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Your Budget is Worthless
When you realize that you’ve buried yourself in debt and decide to get out from under that terrible burden, the first thing you’ve got to do is build a budget because, without that, you’ve got no way to know how much money you have or need. After you’ve got a budget, you’ll start spending according to whatever it says. Hopefully, you’ll stay on budget, but what happens when an emergency does come up? What do you do when your car dies? When you suddenly find out your kids needs vision therapy? How do you manage when your job suddenly gets shipped off to East De Moines?
Your budget isn’t going to help you meet those expenses. Most people don’t have enough money in their bank account to make it all the way to the next payday, let alone enough to keep the lights on and food on the table. How can you possibly hope to deal with even the little things that come up?
You whip out your emergency fund.
The problem with a budget is that it does a poor job of accounting for the unexpected. That’s where an emergency fund comes in. An emergency fund is money that you have set aside in an available-but-not-too-accessible account. Its sole purpose is to give you a line of defense when life rears up and kicks you in the butt. Without an emergency fund, everything that comes unexpectedly is automatically an emergency. With an emergency fund, the things that come up are merely minor setbacks. Without an emergency fund, your budget is nothing but a good intention waiting to get shattered by the next thing that comes along. With an emergency fund, you are managing money. Without it, it’s managing you.
How much money do you need in an emergency fund?
Every “expert” has their own opinion on this. Dave Ramsey recommends $1000 to start. Suze Orman says 8 months. The average time spent looking for work after losing your job is 24.5 weeks(roughly 6 months), so I recommend 7 months of expenses. That’s enough to carry you through an average bout of unemployment and a little more, but that’s not a goal for your first steps toward financial perfection. To start with, get $1000 in a savings account. That’s enough to manage most run-of-the-mill emergencies, without unduly delaying the rest of your debt repayment and savings goals.
How do you build an emergency fund?
Let’s not kid ourselves, $1000 is a lot of money when can barely make it from one check to the next. Unfortunately, this vital first step can’t get ignored. If you really work at it, you should be able to come up with $1000 in a month or so. Here are some ideas on how to manage that:
- Cut. Drop every possible expense. If you drop cable, your cell phone, Netflix, and a weekly dinner out, you will already be saving $400 that month. You’d be almost halfway there.
- Sell. How much stuff do you have that you don’t need, want, or use? I’d be willing to be there’s more than you realize. Last spring, I had a garage sale that brought in about $1300. Everything we sold was just crap we don’t use any more. We sold candles and candle-holders, DVDs, books, clothes, toys, electronics, games, and anything else we could find. I spent a month going through every room in my house to find my inventory. Craigslist is a good way to sell just one or two things at a time.
- Work. Have you thought about delivering pizza or working weekends in a gas station? If you have some technical or writing ability, you could pick up some part time work on oDesk or eLance. Your opportunities are only limited by what you are willing to do.
Stop at a grand?
Dave Ramsey’s advice is to get your fund up to $1000 and then leave it alone until your debt is paid off. Screw that. I’ve got money going into my fund every month. It’s only $25 per month, but over the last two years, it has almost doubled my fund. Don’t dedicate so much money that you can’t meet your other goals, but don’t be afraid to keep some money flowing in .
Using the fund?
When can you pull the money out? That is entirely up to you. I have ju st two points to make about withdrawing from your emergency fund:
- Don’t keep the money in an easy-to-access account. If your fund is in the savings account that serves as your overdraft protection account, it’s too easy to spend it, and it will go away. I keep it in my INGDirect account. I don’t use the checking account for anything in person, so I don’t carry the card. If I want to spend that money, it will take 2-3 days to transfer into my main bank account.
- Never decide to spend the money on the spur of the moment. There are very few major financial decisions that can’t wait until morning to be answered. Sleep on it. If it’s still necessary tomorrow, you can spend it without guilt.
An emergency fund makes your life easier and your budget possible when the unexpectable happens. Don’t forget to fund yours.
How much money do you keep in your emergency fund? What would it take to get you to spend it?
First 3 Things to Do in the New Year
- Image by iowa_spirit_walker via Flickr
With the new year looming, it’s the perfect time to review the things that may not have gone as well as planned in the current year, and plan ahead for the coming year, to make sure things go well from now on.
