Debt-Free Forever Page 6
People often ask whether they can transfer money from one jar to another. I believe a budget is a fluid thing—that it must adapt and change as your needs change. I also believe that how you use your money must be guided by the plan you’ve made, but that you must be flexible enough to adapt on the fly when things change. If you want to take money from the gift jar and use it for food, that’s your business, as long as you realize that you now have no money for gifts. More money will not magically appear (until you refill your jar), and so you will have to be creative for Aunty Angie’s birthday. Keep in mind that if you keep emptying your clothing category so you can go to the movies, when the time rolls around to replace your jeans, you’ll have to hit a thrift store!
KEEPING TRACK OF YOUR CASH
When you spend cash, it is very easy for money to disappear without a trace. You break a $20 to buy milk, and in a feat of trickery, the pocket monster eats the change from the $20. You have forgotten about the cup of coffee you bought on the way to work, the newspaper, the sandwich at lunch, and the $5 bill you handed your kid as he headed out the door for soccer. Never mind the toonie you threw into the catch-all in your car for your next cuppa. That’s the big problem with spending cash: money seems to disappear without a trace.
The only way to use cash and keep track is to
1.Get receipts for everything you buy (or write yourself one).
2.Write everything down.
Getting receipts is particularly important when you have more than one person using the jars since it helps everyone involved see where the money went.
When I work with couples, I give them a small three-ring binder with loose page79 which I call the Handy-Dandy Budget Binder. The first page is a summary and has the budget amount that goes in each of the jars. Each of the subsequent pages is labelled for one of the jars. So there’s a separate page for Groceries and Personal Care, Transportation, Clothing & Gifts, Entertainment, and Other.
Once you’ve labelled each page80n your binder or notebook, write in the first week’s amount. If you have $100 a week for food, here’s what your groceries page might look like at the end of the week.
Each time you spend money, you deduct it from what you had before and carry down the new balance. So if you spent $45 on food, you would deduct it from $100, which would leave you with $55. As you can see, you always know exactly how much you have to spend. No guessing. Dating it lets you see your spending patterns (are you going to the store too often?), and itemizing what you’re spending (on groceries, coffee, veggies) lets you see exactly where your money is going.
If at the end of the first week you have $2.25 left over, you add it to your next week’s $100. Remember, some of the jars are meant to accumulate money. For example, in the Transportation jar, there’s money for both gas and car repairs. If you spend all the transportation money on gas, or borrow money from that jar because it’s “left over,” you won’t have anything set aside when it comes time for an oil change.
Once you start keeping track of your money, you will spend less. That’s part of the magic! Having become aware of your money and how much (or little) you have, you will become far more choosy about how you spend it. Simply by paying attention, you will save money. If after six months you have a lot of money left in the jars that you’re not going to spend, leave enough of a float to cover unusual expenses and by all means slap the rest against your debt or into your savings. You should also revamp your budget numbers so they reflect your lower-than-you-thought spending.
Okay, you’ve balanced your budget and you now know how much to pull from your bank account each week (or however often you’ve chosen) for the jars. It may be that some jars, like Clothing & Gifts or Other, may remain empty until you’re back in the black. All the rest of your money stays in your bank account and can be used to pay your bills.
Managing your money isn’t rocket science. And it isn’t magic. It’s discipline. You have to be determined to live on what you make, passionate about getting your consumer debt (credit cards, lines of credit) paid off in three years or less, and convinced that it is important to have some money set aside for the future.
‘Course, if you’re at all wishy-washy about what it’ll take to get you out of debt, if you just can’t work up the guts to do things differently, it won’t be the jars that failed.
DEALING WITH A VARIABLE INCOME
Whether you’re a contract employee, a freelancer, working for yourself, or working on commission, one of the biggest challenges you face is Feast Today, Fast Tomorrow Syndrome. One month you do really well, have enough to plan a holiday, build a deck, buy some new clothes. The next, you’ve barely got enough to make it to the end of the month without racking your cards to the max.
Working with a variable income isn’t as hard as people think it is. You can still make a budget and stick to it. You can still have the things you need and the things you want. But you must have a plan.
First, you need to set yourself a “salary” and live on it. If your work efforts bring in $2,000 one month and $6,000 the next, and you think of all that money as spendable, you’re going to run into trouble, it’s only a matter of time. So smooth out your cash flow by deciding what your minimum monthly income needs to be to keep body and soul together. This is your Salary. No matter how much money you bring in, it’ll all go into your Business Account and you’ll only transfer your Salary into your Household Account for spending.
To figure out your Salary, do up a household budget that covers all your basic monthly costs: food, housing, transportation, medical, and the like. The “we can live without it” items like clothes, toys, and partying don’t make it to this list. However, savings and debt repayment do. And don’t forget taxes. This is your first-tier budget.
On your second-tier budget, needs like home maintenance, clothes, and entertainment should also be part of your Salary, but with the proviso that if the going gets tough, these spending categories can be shorted until the money starts flowing in again.
