The Big, Bad Budget

There are 2 well-known facts about budgeting:
1. Everyone knows you SHOULD budget.
2. Most people don't have a budget or don't use their budget.

What?

Let's take a look at how we can make budgeting easier, and thus more likely to be applied to your personal finance.

First, we have to believe we need a budget. Without buy-in (from you and your spouse, if applicable) you will not ACT. Budgets are a way of understanding where your money is going. If you don't tell your money where to go, it will find a place and be gone. Budgeting allows you to control the flow of your funds so you CAN do things you want, freeing you to DO things. I once overheard a couple arguing about money and the one party said, "But I make a lot of money! Where is it going?" Ah, we all feel like that, don't we?  Well, a budget lets you know where its going so you can redirect it to where you want it to go.

Now, people hate budgets the way they hate diets. They see it as a way for others to take away all the fun. However, the glory of budgeting is that you choose the amounts you budget to your activities!  For example, if you want to spend $1000/month on clothing, that's fine...as long as you budget for it. If you tend to spend on technology, that's fine...as long as its accounted for. The place people get themselves in trouble is that they don't like how the numbers look on paper, so they change the paper but don't change themselves.

For example, in my experience in the work place, most people eat out for lunch.  So let's assume they spend an average of $10 per work day (average 22 work days/month, amounts vary depending on what you like to eat and where you live) that's $220/month, $440 if both you and your spouse are eating out for lunch. Now add your dinners to that to make up your "Restaurant" budget. What are we talking, $750-$1000? Well, gee. That's a lot of money. Where I live, that's as much and more than people are paying for rent!  And that's not including your grocery money. No one wants to admit they spend that much on fast food!  So what do we do?  We get out our eraser and change it to what we think it should be. Now we have a $150 budget (or whatever you chose) but you haven't CHANGED YOUR BEHAVIOR.  Well, that's one budget that's going to be blown out of the water every month. And you will feel guilty every time you eat out or look at the budget. And you won't budget anymore. Wouldn't it be better to just admit where you are spending your money and then CHANGE YOUR BEHAVIOR to be able to meet your goals?  In this example, what if they decided to brown bag their lunch 2-3 days a week and eat out 1-2 times a week?

When first starting your budget, I recommend going through what you spent last month and budgeting this month the way you spent last month, then working with your spouse from there. Why?  Because these are realistic numbers. They are what other people say you should spend, they are true to your current behaviors. Then you can look at what your goals are from there.

Another problem people run into when budgeting is in the verbage. You must be very careful that the conversation you have with yourself or your partner is not accusatory. If you start off this conversation telling them that we need to do a budget because they are out of control, you are not going to go anywhere. Use the infamous "I" not "you". "I'm worried about our finances. I think we need to do a budget, but I want to do it together. Will you look at it with me?" Dave Ramsey says in most every couple there's a nerd and a free spirit. The nerd likes to do budgeting and numbers and the free spirit thinks its boring. Appeal to your spouses strengths to get success. Are they a visual person? Use Monopoly money and envelopes for each budget. Are they a techie?  Show them the budgeting tools on Mint.com. Do they love math and numbers?  Bring out a pencil, paper and calculator!

How you do it is your deal, but every financial person is going to recommend it. Stop avoiding it and find a way to enjoy it. Do it together and stick to it. Make it realistic or it won't happen. Remember budgeting is a continuous process and not a once in a lifetime experience. Good luck!

"Emergency"

Have you ever noticed that someone can be in serious trouble, but they don't want to call "911" because its not quite an "emergency". Or people have an emergency supply of something, say a flashlight and batteries, but they won't use it for anything, like say a power outage, because it isn't an "emergency".  And yet, an Emergency Fund is frequently robbed for emergencies like vacation, a great sale, replacing a well-used appliance, buying the upgraded widget, etc. What?

What if we regarded financial emergencies with the same sense of urgency and sanctity that we regarded our other emergency lifelines?  What if we planned on things breaking down and on the upgrades we will need and saved for them?

Here's my dream. Indulge me. A spreadsheet (note: I LOVE spreadsheets) with timelines and estimated costs for replacing items so that I can plan on when things will break down and budget accordingly.  Stay with me on this.  What if you bought a fridge, they tell you it will last for 10 years, for example, so you update on your spreadsheet, Fridge, bought 7/23/2013, cost $XXX.xx, estimated replacement 7/2023. You could even put in how long the warranty lasts and when maintenance is recommended if you want extra credit. Then, when you plan your budget, you can know that BTW you will probably have to replace your roof next year and you should replace the hose on your washing machine this month.

Theory in ACTION: I have driven cheap vehicles my whole life. The upside to this is that they are always paid off, the downside is by the end of their life their reliability gets questionable. Knowing this, my husband and I planned on buying a new (new-to-us at least) car and saved for it for years. When the car would go in for maintenance or breakdown, we would knew how much we were willing to pay for repairs vs. replacing the car. By the time we actually replaced it we paid cash for our new-to-us car. It was in the budget and we knew what money we had available to spend on it. Now, we have a maintenance log kept in the car where we note when we replace tires and how long they should last, oil changes, etc. This has been especially helpful because when the car is serviced and they ask you "how long has it been since you...", most people don't know and buy services they may or may not need because they don't know when their last oil change, alignment, what-have-you was, or worse, they don't get the maintenance they need and their vehicles don't last like they should.