To get a good start in the new year, you should focus on three things.
1. Budget.
A good budget is the basis of every successful financial plan. If you don’t have a budget, you have now way of knowing how much money you have to spend on your necessities or you luxuries. Do you really want to guess about whether or not you can afford to get your car fixed, or braces for your kid? I’ve gone over all of the essentials to make a budget before. Now is the perfect time to review that series and make sure your own budget is functional and ready for the new year.
At the same time, spend some time thinking about how your what has gone wrong with your budget over the previous year. In my case, when we got back from vacation in August, our mindset had changed a bit about spending money, and we got out of the habit of staying strictly on budget. By the time we got back on track, it was Christmas and our plans got shot, again. If it weren’t for my side hustles–money that I don’t track in the budget because the money isn’t consistent, yet–we would have had some serious problems this fall. Where have you gone wrong, and what could you do to improve next year?
2. Credit Cards and New Debt.
In the new year, if you haven’t already done so, make sure you throw your credit cards away. The most basic law of debt reduction is, “If you don’t stop using debt, you’ll never be out of debt.” That’s why you need to set up your budget first. Make sure that your expenses are less than your income, so you can make ends meet without having to charge the difference.
How has your debt use worked out over the last year? Have you used it at all, or have you eliminated the desire to pay interest? What have you used your credit cards for? How much of that could you have done without?
3. Estate Planning.
Now is the time to make sure that all affairs are in order, if the worst should happen. If you die, what happens to your money? Your kids? I’ve gone over everything you need in an estate plan before, so I won’t beat that horse again. You owe it to your family to make sure they are taken care of if something should happen to you. At a bare minimum, write a will and get it notarized.
Have you putting off writing your will? You know you need one, but it’s a morbid thought, so it’s easy to put off, right? Get over it. If you love your family, you’ll do better and get your affairs together next year.
That’s a good financial start for 2011. What are you missing in your financial life?
Budget Lesson, Part 6
It’s been a month since I’ve written a post for the budget series, so I’ll be continuing that today. See these posts for the history of this series.
This time, I’ll be reviewing my non-monthly bills. These are the bills that have to be paid, but aren’t due on a monthly basis. Some are annual, some are quarterly.
- School Lunch – This could be cut by sending a bag lunch. We pay about $1.25 per day for school lunch. At that price, I don’t think I can beat the nutrition, let alone the convenience of the meal. We pay this whenever the account gets below $10.
- Property Taxes – We pay this semi-annually. This bill goes up every year due to the ****** ***-******* ******-******* who don’t care about their constituents making ends meet. ******* ***** ******* *******. Huh. Who knew WordPress came with a censor? I could move, but I’d have to get out of commuting distance to get this down much.
- Life insurance – I’ve got two quarterly life insurance policies. I can’t get these much cheaper, but I should be able to next year. The questions asked if I’ve smoked in the last three years, and that will be up on Halloween.
- AAA – It’s only been recently that I’ve owned vehicles reliable enough to avoid paying my AAA dues for me. I could cancel this, but for $80 per year, the hotel discounts make it a wash. One vacation per year comes close to making the difference.
- Vehicle Registration – The only way to cut this would be to get rid of a vehicle. I don’t think that’s possible for us. We work in opposite directions and, for at least one quarter per year, spend too much time chasing around for activities.
- Daycare – We’ve been using our current daycare provider since my oldest(10) was one. When my youngest turns 2 in June, our costs will go down. Without one of us quitting our job, this bill can only go down as the kids grow up.
- City Bill – This bill combines our garbage, water, and sewer. With three adults, three kids, and 5 animals in the house, reducing our garbage level is difficult. We do try to manage our water usage in the summer, to keep that down.
- Web host – I have a few domain names and a hosting package to handle my side hustles and miscellaneous projects. This is a deductible expense. I have been allowing my domain names to expire if the project isn’t being actively pursued.
- Memberships – I have annual dues to two organizations. I’m making payments on lifetime memberships, so these will be going away in about 18 months.
Reviewing this list, there doesn’t seem to be too much I can cut and accomplish any meaningful savings. Am I missing something?
