Tuesday, March 1, 2011

Money Management Part One - Track Your Spending

We're going to spend the next few weeks visiting with Jack and Jill again, as they are exploring the world of finances... new posts will be up on Tuesdays and Thursdays and discussion is welcome in the comments.  This series is based on our personal study of Dave Ramsey's approach to finance, partly inspired by Gail Vaz-Oxlade, and partly written from personal experience.

One thing I need to point out at the start - I didn't make any allowances for child tax credits or provincial benefits, because they vary between provinces.  Thus, I also didn't add into the budget things like kids' activities, diapers, toys, etc.  The assumption is that they only spend on their kids the amount of money provided by their child-related benefits.  

Another thing I didn't do was have Jack and Jill buy a new vehicle.  That's because they just didn't.  The first reason for this is, new vehicles lose worth at an incredible rate over the first four years.  After that, they can be bought used from people who are buying new.   The second reason is, they realized they had higher priorities than buying a new vehicle.  Notice they did have a budget category for vehicle maintenance - they took care of the car they had.  And if it did happen to bite the dust, a temporary replacement vehicle could be paid for using the cash they had already been setting aside.   So I didn't make it a priority to see them in a new car before they made it through the steps of their financial journey.  One might argue that they would only be able to buy "junk" for the amount of money they could have set aside... but that is a matter that comes down to personal priorities and decisions.

Our friends Jack and Jill have decided that they're better off to stay with the status quo for now.  Crunching the numbers was a bit of a rude awakening - the 'sticker shock' connected to the idea of Jill going to work has left them convinced she should stay home, but they aren't sure what their next step should be.  What they DO know is this - they have to get their money under control.  Right now it feels like Jack's paychecks go into a bucket with a lot of holes in the bottom of it, and they aren't really sure where it all goes.

While talking to her friend Jane over coffee one morning, Jill mentioned the stress of it all.  "I just don't know where it all goes!  He makes good money; shouldn't we have something to show for it?"  Jane was sympathetic.  She and her husband Richard had been there themselves not that long ago.  She said they would be happy to help, if Jill could get Jack on board.   So that night after supper, Jill approached Jack with the idea of getting some personal coaching on how to manage their money.  To her surprise, he was all for the idea - a huge relief.   So she quickly called Jane, who was delighted to hear the news and said they'd come over the next evening to help them lay out a plan.

Jill baked some cookies, Jack put on the coffee, they laid out some pencils and paper, and when the doorbell rang, they were ready.  Or so they thought.

"So," Richard began, "What kind of record-keeping system do you use for your spending?"

"Record-keeping?"  Jack looked puzzled.  "We don't have a business - why would we keep records?"   Jill nodded in agreement.

"That's just where we were a few years ago,"  Jane said.  "We've made quite a change in our mindset since then, and it has definitely paid off."  

Richard nodded.  "Absolutely.  Now we look at our household finances the same way we would if we had a business.  And Jane has turned out to be a great CFO, I might add!"   They both laughed.   "But if you had asked me five years ago if we would be where we are today, I would have said it was impossible."

"So, what happened?"  Jack asked, interested.  He had noticed that Richard never seemed to have the same financial stresses he had, yet their lifestyles were quite similar.  Except for a few small things.... but it had to be more than that.  Didn't it?

"I can't really say for sure what the specific catalyst was... I just know that one day we realized that we didn't like the way things were going anymore.  We were fed up - we were spending SO much money on interest and on things that didn't matter.  Our money was just disappearing and we had nothing to show for it!   I started researching, reading, listening, learning... and then we just, well, started!   Over time we started to see the benefits.  The savings started adding up.  The bucket holding our money started looking a little less like a sieve.  And now, here we are."   Richard was beaming.  "As of now we're only a few years away from being completely debt-free!"

Jack's felt like his jaw was on the floor.  "Really?  You can't mean that.  What about your mortgage?  Your cars?"

"Those, too,"  Jane said.  "It's taken a lot of work, but it has been so exciting to see our progress.  It has been SO worth the sacrifices we've made along the way.  But we're getting ahead of ourselves.   Let's look at your budget."

