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A Budget Isn’t Enough
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You know exactly how much you make, to the penny. You’ve listed all of your bills in a spreadsheet, including the annual payment for your membership to Save the Combat-Wombat. You know exactly how much is coming in and how much has to go out each month. Your income is more than your expenses, yet somehow, you still have more month than money.
What’s going on?
The short answer is that a budget is not enough.
A budget is not…
…a checkbook register. Do you track everything you spend? Are you busting your budget on $10 lattes or DVDs every few days? Is the take-out you have for lunch every day adding up to 3 times your food budget? Are you sure? If you don’t track what you spend, how do you know what you’ve actually spent? You have to keep track of what you are spending. Luckily there are ways to do this that don’t involve complex calculation, laborious systems or even proper math. The easy options include using cash for all of your discretionary spending(no money, no spendy!), rounding your spending up so you always have more money than you think you do, or even keeping your discretionary money is a separate debit account. That will let you keep your necessary expenses covered. You’ll just have to check your discretionary account’s balance often and always remember that sometimes, things take a few days to hit your bank.
…a debt repayment plan. You may know how much you have available, but if you aren’t exercising the discipline to pay down your debt and avoid using more debt, you not only won’t make progress, but you’ll continue to dig a deeper hole. Without properly managing the money going out, watching the money coming in is pointless.
…an alternative to responsible spending. Your budget may say you have $500 to spare every month, but does that mean you should blow it on smack instead of setting up an emergency fund? I realize most heroin addicts probably aren’t reading this, but dropping $500 at the bar or racetrack is just as wasteful if you don’t have your other finances in order. Take care of your future needs before you spend all of your money on present(and fleeting) pleasures.
A budget is a starting point for keeping your financial life organized and measuring a positive cash flow. By itself, it can’t help you. You need to follow it up with responsible planning and spending.
Overbanked
Last week, when I mentioned that I lost my phone, there was some interest in my self-insurance warranty plan.
The truth is, that’s just one of 14 savings accounts I keep. I find it’s simpler to keep track of my savings goals by moving the money to separate accounts than to track everything in a spreadsheet. This lets me tell how I’m doing at a glance.
I have one account each at two major traditional banks. These savings accounts exist to provide a target for an automatic transfer that eliminates fees on the associated checking accounts. Whenever much money accumulates here, I sweep it out and throw it at my credit card.
I also have 12 accounts at INGDirect. I chose ING because they are extremely convenient and, at least at the time, had a competitive interest rate. Different countries have different banking options.
Here are the rest my accounts:
- Emergency fund. I deposit $25 every month. I also keep part of my emergency fund in a CD that’s also at ING.
- Property tax fund. Every month, I deposit a bit more than a twelfth of my annual property tax bill. When the time comes to pay, I just transfer the money from my account to the tax assessor. It works well.
- College fund. Yes, this is a straight savings account. Right now, I’m focused on debt, not college. When my debt is gone I’ll ramp this up. I started this just to get started. From here, it’s a few seconds of work to increase the amount I contribute, which is currently $10 per month.
- Warranty fund. Instead of buying warranties, or going into a panic when something breaks, I deposit $50 into this account every month. When something breaks, I take the money out of this account(assuming I have enough) and use it to replace or repair whatever is missing. $50 isn’t a lot to contribute, if you have things breaking every week. I go several months without touching this money, and it’s always been enough to cover what we need.
- Vacation fund. This is pure fun money. I sock away a bit out of every check, and occasionally when other money comes in. Then, we plan our vacation around how much money we have here and how many points we have saved on our credit card. Vacations seem like a luxury when we’ve got debt, but I work so much and miss so much of my kids, day to day, that I consider this a necessity. It’s a week of downtime with my family, doing something they will remember. It’s worth it, several times over.
- Braces fund. So far, we know that two of our kids are going to end up in braces. One of them will probably be this year. We had more in this account, but stole some to cover our vision therapy bill. When our insurance reimbursement finally comes back, that will go straight into this account.
- Camera fund. My wife really wants a prosumer-level camera, so I started an account to save for it. If we go over budget, this is the first account we raid, since this is purely a luxury.
- Personal goal accounts. We each have a goal account set up for things that don’t affect the family. As a practical matter, I save to go to FINCON and a hunting trip with my Dad and my brother, while my wife saves for a couple of scrapbooking retreats each year. These accounts are funded solely from extra money and don’t have an automatic deposit.
- Car fund. This started as a car repair fund, with a $50 deposit each month. When my car was finally paid off last year, I took half of my car payment and redirected it into this account, to help us pay cash for our next car. Last month, I stole some money from this account to play stockbroker. It wasn’t a lot of money, but I’ve gotten a 25% return over the last 6 weeks.
- Internet. This is just a convenient account to catch money that gets paid from things like my Amazon affiliate account.
- Held for tax. The name should be self-explanatory. When I get paid from any of my side hustles, I set aside about 25% to cover any tax bill I may be missing. After I file my taxes, I shoot any leftover money out to my other savings goals or my credit card, as appropriate.
I also have a couple of monthly line items in Quicken that I haven’t broken into separate accounts, just to provide an overdraft buffer, like our gift budget.
That’s proof that I am over-banked. How about you? How do you track your savings goals?
What Happens When You Save
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I’m a debtor.
I’d like that to be otherwise, but I’m pretty close to the limit of what I can do to change that. Don’t get me wrong, it’s changing, but there is a limit to how many side projects I can take on at one time. So, I’m in debt and likely to stay that way for the next couple of years.
