On Paper, On Purpose.

Last week I started my third Financial Peace University class.  I really enjoy walking people through the steps, and watching their eyes light up when they “get it.”  There are many who transform their finances through this 13-week class.  There are others who listen, agree, and still don’t quite get their behavior to act in alignment with their new “values.” 

You have to do more than just want change, you have to make steps toward that goal and act each step of the way.  With money this can take willpower, boundaries, a paradigm shift, and sometimes a cultural one as well.  Everyone wants financial freedom, but it is unrealistic to desire your money do the right thing, when your body and mind do not have the discipline to do that.

A crucial first step is making a budget, or a cash flow plan.  I like how Dave Ramsey describes a budget as “an on paper, on purpose plan for your money before you get paid.”  I can always tell who has done their cash flow plan.  They are the ones who are excited because they took control and created wiggle room in their finances.  They are seeing progress now and have more progress projected into the future.  They feel empowered because they have a plan and are winning their life back. 

It all starts with the budget.  Forget what you think a budget is, or all the times you tried and it didn’t work.  Start with a piece of paper or an excel sheet.  Click here for a budgeting tool

• Put your monthly income at the top.  If your income is irregular click here.
• Start listing all your known monthly bills.
• Check the calendar for holidays, events, and out of the ordinary expenses coming up. List those.
• Then calculate any non-monthly bills, those that come quarterly, bi-annually, annually.  Divide the total by the number of months to figure out the monthly amount, and set it aside for when the bill comes due (6 months of car insurance for $600 would be $600/6mo = $100 month).
• Subtract the expenses from the income as you proceed down the list.

Don’t forget to include what step or goal you are working on (saving for emergencies paying off bills, or investing for retirement etc).  Stop when you hit ZERO.  This is called a zero based budget.

If you hit zero before you are finished, go back and reevaluate some of the categories.  We will discuss more ways to shave down the expenses.  I would love to hear from you!  What strategies have you used to balance your cash flow plan?

Easter Clearance Racks

Now that it is a week past Easter, the clearance racks are full of deep discounts.  While you don’t want to purchase candy a year ahead of time, there will be good buys on plastic eggs, dying kits, baskets, craft items, and décor.

I’m not a huge holiday buyer, but now that we have a bit more room in the budget I have begun picking up a few off-season items.  I purchased 2 of the fancy egg dying kits that were $3 each, for around $.65.  And saw beautiful $30 egg wreaths for the door marked down to $7.50!  That was tempting, but clearance shopping can either work for you or against you. 

If you pick up things you were going to buy anyway at a discount, you reduced expenditures.  If you see great bargains and buy stuff you don’t need, you are not saving any money (See the July 15, 2011 blog "Are you Really Saving Money?" for more on this topic)

My trick is to check the racks at the stores I go to anyway.  I check a couple days after the holiday to survey the selection.  It is usually 50% off.  If they have a large quantity of what I want, I do not buy it that day.  But I check back in another 5-10 days when it goes down in price again. 

I did the same thing with the boxed Valentine cards that the kids trade at school.  I bought a $1 box for the party.  Then after they were marked down two or three times I picked up 5 boxes of cards for .10 each.  I have enough cards to get him through 5^th grade! 

A few tips when buying a year ahead:

•  Only buy what you know you will use or need.  Don’t spend money just because cute!  Clearance racks can bust your budget if used improperly. 
• Make sure you store these purchases in a location that is designated for holiday items.  Otherwise you will forget and purchase things again later on. 
•  If you plan to hit the after 4^th of July, Halloween or Christmas sales, start putting a little spending money aside.  It always feels good to have cash to scoop up some great deals!

Track the Spending

Do you know where all your money goes?  Or does the paycheck come and go, leaving you wondering what happened?  The best way to get control of your money is to make a monthly written plan of where you are going to spend all of it, before you get paid.  Dave Ramsey calls this living on a zero based budget.  All the money in, minus all the money out, equals zero.  If you have a partner, you need to do this together.

People always ask, “what if I don’t know what is going to happen?”  The written plan can be flexible.  Here are some pointers 

• Pull out your calendar when budgeting:  Check for birthdays, oil changes, and other non-monthly items that may be coming up in the next 30 days. 

• Divide other non-monthly items by 12 and start putting cash aside for those due dates.  This is good for car tags, insurances, house taxes, quarterly bills and holidays. 

• Make sure you allocate some money into an emergency fund.  Dave recommends building up $1,000 starter emergency fund.  After all the non-mortgage debt is paid off, that can be increased to 3-6 months of expenses.

Before we started this program, we had no savings.  Now, I always keep 1-2 co-pays in an account and some money for minor car repairs in addition to our starter emergency fund.  The peace of mind is empowering!

If this seems way too hard, try tracking where every cent goes for a month.  The book Your Money or Your Life goes into great depth about tracking your spending.  There are many ways to do this from checkbook software to carrying a small spending journal with you.  Either way, keep a detailed record for a month.  At the end of the month, group expenses into categories.  You may be surprised!   Sometimes little expenses you don’t think much of, happen often enough to add up.  Look at each category and ask yourself some questions. 

Can I cut back?

Do I need this?

Did this purchase bring me fulfillment?

This makes it easier to see spending patterns and rerout them into more productive channels.  The next month you will have more confidence to create the written plan before you get paid! Knowledge really is power.  The longer you stay in the dark about the whereabouts of your spending, the longer it will take you to prosper.  Let me know how it is going for you!