Hayden Panettiere Gets Engaged – Crazy Wedding or Not?
Hayden Panettiere has formally announced her engagement! The starlet will be marrying Vladimir Klitschko, who is a world renowned boxer that has won an Olympic gold medal. The unexpected public revelation has sparked rumor trails regarding glitzy wedding plans. While no date has been set, and nothing has been confirmed, there is widespread speculation that the event is going to be glamorously over-the-top.
A decadent gala may very well be in the planning stages. The “Nashville” actress, age 24, is one of America’s most idolized entertainers. She appeared on “Live with Kelly & Michael” to declare her commitment. During the show, she flaunted an extravagantly oversized engagement ring. This fancy display could be the precursor to an expensively ostentatious wedding.
Although Panettiere’s fiance is 13 years older than her, it is the first marriage for both partners. This may instill extra incentive for the couple to make their officiation an extremely flashy occasion. Because Klitschko is a famous Ukrainian athlete, he will also be anticipating a magnificently choreographed wedding. Both individuals could invest fortunes in perfecting their walk down the aisle together.
Of course, one of the biggest decisions that Panettiere faces is the selection of her gown. All eyes will be on the fabric that she chooses for this special day. If they go through with a public wedding, the dress will be permanently immortalized in global media. She is going to want to show off flawless class, glimmering austerity and sizzling sultriness. Fashion critics are eagerly anticipating her selection. The high-end designer that she picks will receive a tremendous boost in popularity, especially if she pulls off a beautiful presentation.
A crazy wedding would be completely in character for the young television star. Her most known role was a bubbly cheerleader on the long-running series, “Heroes.” With vivacious charm, she became a sex symbol across the country. Explosiveness is simply a part of her personality, so a bombastic celebration is to be expected. Furthermore, Ukrainian wedding parties have a tendency to be more raucous than American traditions. If they follow any of the groom’s cultural practices, the event could become out of control.
The massive ring on Panettiere’s finger indicates no desire for privacy regarding this affair. In fact, it was an invitation for the mainstream media to cover the entire ordeal. This hints that the couple might be planning a gigantic wedding event. They can easily afford it, and the public celebrations will rapidly enhance the star’s critical acclaim.
In contrast, a private exchange of vows would disappoint her legions of fans. Furthermore, paparazzi could still infiltrate the wedding to snap pictures. To avoid any uninvited intrusions, the couple should be open to media coverage during their nupital arrangements. This will let them control the event, and allow them to recoup some of the expenses through lucrative network contracts. Regardless of how they conduct the wedding, it is certain that the whole world will be diligently watching with admiration, and perhaps a slight tinge of jealousy.
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How to Save
Saving is hard. For years, we would either not save at all, or we’d save a bit, then rush to spend it. That didn’t get us very far. Years of pretending to save like this left us with nothing in reserve. Finally, we’ve figured out the strategy to save money.
First and foremost, make more than you spend. This holds true at any level of income. If you don’t make much money, then you need to not spend much, either. Sometimes, this isn’t possible under current circumstances. In those cases, you need to either increase your income or decrease your expenses. Cut the luxuries and pick up a side hustle. The wider the gap between your bottom line and your top line, the easier it is to save.
Next, make a budget and stick to it. There is no better way to track both your income and your expenses. I’ve discussed budgets before, so I won’t address that in detail today. Short version: Make a budget. Use any software you like. Use paper if you want. Make it and use it.
Pay yourself first. The first expense listed on your budget should be you. Save first. If you can’t afford to save, you can’t afford some of the other items in your budget. Cut the cable or take the bus, but save your money. Without an emergency fund, your budget is just a empty dream when something unexpected comes up. And something unexpected always comes up.
Automate that payment to yourself. Don’t leave yourself any excuse not to make that payment. Set up an automated transfer to another bank and forget about it. Schedule the transfer to happen on payday, every payday.
Now comes the hard part: Forget about the money. Don’t check your balance. Don’t think about it in any way. Just ignore it. For the first month or two, this will be difficult. After that, you’ll forget it exists for a few months and come back amazed at how much you’ve saved.
If you don’t forget about it, and you decide to dip into the account, you are undoing everything you’ve worked so hard to save. Do yourself a favor and leave the money alone.
