In review – last week
Last week I talked about our second week in class for the Dave Ramsey’s “Financial Peace University” seminar that we’re attending. In that post we talked about how men and women, nerds and free spirits all relate differently to money. A few of the important points:
- Men and women think very differently about money. For men it is often more of a tool, something to be used. For women it often means security.
- The nerd and free spirit must learn how to work together.
- If you are single, find an accountability partner with whom to discuss your finances.
- Teach your children how to manage money so they avoid our mistakes.
We also talked about the importance of having family budget committee meetings to discuss your finances. You need to be open with your partner about your money!
This week – Cash Flow Planning
This week the subject of the class was the importance of putting together a working cash flow plan so that you always know where all your money is going. In other words – A BIG SCARY BUDGET!
A lot of people are making enough money to be able to pay off all their debts, save and do other things, but they just don’t have a handle on their money. They don’t know where it goes month to month, and as a result they end up going into debt, not saving, and just getting themselves into a heap of trouble. The lesson this week hopes to aid in getting you to a place where you KNOW where your money is coming from, and where it is going to. Every dollar gets a name, and goes to a certain income or expense category.
Some key points from this week’s lesson:
- Spend all money on paper before the month begins. You don’t want money not being allocated, and then “disappearing”.
- Use the Envelope System for successful cash management.
- Give your budget 90 days to really start working.
Budget committee meetings and a cash flow forecast
Last week we talked about the importance of setting goals, and of the need for family “budget committee meetings” where both partners in the relationship talk about the monthly budget, and have a stake in it. You are both responsible for the budget. This week, we went from just setting up a quickie budget to actually doing an in-depth cash flow forecast. Another name for this cash flow forecast is a zero based budget.
For my wife and I this meant actually looking at all the money we’re spending on different categories historically, finding where we think we can cut some expenses, and where we can’t.
Everyone will have certain set expenses that will be the same every month (mortgage, utilities, insurance, etc), as well as some expenses that will vary from month to month. You have to decide how much to budget in those categories, and try to get to a point where you’re allocating enough, but not too much.
To do figure out how much we needed or those variable spending categories we went into our Microsoft Money software and ran some reports to find out what we normally spend on food, gas, entertainment and so on. Once we had a reasonable idea of what we spend, we looked at the budget and found that we felt we were spending too much on food and entertainment. We then forecasted what we thought we could get by with for those categories, and slashed the available budget for those categories. The extra money went to savings.
So the whole exercise of putting together the cash flow plan is done to give every dollar a name, and to allocate every piece of income to either an expense category or a saving category. That way dollars don’t just “disappear” and go down the black hole of missing finances.
If you’re just getting started on doing a zero based budget, a great resource another blogger has put together is the zero based budget spreadsheet by Gibble over at Gather Little by Little. His spreadsheet basically breaks the monthly income and spending down into categories and allows you to track all of your income and spending in one handy spreadsheet every month. Check it out and download it here.
The envelope system
After setting up our zero based budget, the next step was to setup our envelope system of budgeting for certain spending categories. For those of you who aren’t familiar with the envelope system, it boils down to this: You set up several envelopes for some of your biggest problem spending categories (For us this included food, entertainment, gas and “blow money”). When you get paid, you take out enough cash to fund that particular category for 2 weeks or a month. You put that cash into an envelope. Whenever you need to spend money in that category, you take money out of the envelope. Once the money in the envelope is gone, it is GONE. If you want or need to spend more money in that category you’ll need to take money out of another envelope, or another spending category. There is no free money, it has to come from somewhere!
We’re a little apprehensive about starting the envelope system just because before this we’ve never really been this careful about what we spend. It is going to be hard not just whipping out the debit card and paying for stuff, or just going out to eat whenever we feel like it. It’s going to take some getting used to, but we’re committed to doing this because we know it can save us a ton of money.
For another quick primer on the envelope system, please check out this post from Christian Personal Finance called, “How to budget with the envelope system“.
So now that we’ve done our zero based budget, given every dollar a name and set up our envelopes for problem spending categories, we just need to start working the budget and give it time.
Dave Ramsey talks about how your initial zero based budget is NEVER going to be 100% right, you’ll need to adjust it month by month until you get it where it works for you. Some spending categories will need to go up, and others down. He suggests giving it 90 days, and at that point you’ll probably be at a point where it is pretty close to where you need it to be.
When setting up your zero based budget, don’t be surprised if it takes you a few hours. You may even need to do it over a couple of days, especially if you’ve never kept track of your income and expenses before. It’s not easy, but the money you’ll be saving from getting things in order will be worth it.
Next week
Next week we look at big nasty D word. Debt!
The lesson is titled “Dumping Debt” and talks about a system for getting rid of debt. Stay tuned!
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LINKS:
Dave Ramsey’s 7 Baby Steps @ M-Network Blogs
ChristianPF.com – How to make a budget
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Did they teach you what to do if your month to month income varies wildly? I’m self employed, and cashflow planning has been a challenge for me.
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Yes, they have a couple of worksheets that detail what you should do if you have a variable income (like in sales jobs, self employed, etc). Basically you’ll be making a list of what your spending priorities are, and how important each is. You then spend the money as it comes in on the things that are most important – then you just go down the list.