As part of my budget, I set up a few categories of items that are either necessities or “really wants” without being immediate expenses. For example, I’m setting aside some money each month for car repairs, even though my car isn’t currently broken. When it comes time to fix something, I hope to have the money available to fix it, without having to scramble or <spit> tap into my emergency fund.
All told, I have about a dozen of these categories set up, each as a separate INGDirect savings account. Twice a month, a few hundred dollars gets transferred over and divided among the savings goals. Most of these goals are short-term; they will be spent within the year, like the account for my property taxes. Some of them are open-ended, like my car repair fund. Some are open ended, but will eventually end, like the fund to finance my son’s braces. All of the accounts are slowly growing.
As I’ve watched the progress of my savings accounts, I’ve noticed something funny.
My confidence is up.
It may only be a few thousand dollars, but it’s more money than I have ever had saved. The vast majority of this money will be spent over the next few years, but having it there, now means that I have tomorrow covered. For the first time in my life, I’m not living paycheck to paycheck. No matter what happens, I know I can make ends meet for a couple of months. That fact alone has reduced my stress level more than I could have imagined.
Two years ago, I was sure I was going to file bankruptcy. Now, I’m looking at being just two years away from having all of my debt gone. I have faith that my future will be bright, and only getting brighter. If I can dig myself out of this hole once, I can do it again, no matter what happens.
This has brought a calm that I can’t easily explain. I don’t have to worry about where next week’s groceries are going to come from, or how we’re going to afford braces in a couple of years.
Having an emergency fund and some auxiliary funds has been entirely worth the work we’ve done for last two years. Have you noticed any changes as you pay off your debt and build savings?
Make a Budget
- Image by r.lovewell via Flickr
In the past, I’ve gone through a detailed series of budget lessons demonstrating how to make a budget and showing my personal budget spreadsheet template. If you weren’t here to see them develop, you probably haven’t seen them at all. I’ve never built an actual index for those posts.
This is the master index of my budget planning resources. As I develop more, this will grow.
Budget Lesson #1 – In this lesson, I go over how we handle discretionary income and I explain our modified envelope system. The discretionary budget contains things like our grocery bill, or the clothes we buy. We have near-total discretion over what is purchased, hence the name.
Budget Lesson #2 – Lesson #2 contains the details of our monthly bills. These are the ones that are consistent, predictable, and actually due each month. Most people take these for granted as the bills they have to pay, but it’s not true. You can get almost all of your regular bills reduced just by asking. You would also be surprised what you can do without, when properly motivated.
Budget Lesson #3 – This is where I explain how we deal with the non-monthly bills. That is, the bills that have to be paid, but are not due on a monthly basis. I also share the personal budget spreadsheet template I developed. I am working on a few sample templates to match various imaginary scenarios. If you’d like to be an anonymous case study, and get free help setting up a budget, let me know, please.
Budget Lesson #4 – In this lesson, I describe our “set-aside” funds for things that will need to be paid eventually, but not on a set schedule. Sometimes, they are never actually due. We set aside money for the parties we throw, for car repairs and for a number of other things. A few of these items are outright optional, but they are part of what makes life fun. You can’t make a budget without including some of the extras.
Budget Lesson #5 – This is the companion piece to lesson 2. Learn how I’ve reduced–or attempted to reduce–each of these bills. For the better part of two years, I called Dish Network every few months to ask for a discount. For almost 2 years, it was granted. Then one, day, they told me they were putting a note on our account to keep us from getting any more discounts, so I canceled. 100% discounts help us save more.
Budget Lesson #6 – This is the reduction companion to lesson 3. These bills are harder to reduce. Have you ever successfully gotten your property taxes lowered?
Budget Lesson #7 – This is the reduction companion to lesson 4. Notice a pattern, yet?
Budget Lesson #8 – Here, completely out of order, is the reduction companion to lesson 1. Watch as I magically reduce–or rationalize–our discretionary budget.
So, dear readers, what part of budgeting should I address next?
Make Yourself Accountable
Everybody knows the reputation New Year’s resolutions get for being abandoned in under a month. Following through with your saving and budget goals can be difficult. There are thousands of strategies for keeping your resolutions, but I’ve found that the best goal-keeping mechanism is to make yourself accountable. There are several ways to accomplish this.
Make Firm Goals. If your goals are open to interpretation, it’s easy to interpret them in a way that lets you off the hook. Make the goals concrete and immune to interpretation, and that can’t happen. “Get up earlier” may mean five minutes, which is technically meeting the goal, but not really. “Get up at 5am” is clear and concrete.
Get a “Goal Buddy”. When I am out shopping, if I’m struck by the impulse to buy something I probably don’t need, I call my wife. She’s more than happy to encourage me to put the movie or game back on the shelf. I have a friend who will call me up if he’s thinking about buying a new gadget so I can talk him down. Friends don’t let friends mortgage their futures.
Go Public. As you may have noticed, I’m being as open as possible with my goals for the year. I have laid out clear goals and I provide fairly frequent updates through both this site and twitter. If I fail, I fail in front of an audience. That’s strong encouragement to succeed. Tell your family, friends and coworkers. Announce your goals on the internet. Make it as difficult as possible to fail gracefully.
Punish Yourself. I have a line item in my budget called “In the hole“. If I go over budget one month, the overage is entered as an expense the following month. This serves the double purpose of getting the budget back on track and forcing me to sacrifice something the next month to make that happen. Another option may be to write out a check to a charity you hate, and drop it in the mail if you miss your goal. Anything unpleasant can work as your punishment.
How do you keep your goals?