Now, you could have a big fat monthly total if you’ve weighed yourself down with big fixed expenses—like that $800-a-month car payment or a home that’s way too much for your wallet. Ditto if you’re carrying tons of debt. Let’s assume for the purposes of this discussion that if you have those things you can pay for them. (If you can’t, this may be the time to reassess your priorities.)
In good months, you’ll have plenty left over in your Business Account. Don’t be tempted to touch it. It’s your cushion. In a month when you haven’t brought home as much as normal, you’ll still have a whack of cash in your Business Account so you can transfer your Salary to your Household Account without a hiccup.
Use whatever additional income you earn above your tier-one and tier-two budget needs for other goals. Whatever you have in your Business Account—your Business Buffer and earnings beyond your Salary—should be invested in a high-yield account. If you’re doing very well financially, you can decide what other goals you want to accomplish (like the deck, a vacation, or a shopping spree). Build or replenish your emergency fund if you’ve dipped in, and pay down your debt. Make sure you’re also having some fun.
Being self-employed brings loads of terrific benefits along with some very interesting challenges. I’ve been self-employed for about 30 years—some lean, some luxurious. And I wouldn’t swap the flexibility self-employment offers, no matter how hard I had to work when things were busy. There was one period where I worked 17 hours a day, 7 days a week for about 7 months. I literally rolled out of bed and to my computer, rolling back in to sleep. I had no life. I made a lot of money. And a good thing too because when I finally decided to have kids, because I was self-employed I wasn’t entitled to any mat leave benefits. But I had a whack of cash set aside. See what you can do with a plan?
GAIL’S TIPS
Figure out what it takes to live modestly for a month. You’ll need to cover your regular bills like mortgage or rent, utilities, car payment, gas for work, food. Once you
think you’ve got the bare bones covered, look at how much cash you think you’ll have to spend.
Planning to spend $600 this month on everything from groceries to gas to your sister’s birthday present? Cut that in half and challenge yourself to live on less.
Before you throw your hands up and say, “Ridiculous,” just try it. There’s no failure here. It’s an experiment. It’s to see whether it can be done. After all, even if you miss by $150, you’ve still spent much less than you thought was possible. Hit the mark and you’ve experienced living modestly and saving money at the same time. Double whammy!
ALIGNING YOUR CASH FLOW
Even with a perfectly balanced budget, sometimes you can run into trouble if your cash flow isn’t properly aligned. Sometimes people’s cash flow is out of alignment because of how often they are paid. Sometimes it’s because of when their bills hit their bank accounts for auto payment. Mostly it’s because people don’t take the time to sit down and plan when the money goes out based on when it comes in.
The first thing to do is to make a Bills to Be Paid List of what you have to pay by date. If your mortgage comes out on the 5th, and that’s the first bill of the month, it goes at the top of your list. (This assumes you have enough income to cover all your bills. If you don’t, you’ll have to find a way to make more money.)
When you’re managing your bill payments, remember that you can’t wait until the due date on the statement to pay your bills. While some companies have a grace period, if you try to pay on the due date using online banking, telephone banking, or a bank machine, and the payment isn’t posted that day, you’ll be charged a late payment fee. Get in the habit of paying all your bills at least three business days before the due date.
Plot when your bills are due and the amounts you must pay on a “month at a glance” calendar. You can photocopy any month from an agenda or datebook and use it as your template. You can now quickly see when the money needs to come out of your account.
Time to put in your paydays. That’s when the money is coming in. Write on the calendar the amount being deposited to your account.
If you get paid on the 30th of the month, that money will actually be used at the beginning of the next month. So if you are paid semi-monthly, you will pay half your bills from the 1st to the 14th with the money you deposited on the 30th, and the other half of your bills with the pay you got on the 15th.
If you get paid biweekly, there will be some months when you get paid three times instead of twice. You need to determine how many months of the year this happens, so you can allocate the “extra” paycheque appropriately. For your budget’s sake, you may have to live as if you only get two pays a month, and use the “extra” for boosting things like Home maintenance, your Vacation Fund, Savings … anything that doesn’t have to be deducted monthly.
When you align your cash flow, you pay only the bills for which you have money in the bank during any period.
Look at your calendar with the bills and pays plotted on. Do you have enough for your jars and to cover each of the bills that must be paid on the date they are due? If you have bills you simply cannot cover in a particular pay period, then you will have to call some of the companies you deal with and change your billing date. Yup, you can do this. It’s a pain, but a little effort now will make managing your cash flow a whole lot easier over the long term. Simply pick up the phone and ask for your billing date to be changed to a time in the month when you do have the money available to pay the bill on time. Keep in mind that you’ll have to pay a pro-rated bill when you change your billing date, but it’ll eventually smooth out.
Once you’ve aligned your cash flow, go back to your Bills to Be Paid List and write the “paid on” date in beside the bill, so you have an at-a-glance list of when all your bills will need to be paid. One of the biggest benefits of having all your bills visible on a calendar and on the Bills to be Paid List is that you can track them as they come in. If for some reason a bill doesn’t arrive when it is supposed to, you’ll know the bill is missing and can call, get your balance, and make a payment before late fees and interest start to accumulate.