The nice part about this is you don't have to have a heart-attack when you find out things need to be replaced. We all know the things we need and use every day will have to be replaced, for example refrigerator, furnace, roof, and we know they are not cheap. If we plan for them instead of just praying for them, we can save our emergency funds for emergencies, like losing a job or unexpected health care. Of course, statistically we could plan and budget for those too, but let's not get too far ahead of ourselves. First things first, make sure you have an emergency fund (experts recommend 3-6 months of expenses) and don't use your emergency fund for new jeans or a timeshare.  

The Power of Awareness

I worked for a few years as a manager for a well-known, industry-leading company. One of the things I learned from them was that awareness increases performance. Simply checking in on yourself and asking how you are doing, are you on track to meet your goals, etc is essential to success. I am a nerd and enjoy checking in on it, so I monitor my bank accounts, budget, goals, trends, etc on a daily basis. For a normal, non-nerd person (although I believe we are all nerds at heart, just on different topics) I would recommend at least once or twice a week.

A couple of benefits come from checking in often on your finances. The ones on the top of my head are

1. You can't stay in your budgets if you aren't aware of how much you have left. Budgets aren't just things you set in the beginning of the month and feel guilty about blowing at the end of the month. If you know where you're at you're more likely to stay within the boundaries you set and make your goal. 
2. Seeing yourself succeeding is motivating. We like to see when we are doing well and checking in on yourself is the only way to see that.
3. It's easier to remember the recent past than distant. Marking transactions into appropriate categories can be difficult if the only label from your bank isn't helpful. For example, I had a transaction labeled "Bozotronics" from the bank. What?  Never heard of them. But then I looked at the amount and realized it was payment for a parking spot that happened to be next to a company called Bozotronics. How I would have come up with that even a week later I wouldn't know, but since I looked right away it was easier to remember and categorize it. 
4. Preventing identity theft.  Checking your accounts daily means you will catch other people stealing your money quickly, hopefully before something drastic happens. Someone once told me that the thieves usually buy a couple little things so your bank doesn't suspect anything. For example, if you live in Montana and all of a sudden there's a $5,000 transaction in London, it's pretty obvious to the bank that its fraud. However, if there's a $20 transaction and then a $40 transaction, and then a $100 transaction, and THEN the $5,000 one hits, its less likely that they'd catch it for you. 
5. Last but not least, to protect you from yourself. I have also worked for an online company who sold subscriptions to their site. Each subscription came with an automatic renewal at a lower rate as a perk. Sound familiar?  You've probably seen something like this somewhere, whether you have done online gaming, online dating, online movie subscriptions, gym memberships, magazine subscriptions, etc. The catch is if you FORGET you signed up for these things, THEY WILL CHARGE YOU FOREVER. It's not that there's a mean lady punching a button to charge your account every month, its that its AUTOMATIC, so it will keep going until you tell them to stop. So don't call their call center and yell at them for charging you (pretty please, been there, done that!). Instead check your accounts so you notice the first month they charge you and can call and cancel it if you don't want it. I had people call me wondering what the charge was on their account, only to find out we had been charging them for YEARS! Even if you dispute charges, most credit cards will only work with charges for the last 3-6 months depending on the card. Not to rant, but check your accounts people. Really.

Now, the EASIER this piece is, the more likely you are to do it. Yes?  Yes. Ok.  So I'm going to tell you how I do it (because its my blog, muahahaha) and if you decide to paper/pencil it or use a different software, etc, it's ok. As long as you actually do it. 

I heart Mint.com. I know, I'm a nerd. Don't judge until you try it. Free, easy, simple.  It compiles all your budgets, account information, goals, etc. to give you a financial dashboard you can quickly and easily read. It's mobile so you can know your budgets on the goal. It remembers when you categorize things so you don't have to categorize everything (double heart on that one). All you have to do is log in, check your recent transactions and label the ones that it didn't know, glance at your budget (which it shows you how much of your budget you've spent relative to how far through the month you are), check your goals, and out!  5 minutes and you know where you stand. Boom. 

Now we all have pet budgets that we like to blow. For some its Fast Food or Groceries. For others its Clothing, Entertainment, or Technology. Whatever your most-blown budget is I recommend using cash for. For you Dave Ramsey fans, you are familiar with how this works (confession: I'm a Ramsey addict). Basically it works like this: you withdraw the money you've budgeted for that category and carry it in an envelope marked "clothing" or whatever. You spend money on clothing from the envelope. When the money is gone, you can't spend anymore. This is great because you are very aware of your budget. Everyone hates getting to the register and realizing you don't have enough to cover it. It is sufficiently embarrassing that you don't overspend. Boom. Problem solved. It's also nice because the money doesn't disappear if you don't spend it. It's right there, waiting for whatever you find next month that you need a little extra for.  I highly recommend using cash for your splurge money/spending money/blow money, whatever you call it. Pull it out at the beginning of the month and then you can use it on WHATEVER YOU WANT, but you won't overspend. This category by nature tends to be easy to blow, hence the name, so plan on it!