Jill glanced at Jack.  "We.... well, we don't really have a 'budget' right now, aside from our bills, of course."

"Well then - are you ready to get started?"  Richard asked Jack. "It's never too late, and the first few steps aren't too complicated.  Let's start getting you guys on track, shall we?"

Jack and Jill looked at each other, then nodded decisively.  "We want what you have - this, this peace you are living with.  Can we possibly get there?"  Jill asked Jane.

"You can, and you will.  We'll help you, but it will be you two doing the work.  Once you get your vision, there will be no stopping you!!"  Jane grinned.

"Great - what's the first step?"  Jack asked.

"The first thing you need to do is figure out where your money is going.  How are you at the end of the month?  Is everything paid?"  Richard was making a few notes.

"Yes - it's tighter some months than others, but we make it."  Jack nodded.

"Okay, then for this month your first assignment is to keep a spending journal.  Every penny.  Get receipts for everything and add it up in a notebook.  We'll get back together next month and go over your record.  Sound good?"  Richard looked up from the notes he'd made.   Break it down like this - don't go overboard, but let's see if we can figure out where your money is going.  Then we'll start plugging holes."  Jane smiled encouragingly as Jack took the page from Richard and looked it over.

Spending Journal

(who got your money?)

(what did you buy?)

$ Amount
(how much did you spend?)

(assign spending to a category from your list)

Suggested Categories:
Utilities - Heat, Electricity, Water
Housing - Mortgage/Rent, Property Taxes
Bills - Phone, Internet, Cable, etc
Food - Groceries
Clothing - Including Shoes & Accessories
Vehicle Expenses - Gas, Maintenance (not incl. payments)
Charitable Giving
Debt - Loans, Credit Cards, Car Payments

"Start with this," Richard said.  "Add your own categories as you need to - they're just there to help you reach conclusions at the end of the month about where your money is going."

"Thanks,"  Jill replied, looking over Jack's shoulder at the page.  "I'm sure we can do this with no trouble."

Jane smiled knowingly.  "It's harder than you might think, but if you're both on board, you'll get the hang of it."  She turned to Jack.  "Jack, do you have a small notebook you can carry with you?  What Richard found helpful when we started out with this was, he tucked a little coil notebook, a small pen and a mini stapler into his briefcase.  Whenever he spent money, he would jot it in the notebook - and if he had receipts he would staple them to a page in the notebook.  Then at the end of the week, he just tore out all the pages and we copied everything over into our larger journal.  It worked so much better than trying to sort out a pocket full of receipts that were dumped on his nightstand."  She laughed.  "Although I'm sure there were more than a few odd glances thrown his way when he asked for a receipt for a $1.00 cup of coffee, he really did great with this.  And it really paid off - it only took us about two weeks before we started seeing some of the holes in our budget."

"Collecting receipts was easier for Jane," Richard added.  "Most of her spending was bigger - things like grocery trips, clothes for the kids, and so on.  But let me tell you, her receipts were a lot harder to sort out into the journal.  It got to be a game trying to figure out what the abbreviations on the receipts stood for."

Jane laughed.  "For a while I actually sorted out my purchases at the store.  Sometimes I even paid for them separately, especially when I was shopping at Walmart and buying books, clothing, groceries and gifts all in one trip.  You do what works... but I swear the cashiers thought I was nuts.  You might not have to go that far - you'll figure it out as you go."

They enjoyed their coffee and cookies and continued chatting.  As the evening wore on, Jack and Jill were really starting to catch their friend's enthusiasm.  After Richard and Jane left, Jill gave Jack a hug.  "I am so glad we are on the same page with this," she smiled up at him.  "For the first time, I'm really feeling encouraged... optimistic, even!"  

Jack looked thoughtful.  "I won't say I'm not a little intimidated by all of this...."  He paused, then laughed.  "But they sure are convincing.  Their excitement - their confidence that this can work - heck, they're living it, aren't they?  I'm willing to give it a shot.  It's got to be better than doing nothing about it, right?  We start tomorrow!"

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