Doing this takes some time, but not as much as you might think. And finally having a system for when each bill will be paid will mean you’re not scrambling to find money. No more overdraft fees. No more interest and late fees. It’s definitely worth the effort.
GAIL’S TIPS
If you change your billing date from the 1st to the 12th, the first time you get a bill it will be for more than normal because you’ve used more days of service. So your first new bill will be “pro-rated”… it will have the additional amount on it. This may, in fact, not happen until the second or third bill, depending on when the pro-rated bill gets calculated so keep an eye on your bills when you make a billing-date change, particularly if you have an auto payment set up for that bill. You don’t want to be caught short in your bank account because a pro-rated bill took more than you expected from your account.
WHAT’S PUSHING YOU OUT OF YOUR BUDGET ZONE?
One of the biggest problems people have living on a budget stems from their failure to plan for inevitable and sometimes infrequent expenses. Sometimes people refer to these as “unexpected” expenses—I’m not sure why, since some of the things they include as “unexpected” aren’t unexpected at all, just irregular. “Unexpected” is really just another way of saying, “I don’t want to have to think about it.”
Be honest. Did you really think you were going to get through the year without your seven-year-old car breaking down at least once? Did needing new tires actually come as a surprise? Did you think the window that got broken last summer was going to mysteriously repair itself?
Home maintenance is one of the areas where people act all surprised when the bill comes due. The rule of thumb is that you should be budgeting between 3% and 5% of the value of a home for annual maintenance. Older homes require more financial investment. Brand-new homes require almost nothing initially, often lulling home-owners into a false sense of what things really cost. People just about choke when they work it out for themselves. One couple with a $400,000 home informed me there was no way they could afford $1,000 for home maintenance. Really? Your most important asset? You can’t afford its upkeep? So you have people paying through the noses on their mortgages, watching their homes crumbling around them because they don’t want to have to deal with the realities of home maintenance. That’s how the new roof becomes an “unexpected expense.”
It’s time to pop a Home Maintenance amount into your budget. While hitting the 3% to 5% goal may not be doable with the debt you are carrying, popping that number in as a starting place will give you a good idea of what you have to work toward. Let’s say the value of your home is $276,000. Of that amount, 3% would be $8,280 a year ($276,000 ÷ 100 × 3 = $8,280), which when divided by 12 is $690 a month.
GAIL’S TIPS
If the 3% to 5% maintenance amount freaks you out because your land value is the biggest part of your home cost, then use the “insured value” from your home insurance as the amount on which you calculate your maintenance amount. And if you’re paying condo or strata fees, this falls under your Home Maintenance category and comes off how much you must set aside personally for maintenance costs.
The same holds true for household appliances. Do you have an appliance replacement fund? Are you saving up for the next electronic item that will fizz out, or will it be an “unexpected expense?” How about the new hockey equipment the kids will need next winter?
It’s not like these things aren’t inevitable, it’s just that no one wants to think about them because that would mean we would have to budget for them, and that would mean less cash is available to spend on the random stuff we want to buy ourselves. So we go ahead and go shopping for Stuff. We act surprised when we’re faced with the expenses we knew were inevitable, and then we whine about not having any money.
It’s easy to forget about the annual car, home, or life i
nsurance coming due this month if you don’t have it built into your budget as a monthly amount. Ditto your vehicle registration and plates, your health club membership, and the kids’ soccer fees. Then there are your property taxes, if you pay them directly. You can’t ignore your home maintenance forever, so you might as well put it in your budget monthly and set aside some money for when the roof starts to leak. And if you’re self-employed or working on a contract basis, you should also be setting aside the taxes you’re going to have to come up with come tax time. There are Internet tax calculators that will automatically calculate the tax you’ll likely owe when you enter your income and province of residence. Whatever amount the calculator comes up with, divide by 12 and set that amount aside every month so you can stay on the right side of the Tax Man.
You may be able to wear your jeans until the bum is bare, but the kids will outgrow their clothes before they wear them out, so you should have some money budgeted for them on a monthly basis. Look at how much you spent last year, divide by 12, and use that as your monthly amount for your budget. Pet care costs are predictable until Poochie gets sick. If you don’t have pet insurance, then you should have a little set aside monthly in your budget for your inevitable trip to the vet. The amount you set aside will be dependent on the type of critter you own. (Pure breeds cost more, and some four-legged friends are more susceptible to certain illnesses than others.) Ask your vet what he or she thinks is a reasonable amount you’ll likely have to spend on Fido this year.
Don’t forget medical costs. Yes, I know we have universal medical coverage, but not everything is paid for, no matter how “universal” it is. So if you aren’t budgeting for things like glasses, the dentist, cold medicine and painkillers, and all the other stuff you’ll end up buying, you’re bound to run into some “unexpected expenses.”