life has gone.

1. In college, I used to divide up my paychecks into cash envelopes and save toward my goals.  I never overdrew anything and never had a problem with money.
2. In marriage, we bought a car with basically no money down and with no idea of what it really meant to be able to afford a car.
3. In marriage, we had a joint checking account that was routinely overdrawn because neither of us knew what the other was doing.
4. In marriage, we tried a budget, failed the first month, and completely abandoned it.
5. In divorce, I spent a lot on my credit card and was on food stamps because I was seriously underemployed.
6. In post-divorce, employed-full-time life, I basically had this mentality: LOOK AT ALL THE MONEY I MAKE I CAN AFFORD TO DO WHATEVER I WANT.

Nope.  No, I really can’t.  While I was able to afford things – like a zero-debt vacation to Spain, ahhh, Spain – I really could have put my money to better use.  I could have been doing this debt snowball thing a year ago and be practically done by now.  But I cannot allow myself to beat myself up over what I could have or should have been doing.  The important thing is that I’m doing it NOW.

Dave talks about the four walls: the things you need to take care of before anything else.  The things that will take care of your family.  The things that need to be a priority.  Food, shelter, basic clothing, transportation, and utilities.  In the lesson this week, Dave mentioned speaking with people who were current on their credit card payments but behind on their mortgage or about to have their electricity shut off.  You must prioritize the basic needs of yourself and your family.

I’m going to do something uncharacteristic of myself and quote a Bible verse.

But if anyone does not provide for his own, and especially those of his household, he has denied the faith and is worse than an unbeliever.  –1 Timothy 5:8

Now, I’m not really religious (in fact, I very awkwardly rejected an invitation to lead the group in closing prayer this week), but even I get this.  It boils down to this: If you can’t take care of your family, your priorities are whack.

You can reduce some of your four walls costs, like downsizing to a smaller house or apartment, selling your home to rent while you straighten out your debt, sell your expensive car and pay cash for a beater until you can afford to upgrade, shop at Goodwill, eat beans and rice, cancel extra utilities like cable or internet, etc.  It’s possible to maintain your four walls of security while scaling them back considerably.  Not everyone will have to do this, but some people might.  I am very blessed that I can afford these necessities and still have some room for a few luxuries.

A written budget has many benefits, including

• Removing most money fights from your relationship
• Removing feelings of guilt, shame, and fear from purchases
• Identifying areas of overspending
• Giving a sense of control over your money

The easiest and most powerful way to control your money is with the zero-based budget and the envelope system.

A zero-based budget just means that you plan out where every single dollar is going to go that month.  Write down your monthly income and expenses, and your bottom line should be zero.

For example, let’s say my monthly income is $3000.

• Giving: $300 (10%, you can adjust as needed for your budget)
• Housing: $500 rent
• Utilities: $40 electric, $30 gas, $80 cell phone, $30 internet (total $180)
• Groceries: $300
• Gasoline: $200
• Fun money: $60
• Car payment: $280
• Student loan: $100
• Student loan: $350

These expenses add up to $2270, so I have $730 left to allocate.  Maybe I’m saving up for something (Christmas gifts, a car repair, an eye exam, a new computer), or maybe I can throw all of that extra money at my current baby step.  If you’re on baby step one, that’s $730 toward the emergency fund of $1000 – almost done!  If you’re on baby step two, like I am, that’s $730 extra you can throw at your smallest loan to finish it off faster.

But what about irregular incomes? So glad you asked.  Dave also has a form for managing irregular budgets, like if your income is based on commission or you’re self employed with a fluctuating income.  This is sort of like my freelance income, but I’ve rolled it all into one spreadsheet.  I am still finessing it all into a format I like.  With an irregular income, you should plan out the money you need at minimum to meet your four wall requirements.  Then make a list of the things you’d do with extra money – making payments, going to a movie, buying a new pair of pants, whatever you need or want beyond your four walls.  Prioritize those “extra” things, and as your income exceeds your minimum requirements, put the extra money toward the list.

The envelope system helps keep you accountable with your money.  When you have to part with cash, it’s a harder thing to do than just swiping a card and never really seeing the money come out of your life.  That’s one of the biggest things that got my finances out of control – that debit card!  Now I take cash out of the bank for groceries, gas, personal, and other spending (such as visiting my sister, or buying painting supplies, etc.) and keep them in labeled envelopes.  Whenever I add or remove money from my envelope, I write down the amount and the new balance.  At the end of the month, I put all the leftover money toward my debt snowball.

The most important thing to realize with cash envelopes is that WHEN THE MONEY IS GONE, YOU ARE DONE BUYING THINGS.  

I had to adjust my budget the first month because I under-budgeted for gas.  Running out of money in your cash envelopes does not always mean that you’re just done – for gas, you re-evaluate.  For clothing or personal spending or going to the movies, no. You’re done.

I confess that I did add $20  to my September “Personal/Fun Money” envelope for going to a city-wide yard sale with my mom. How I would correct this for the future would be to take a look at my budget and create a “mom” category for things like yard sales, etc. (seriously, it’s a great bonding time for us, as we are both warrior bargain shoppers). I shouldn’t have just added $20 willy nilly.  I’d also like to point out that I did NOT get Chipotle when I was only $0.45 short.  I waited for the next month. See, I have a little self control. 🙂

What I am looking forward to doing is filling out Dave’s Allocated Spending Plan form.  It has weekly columns so that you plan out not only WHERE your money will go but WHEN.

For example:

In week 1 of this month, 9/20-9/26, I took out money for cash envelopes

In week 2, 9/27-10/3, I  paid rent and took out more money for cash envelopes

In week 3, 10/4-10/10, I will pay both loans, my car payment, and my electric bill

In week 4, 10/11-10/17, I will pay my gas bill, my phone, and internet

…and so on and so forth.  The gym is in there somewhere too!  I really need to fill it out.

At the end of each lesson, we’re asked to write down a one-minute takeaway.  This week, mine said:

“Communicating about money is important for a healthy marriage and will eliminate money fights.”  Can you tell I have marital finance PTSD? If I’m going to do it again (and I hope to, someday), I want to be better prepared for a marriage of open communication, especially about money!

If you aren’t following a budget (a WRITTEN budget) right now, I encourage you to do so.  Let me know if it surprises you to see where your money is going.  It sure surprised me when I actually tried to look.